I got three ideas out of Ben’s book that have been the cornerstone of everything I’ve done, which are to look at stocks as part of a business rather than simply little things that go up and down. And then I took to heart his Mr. Market saga, which I think is vital to having the right attitude toward market fluctuations. Then third, the margin of safety.
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I don’t think there’ll ever be another Buffett, partly for the longevity, but partly because many people could never sustain that kind of return without blowing up.
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The challenge is whether you can invest in things that won’t be too bad on the day when the market turns.
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Risk to us goes back to not paying attention to how one does in the short term.
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I’ve always said you might as well assume the world is going to work, because if it doesn’t, it doesn’t really matter what your investment portfolio looks like.
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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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I am very focused on understanding the downside. And I have a pretty good track record, but it’s not perfect. You can’t play at this level without some pretty big highs and lows.
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The important thing to remember about investing is that it is not sufficient to set up a portfolio that will survive on average. The key is to survive at the low ends.
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The concept of surviving on average is irrelevant. You have to survive every day. Which means, really, that you have to survive on the bad days.
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Risk management means protecting oneself from the adverse and unexpected decisions others may make and, in the process, making better decisions than they do.
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You always need to be cognizant of six sigma events that can have ugly impacts on your portfolio and account for the approximate probabilities.
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We get protection by being price-conscious and by being extremely knowledgeable about our holdings.
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My mission isn’t to make money in bull markets. My mission is to preserve capital.
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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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The investment counsel business, as it is traditionally practiced, and probably as it should be practiced, is a simple process of making sure that clients never have so much risk exposure that their capital or standard of living can be impaired by some specific negative surprise.
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The three main objectives of investors are: (1) Capital conservation, or stability of market value of invested principal; (2) Liberal income at a fixed rate; and (3) Capital growth.
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Large losses are forever – in investing, in teenage driving, and in fidelity. If you avoid large losses with a strong defense, the winnings will have every opportunity to take care of themselves. And large losses are almost always caused by trying to get too much by taking too much risk.
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I don’t think the objective of investment should ever be to take a risk in order to get a return. I think the objective of shrewd investment should be to find opportunities which offer a larger return than the average, combined with adequate safety.
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To me, the primary task in investing is to test and then retest some more the parameters and paradigms that appear to govern daily events. Betting against them is dangerous when they look solid, but accepting them without question is the most dangerous step of all.
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The tour we’ve taken through the last century proves that market irrationality of an extreme kind periodically erupts — and compellingly suggests that investors wanting to do well had better learn how to deal with the next outbreak.
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If you quantify, you won’t necessarily rise to brilliance, but neither will you sink to craziness.
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If you risk something that is important to you for something that is unimportant to you it just doesn’t make sense.
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Many years ago, an older partner taught me to distinguish between outcomes that are unlikely and outcomes that are catastrophic. The latter are to be avoided even if the odds on them are tiny.
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One of my life principles is that the only way you can live life is by dealing with what is, and not with what might have been. So that’s the way I’ve tried to deal with setbacks.
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Investors need to pick their poison: Either make more money when times are good and have a really ugly year every so often, or protect on the downside and don’t be at the party so long when things are good.
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Avoiding round trips and short-term devastation enables you to be around for the long term.
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We try to protect against tail risk: the risk of unlikely but possible events that could be catastrophic.
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The way I would think about risk aversion is most people would not want to toss a coin for their entire net worth.
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It is crucial to have a strategy in place before problems hit, precisely because no one can accurately predict the future direction of the stock market or economy.
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The best investors do not target return; they focus first on risk, and only then decide whether the projected return justifies taking each particular risk.
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Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of risk must never take a backseat to return.
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You must always be prepared for the unexpected, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can be far worse.
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It is only in a bear market that the value investing discipline becomes especially important because value investing, virtually alone among strategies, gives you exposure to the upside with limited downside risk.
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Value investors thrive not by incurring high risk (as financial theory would suggest), but by deliberately avoiding or hedging the risks they identify.
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Higher risk investments often erode one’s capital and produce lower returns — the worst of all investment worlds. Higher-returns-for-higher-risks only applies on average and over time.
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The problem in investing, I think, is timing. You may be right. But in the long run, we’re all dead. Even if you’re right, if it takes 20 years to work out, it can be a disaster.
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You have to say to yourself, “If I’m right, how much am I going to make? If I’m wrong, how much am I going to lose?” That’s the risk/reward ratio.
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Diversification of risk matters not just defensively, but because it maximizes returns as well, because we expose ourselves to all of the opportunities that there may be out there.
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Survival as an investor over that famous long course depends from the very first on recognition that we do not know what is going to happen. We can speculate or calculate or estimate, but we can never be certain.
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When inflation is low, you feel that you know more about the future, and are much more willing to take risks.
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At times of shock, converting illiquid assets to cash to build flexibility is very expensive. Finding an umbrella in a rain storm might be impossible or very costly.Back to top. Source: Link
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There’s no asset so good that it can’t be overpriced and become a bad investment, and very few assets are so bad they can’t be underpriced and be a good investment.
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I spend a great deal of my personal time trying to figure out one thing, which is, at a given point in time, how should you balance aggressiveness and defensiveness in your portfolio.
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Investment survival has to be achieved in the short run, not on average in the long run.
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Let us define the speculator as one who seeks to profit from market movements, without primary regard to intrinsic values; the “prudent stock investor” as one who (a) buys only at prices amply supported by underlying value, and (b) who determinedly reduces his stock holdings when the market enters the speculative phase of a sustained advance.
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The only significance of stock market gyrations to the true investor is that they give him an opportunity to buy good common stocks when they are cheap — or at least reasonably priced — and at times offer him an invitation to sell out at temptingly high levels.
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A large advance in the stock market is basically a sign for caution and not a reason for confidence.
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Let us define the speculator as one who seeks to profit from market movements, without primary regard to intrinsic value; the prudent stock investor as one who (a) buys only at prices amply supported by underlying value, and (b) who determinedly reduces his stock holdings when the market enters the speculative phase of a sustained advance.
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The future, as I see it, is something to be protected against rather than to exploit.
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Risk-taking is an inevitable ingredient in investing, and in life, but never take a risk you do not have to take.
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I view diversification not only as a survival strategy but as an aggressive strategy, because the next windfall might come from a surprising place.
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The greatest risks are the risks that we don’t see and the most difficult problem is in preparing in advance for that kind of thing.
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The trick in risk management is in recognizing that normal is not a state of nature, but a state of transition and that trend is not destiny.
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One of the tricks of this business is, keep your losses down and then, if you have a few good breaks, the compounding works well for you.
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We would rather underperform in a huge bull market than get clobbered in a really bad bear market.
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It’s not as simple as having timid people and bold people. Some people will be risk averse in one circumstance and not so averse in another. It’s oversimplifying human nature to think we can put people into those two categories as the only psychological measure we use.
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The first and foremost responsibility of every investor is preservation of capital.
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Whenever we consider an investment, we think just as much or more about what can go wrong as about what can go right, and we put the avoidance of losses on a high pedestal.
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The point is to consider risk control, loss avoidance, at least as important as return.
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