Using the outlook for the economy to predict the direction of the stock market, which most appear to do, has it exactly backward. The stock market’s behavior will predict the economy’s future behavior.
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By the time market declines (or advances) are front-page news, they usually have run their course.
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Markets are all about expectations, and the critical question for investors is always, what is discounted? Are the expectations reflected in market prices too high, or too low?
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Having a long term strategy may seem a quaint idea in a market dominated by high frequency trading, the 24 hour news cycle, the ubiquitous and shrill blogosphere, flash crashes, and where it is repeated as though divinely given that buy and hold is dead.
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It is almost a tautology in capital markets that the best investments are those with the worst previous returns, where expectations are low, demand is down, and prospects appear at best highly uncertain.
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One of the most remarkable things about the investing world is how (correctly) venerated Warren Buffett is and how completely people ignore his investing advice.
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Stocks are the long duration asset, and their level reflects people’s optimism about the future and their attitude toward risk.
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In order to earn excess returns, one has to anticipate changes in expectations, not react to them.
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One of the things we tell our analysts is, if it’s in the papers, it’s in the price. Meaningful price changes only occur when new, previously unexpected information appears.
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Bargain prices do not occur when consensus is cheery, the news is good, and investors are optimistic.
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All of the great investing periods begin when things are terrible and end when they are wonderful.
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Rates of return on stocks are a function of three things: beginning dividend yields, growth of earnings, and changes in valuation.
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What I believe will happen in financial markets and what ends up happening have no necessary relationship. The future is uncertain, and the returns investors earn will depend on the nexus of actions taken and how events unfold.
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As is often the case in financial markets, when the opinions are all on one side, the opportunities are usually on the other.
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There are always reasons why the market is down, and those reasons dominate investor’s consciousness; but current fears are reflected in current prices.
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Our memory provides continuity and context to our daily activities, enabling us to recognize familiar situations, see their similarities and differences, integrate experience into a broader context, draw lessons from the past, and so on. Investment memory, though, seems considerably more short-term, selective, and sub-optimal.
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The key question in markets is always what is discounted. Excess returns are earned when expectations — what is discounted — are different from what occurs.
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One of the most powerful sources of mispricing is the tendency to over-weight or over-emphasize current conditions.
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Growth is an input into the calculation of value. Companies that grow are usually more valuable than companies that don’t.
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The reason to own commodities may be that one believes they provide equity like returns with little correlation with equities. The time to own commodities is (or at least has been) when they are down, when everybody has lost money in them, and when they trade below the cost of production.
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We practice the Taoist wei wu wei, the “doing not doing” as regards our portfolio, otherwise known as creative non action.
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Two things seem pretty clear to me: first, no one can consistently buy at the low or sell at the high (except liars, as Bernard Baruch said), and second, lowest average cost wins.
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Systematic outperformance requires variant perception: one must believe something different from what the market believes, and one must be right.
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The most important question in investing is what is discounted, or put slightly differently, what are the expectations embedded in the valuation?
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The most common error in investing is confusing business fundamentals with investment merit.
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Being wrong is something anyone involved in capital markets has to get used to, though being used to it and being comfortable with it are two different things.
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The reason commodity prices are so volatile is that they are commodities, economically undistinguishable items except for price.
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The market doesn’t lack for analysts and commentators who mine the data for patterns and declare how the future will look based on how past patterns evolved. I wish it was that easy.
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My view is that it is different every time, and that the relevant analytical exercise is to figure out what the differences are, what the similarities with past periods are, and what it all means, so that one can make sensible investment decisions.
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Complex adaptive systems such as markets and economies are characterized by imbalances. They are non-linear, non-equilibrium systems; the imbalances are a reflection of the systems’ adaptation to change.
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Most companies that sport lofty valuations fail to generate results that justify them.
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We believe successful investing involves anticipating change, not reacting to it.
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Investing is all about probabilities, and just because there appears to be a strong consensus prices are going to keep going up, doesn’t mean that is wrong, or right. The consensus does tend to be wrong at the turning points, being invariably bullish at the top and bearish at the bottom.
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In general, you can get a good sense of what to buy now by looking to see what the worst performing assets or groups were over the past five or six years.
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The most important question in markets is always, what is discounted? What does the market expect, as reflected in prices, and how do my expectations differ?
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Active managers are paid to add value over what can be earned at low cost from passive investing, and failure to do that is failure.
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As I often remind our analysts, 100% of the information you have about a company represents the past, and 100% of the value depends on the future.
