Euphoria can lift housing and dot-com prices; panic can send sound banks tumbling.
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As “bandwagon” investors join any party, they create their own truth — for a while.
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It is not the certainty of disaster ahead but the uncertainty of better days to come that keeps the investor from buying.
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After many years of studying Wall Street’s victors and victims, I must conclude that the American public still insists on losing its savings every time the old hook is baited with the immortal easy-money worm. After every smash the blame is laid on the hook and not on the hunger.
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Firmly believing that stock speculation is an unbeatable game, I have come to the conclusion that while no bear operator ever made a large fortune in the stock market and kept it, unless he trusteed it, the greatest losses are sustained by the bulls, not because they are bulls, but because there are more of them — more optimists than pessimists.
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The public today is just as eager to buy a mystery as it was fifteen years ago or fifty years ago. The psychology of greed and cupidity has not changed appreciably.
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One of the speculators’ hells consists of thinking of the money you didn’t make. If you had only done what you ought to have done, but didn’t!
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The stock ticker knows more than everybody. It deals with results. It satisfies your craving for action. It makes life worth living. And when it says that you are an ass, it convinces even you of it.
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A man who has bought a stock against the advice of a conservative broker, and has doubled his money in a fortnight, finds his suspicions turned into convictions by the impartial judge, the stock ticker.
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All booms are alike. The stage setting varies, but fundamentally they are as drops of water. Customs, like costumes, change from force of environment and economic conditions, but human nature remains the same.
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People think they’re hiring a manager to make them money. But probably, they’re hiring a manager to keep them out of trouble and maybe fight their own instincts sometimes.
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The ability to not be getting margin calls, not be having redemptions, not be scared out of your mind when something’s gone against you is probably the most enhancing thing to long term returns.
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A great mob of easily led investors, eagerly searching for “straight tips” which may bring instant wealth, make their mistake in common, and when the mistake is disastrous they try, en masse, to escape.
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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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Bargain prices do not occur when consensus is cheery, the news is good, and investors are optimistic.
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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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One of the most powerful sources of mispricing is the tendency to over-weight or over-emphasize current conditions.
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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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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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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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The fact is that our theories of rationality in economic behavior rest upon introspection. We are as apt to deceive ourselves about the prudence and rationality of our plans as about their moral worth.
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When I started, I didn’t realize that the biggest profits usually come from sitting on a great position — from doing what looks like nothing to the outside world. You have more time than you think, so be patient.
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People who have had success in other parts of their lives have difficulty accepting how much failure there is in the stock market.
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In investing, where doing nothing often prevents blunders, a certain style of laziness is adaptive, but mental laziness isn’t, and not thinking independently is absolutely toxic.
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I don’t think it’s productive to wallow in regret. But if you’ve lost money in a stock and you don’t learn anything, that’s wasted money. Figure out what it is that you did wrong and don’t do it again.
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Stoic detachment combined with emotional awareness is the perfect combination for stocks. Feel the fear, but let reason decide.
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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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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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Difficult decisions require intellectual honesty, being able to see things as they are, not as you want them to be, and then facing up to problems and doing something about them.
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Failure to be honest with yourself is a problem in any business, but it is especially disastrous in an entrepreneurial company, where the risk-reward stakes are so high.
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Institutional investing, as it is structured today, simply makes it more difficult to make a high-conviction, long-term decision than to make a low-conviction, short-term decision. The rewards of short-term results substantially superior to the market, and the penalties of short-term results well below the market, are awesome.
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As history has taught us, most of the time, most of the crowd moves long after the optimum time to have moved is passed. So it is with investment trends, which start with the belief of a few and end with the conviction of the many.
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Early on I adopted a philosophy I call the Eleventh Commandment, “Thou shalt not take thyself too seriously,” and it became a governing principle in my life. Big investment deals can get heady at times, and it can be easy to start thinking your brand is bigger than your performance.
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I have a saying: “If everyone is going left, look right.” Conventional wisdom is nothing to me but a reference point.
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Reputation is your most important asset. Everything you do, everything you say, is part of the permanent record. Your name reflects your character.
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We may forgive ourselves for owning a market dullard when the rest of the market is also in the doldrums, but it is disheartening to see one’s favorite resting as quietly as a castor-oil bottle while the rest of the market goes gaily upward.
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Crowd enthusiasm, always greatest at the peak of a market, more often leads sensible men to behave foolishly. Nevertheless, the aim should be to have one’s self well enough in hand to be immune to outbursts of mass emotion.
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Vanity makes men sell good stocks and keep poor ones in times of distress. They don’t mind disposing of gilt-edged stocks which show a profit — the very ones which might finally make up the losses on others.
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Successful investing requires the management of your own ego and temperament and usually that of your clients as well.
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Faith in the future is as much motivated by confidence as it is a reflection of fear in acknowledging a mistake.
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Taking risks today for tomorrow’s reward is both the most challenging and difficult of tasks. Unbridled optimism must be tempered with reality.
