Novel Investor • Page 9 of 13 • Compounding investing wisdom...

England’s First Market Bubble: The Mania of 1692

March 4, 2020

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Jon

The year was 1688. The mood in England was optimistic. People were flush with cash and had few places to put it. The environment was ripe for a mania.

The East India Company was one of a handful of joint-stock companies trading at the time. Trading is a loose use of the term. Few people were willing to part with their East India shares since they were so lucrative and the company refused to issue more. The demand for shares needed to be supplied…

About 100 new joint-stock ~~companies~~ schemes would be born over the next four years — insurance, fisheries, tanning, swords, diving, and more. Stories would be woven about the future prosperity of each endeavor.

And like all bubbles, investors ate it up. What started as a need to earn a decent return, morphed into a get-rich-quick greed as the price action and large gains took hold. It would fuel the mania until something — supply for shares exceeded demand — caused the collapse.

If this sounds familiar, it should. It was repeated again in 1720. Twenty-eight years later the South Sea Bubble would birth (and wipe out) a similar list of companies. And that’s just the next market bubble, in a long list of bubbles that mirror it.

The bubble that began in 1688 was mostly forgotten until Lord Macaulay retold the tale almost 200 years after it popped (added paragraph spacing for easier reading): Continue Reading…
Inverting the Investment Process

February 28, 2020

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Jon

Charlie Munger held court at the DJCO annual meeting a few weeks ago. One issue with Munger’s (and Buffett’s) popularity is the Q&A session at these meetings get repetitive. Anyone watching past sessions or reading through old transcripts will hear the same questions and answers annually.

Now, every so often, Munger changes up the answers.

This year, he expanded on a trick he calls the inversion process. It’s the idea of flipping a problem (or question) on its head. It has wide uses, including in investing: Continue Reading…
Lessons from the 2019 Berkshire Letter

February 26, 2020

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Jon

Warren Buffett began his 2019 Shareholder Letter with a review of a short but groundbreaking book. The findings would change what the author, and everyone along with him, believed ever since.

Edgar Lawrence Smith set out to prove a theory that bonds were better investments than stocks during periods of deflation, while stocks were better than bonds during inflation.

Instead, he found that stocks were better investments all around. His work, Common Stocks as Long Term Investments would be published in 1924. The ideas didn’t catch on until John Maynard Keynes popularized the book with a written review in May of 1925.

Smith’s findings completely upended the widespread view that bonds were “safe” and stocks were speculative. And the book would go on to play a role in the ensuing market bubble that burst in 1929. Continue Reading…
Wise Words from Philip Carret

January 31, 2020

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Jon

Philip Carret has one of the longest successful track records on Wall Street. But before his Wall Street career, he was a pilot in WWI, a Harvard graduate, and finally a reporter for Barron’s.

A series of articles for Barron’s led to his first book, The Art of Speculation. In it, he describes his concept of value investing.

In 1928, Carret founded the Pioneer Fund, one of the first mutual funds in the US. The fund got off to a horrible start thanks to the ’29 crash and the Great Depression. But they both survived. And despite the early losses, the fund performed phenomenally over the 55 years he ran it.

I think it’s safe to say Carret practiced the art of patient investing longer than anyone. He was still managing money when he died in 1998 at the age of 101. Thankfully he shared some of his (almost) eight decades of investing experience over the years.

Here’s Carret: Continue Reading…
Phil Fisher: Scuttlebutt and Assessing Management

January 30, 2020

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Jon

Most of the great investors are divided over the need for qualitative analysis. The two biggest areas are measuring management and moats.

Both sides make solid arguments because you’re trying to assess something that can’t be easily measured. That’s why qualitative analysis is more art than science. Put simply, some people got it, some people don’t (like me).

Those who are gifted in the art — like Buffett, Fisher, and Lynch — have an innate ability that normal humans don’t have…and their returns show it.

However, the likes of Graham and Schloss did quite well despite taking the other side of that argument. They didn’t think they could successfully do it, so they avoided talking to management like the plague.

Of course, both sides are correct…investors do better when they stick with what they’re (honestly) good at and avoid the rest.

That said, Phil Fisher mastered qualitative analysis. He wanted a company with great management at a reasonable price. He felt management was the most important ingredient to separate a business from its rivals. Continue Reading…
Why a Bull Market Ends

January 22, 2020

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Jon

When? That’s what everyone wants to know. The answers to why a bull market ends come pouring in the second the when is confirmed.

But the explanations why are usually complex. They certainly won’t help anyone predict the next turn. They’re often secondary, or scapegoats, to what really happened.

The 1982-87 bull market is a good example. The five year period saw steady gains in most quarters: only 5 out of 20 quarters were negative, with no declines of as much as 10%. And 1987 started off hot, up 21% in the first three months, before peaking in August.

The bull market that culminated in Black Monday ended because…Computers! Computerized trading, that is. That one gets piled on all the time. Portfolio insurance and leverage also got blamed. And they sound good too. Continue Reading…

England’s First Market Bubble: The Mania of 1692

Inverting the Investment Process

Lessons from the 2019 Berkshire Letter

Wise Words from Philip Carret

Phil Fisher: Scuttlebutt and Assessing Management

Why a Bull Market Ends