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The market does reflect the available information, as the professors tell us. But just as the funhouse mirrors don’t always accurately reflect your weight, the markets don’t always accurately reflect that information. Usually they are too pessimistic when it is bad, and too optimistic when it is good.
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While markets constantly change and adapt, grow ever more complicated, interconnected and global, the principles that underlie successful, long-term investing have remained pretty much the same as they have always been.
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When growth becomes scarcer and the discount rate becomes lower, growth becomes more valuable.
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One of the enduring features of the findings in behavioral psychology as it applies to finance, a subject I have discussed many times over the years, is the almost complete inability of those who are aware of them to actually apply them.
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About the only advantage of being old in this business is that you have seen a lot of markets, and sometimes market patterns recur that you believe you have seen before.
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As long-term investors, we position portfolios for the 95% of the time the economy is growing, not the unforecastable 5% when it is not.
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In any investing environment, the scarce resource becomes more valuable relative to the abundant resource.
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Price and value are not only different, it is precisely that they can differ widely that creates the opportunities for value investors to earn excess returns. The greater the difference, the greater the potential return.
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For value investors, price is one thing, and value is another. When prices move against us, it usually means that the gap between price and value is growing, and our future expected rates of return are higher.
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It is an old cliché that they don’t ring a bell at the tops and bottoms of markets, but it is not entirely true. Occasionally someone climbs up in the belfry and does just that, as a public service, but knowing that few are likely to heed the bell.
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It has been well and correctly remarked that the only things that go up in credit crisis and financial panic are correlations and volatility.
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Economic numbers report the past, and corporations observe the present, while the market lives in the future.
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Bull markets typically begin when the following four conditions are present: the economy is bottoming, profits are bottoming, the Fed is stimulating, and valuations are low.
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Inflation can only arise if labor or business, or both, have pricing power.
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There is a tendency to look to the past and say, these things have done well and therefore that’s the way you should invest — as opposed to saying where are the greatest investment opportunities going forward.
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Our view is that reasoning from the macro to the micro tends to be very dangerous.
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One of the markers, in my opinion, of a high future return is where the worst rate of return has been during the preceding five or six years.
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Our approach can be summarized with the phrase “lowest average cost wins.”
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Stocks tend to bottom when the earnings bottom, or when the fundamentals bottom.
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It’s much more stressful to me when the market’s soaring and everybody’s excited, and everybody’s talking about how much money they’re making.
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If a stock goes up 30 or 40 times in ten years, it has to have been grossly underpriced to begin with.
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What these companies do is try to put the best spin or face on their situation. Rarely will managements tell you how bad things are.
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Almost every value trap is the result of people extrapolating past returns on capital and past valuations onto a different situation today.
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The more things people worry about the better for an investor, because those worries are already instantiated in the overall market.
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People often say there’s lots of uncertainty, but when was there ever certainty in the markets, the economy, or the future? I’m just trying to understand the present.
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I think that most individual investors make great mistakes when they try and time the market, and try and think about what’s the best stock to buy now.
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The biggest problem that people have isn’t selecting the right money managers. It’s the way they change managers all the time in response to fluctuations of short-term performance.
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For most investors in general, selling the expensive asset, and buying the cheap asset, seems like a logical strategy — except when you actually try to do it. Because most people are actually not wired to be selling what’s expensive and going up, and buying what’s cheap and going down.
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If you have a valuation discipline, then you know that stock prices change more rapidly than business value. You also know that rising stock prices mean lower future rates of return and falling stock prices mean higher rates of return.
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The problem is that real risk and perceived risk are two different things. And that’s where people get into trouble, because they perceive risk to be high when prices are low, and they perceive risk to be low when prices are high.
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A lot of people look to hit singles and sacrifice bunts and make small returns. But statistically you are far better off with huge gains because you are going to make mistakes. And if you are playing small ball and you make a few mistakes, you can’t recover.
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Valuation is determined by the relation between a stock price and the present value of the free cash the business will generate over one’s forecast time horizon. The problem comes with assessing the future free cash flow. It is a highly subjective and uncertain exercise.
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In general, stocks are not undervalued because they go up over some short time frame. But it’s hard to make a case that they’re not undervalued if they go up year after year over long periods of time — especially when they’ve provided excess rates of return over the market.
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There is very little value added trying to predict where the market is going or guessing whether it’s overpriced or underpriced.
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Managers should start out with the belief that if they are trying to actively manage money and outperform the market, the odds are against them.
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Passive management does not give investors the return of the index; it gives them the return of the index less costs. So, the longer they have their money passively managed, the greater their underperformance will be relative to the index.
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