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Investor anticipations, similar to the laws of economics, are shaped at the margin. That is why changes in earnings estimates follow, for the most part, changes in stock prices, and not vice versa as it should be.
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Most investors tend to cling to the course to which they are currently committed, especially at turning points.
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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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Too many businesspeople delude themselves. They want so much to believe that they listen only to what they want to hear and see only what they want to see.
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Discipline comes from the marketplace, from fear of loss and the consequences that come from overindulgence.
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People always have this emotional relationship with stocks, and once they have been bitten by something, it takes a while to get back into it.
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I know that stocks represent fractional ownership in businesses and that, over time, the stock market will reflect their true intrinsic values. And crises bring worries and fears that make many investors forget that simple fact.
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Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios which frequently appear downright imprudent in the eyes of conventional wisdom.
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Memory – and the resulting prudence – always comes out the loser when pitted against greed.
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The pendulum of investment psychology is constantly fluctuating between optimism and pessimism, between greed and fear, between credulousness and skepticism, between risk tolerance and risk aversion.
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The truth is markets are made up of people, with their emotions, insecurities, their tendency to go to extremes, and their other foibles. Thus, they often make mistakes and swing to erroneous extremes.
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Waiting patiently is an essential part of being an investor. And when you do take action, do it dynamically, forcefully.
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To be a great investor, you must have an approach, and you have to stick to it, despite the times when it’s not working.
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For some reason, because of the way investor psychology works, people switch from only seeing the good to seeing only the bad.
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The thesis underlying everything, whether you’re an actively managed fund or a passive fund, is that the U.S. will be OK. If you don’t believe that, you shouldn’t be in the stock market.
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It is important to make sure that one is not lured by rash enthusiasm into commitments at levels greatly above those soundly warranted by the financial set-up and the earnings record.
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If you are a long term investor, you don’t have to worry about market psychology.
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I think there is a mindset among many professional investors that if I go down the drain, well it is o.k. as long as everyone else is going down the drain with me.
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At the end of every day, I look at my stocks that went up and wish I had more and look at the ones that went down and wish I had less. It’s human nature.
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If I had to name one factor that dominates human bad decisions, it would be what I call denial.
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In the stock market, the most important organ is the stomach. It’s not the brain.
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People make changes in their lives and their portfolios because they are confident they are making a change for the better. Without that confidence, they would merely sit still.
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Any market will gain respectability if it goes up high enough and any market will lose respectability if it goes down enough.
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Investing isn’t about beating others at the game, it’s about controlling yourself at your own game.
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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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Inflection points occur in the market, and around them performance can suffer, but you have to stick to your guns.
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The mantra is patience, patience and more patience. Think long-term and remember that the big rewards accrue with compound annual rates of return.
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The achievements of natural science stand as convincing testimony to man’s ability to use reason. Unfortunately, these achievements do not ensure that human behavior is always governed by reason.
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One could say that my whole career in Wall Street proved one long process of education in human nature.
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There has always been a considerable number of pathetic dopes who busy themselves examining the last thousand numbers which have appeared on a roulette wheel, in search of such a repeating pattern. Sadly enough, they have usually found it.
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People would rather believe that they have been robbed than that they have been fools on the advice of fools.
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Although expectations of the future are supposed to be the driving force in the capital markets, those expectations are almost totally dominated by memories of the past. Ideas, once accepted, die hard.
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The underlying driving force behind market timing decisions seems to be emotional — fear, greed, chasing performance — buying something after it has gone up, disappointment, and sales after something has declined.
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You have to really understand the businesses that you’re buying through the medium of stocks. And unless you’re willing to put a lot into that, you shouldn’t expect to get much out of it.
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When people are looking for performance they sharpen their pencils and find reasons to buy.
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Consistency and patience are crucial. Most investors are their own worst enemies. Endurance enables compounding.
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The very best investors are the ones who invest according to their own psyche. You find that their investment styles are consistent with their personalities, their intellects, their approaches to work. It’s not somebody else’s style; it’s their own, and it’s deeply ingrained.
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Humility is an enormously important quality. You can’t win without it. Survival in the end is where the winners are by definition, and survival begins with humility.
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There is a considerable tendency for common stock investors to do the greater part of their buying, both of “good” and “bad” securities, at high levels of the market. They are equally inclined to do the greater part of their selling at low levels of the market, a procedure which is not conducive to successful results.
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I think I am safe in asserting that the margin trader, speculator, gambler, or whatever you choose to designate the average man who goes to Wall Street after easy money, does not lose money when he sells. He loses it when he buys!
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The human animal never behaves as wisely as he means to, particularly when his counselor is Hope or Fear.
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Periods of depression invariably follow periods of overoptimism, when fear replaces hope as the controlling emotion.
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You can’t imagine how many shrewd, experienced business men forget in Wall Street what it took them years to learn.
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Anything that helps make addicts out of occasional traders should be avoided as if it were the bubonic plague.
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