Quote for the Week

I refuse to attach a permanence to anything I see around me — including the pessimism I read today in The Wall Street Journal. With my 60 years of experience, I can’t tell you that any of the enormous developments I’ve witnessed, including two world wars and the spread of communism, have had any identifiable long-term effect on common stock investment.

When I started in the investment business, the first thing that happened was that World War I closed down the New York Stock Exchange for five months. It looked as if the end of the world had happened, but after a year and a half we were in the midst of a raging bull market.

Six months ago all you needed was a minimum of intelligence and a maximum of courage to be bullish. That’s changed, of course. Now it requires less courage but more intelligence to find the values. — Benjamin Graham (source)

Quote for the Week

Another very simple effect I very seldom see discussed either by investment managers or anybody else is the effect of taxes. If you’re going to buy something which compounds for 30 years at 15% per annum and you pay one 35% tax at the very end, the way that works out is that after taxes, you keep 13.3% per annum.

In contrast, if you bought the same investment, but had to pay taxes every year of 35% out of the 15% that you earned, then your return would be 15% minus 35% of 15% or only 9.75% per year compounded. So the difference there is over 3.5%. And what 3.5% does to the numbers over long holding periods like 30 years is truly eye-opening. If you sit back for long, long stretches in great companies, you can get a huge edge from nothing but the way that income taxes work.

Even with a 10% per annum investment, paying a 35% tax at the end gives you 8.3% after taxes as an annual compounded result after 30 years. In contrast, if you pay the 35% each year instead of at the end, your annual result goes down to 6.5%. So, you add nearly 2% of after-tax return per annum if you only achieve an average return by historical standards from common stock investments in companies with tiny dividend payout ratios…

There are huge advantages for an individual to get into a position where you make a few great investments and just sit back and wait: You’re paying less to brokers. You’re listening to less nonsense. And if it works, the governmental tax system gives you an extra 1, 2 or 3 percentage points per annum compounded. – Charlie Munger (source)

Quote for the Week

I think the idea of timing or hedging is a very difficult thing for investors to pull off. It is in the nature of the human psyche, we are much more likely—this is a behavioralist kind of argument—to make the wrong choices at the wrong time. We’ve compared returns earned by mutual fund investors—dollar-weighted returns—with returns earned by mutual funds themselves, or time-weighted returns, and the investors seem to lag the funds themselves by almost 3 percent per year. Fund investors put almost no money into equity funds in the late 1980s and early 1990s when stocks were cheap, and then they poured huge amounts of money into equity mutual funds between 1998 and the crash in 2000. Investors also bought the wrong kinds of funds, that is, in the three years leading up to the crash, they put nearly $500 billion into technology funds, telecommunications funds, and a whole new breed of aggressive growth funds we can describe as “new economy” funds. At the same time, they took about $100 billion out of value funds. Then, after the market crashed, they took money out of those aggressive growth funds and put it into value funds. Overall, investors seem to have an innate sense of bad timing. You can actually measure this. – John Bogle (source)

Ben Graham once alluded to the idea that the market cycle might as well be called the human-nature cycle. Because the rise and fall of speculative behavior follow the same path.

Graham, of course, meant it as a warning.

He saw speculation as an attempt to profit purely off of moves in market prices. Nothing else matters. Not valuation, earnings, cash flows, or what management is doing to improve the business. Just price.

In other words, if you’re buying a stock with the hope of flipping it to someone else at a higher price, then you’re speculating.

The keyword being hope. When you buy a stock for no reason other than you believe the price is going up, you’re going to need it. You might as well be gambling. Decisions based on price alone are almost always emotional and emotions ruin returns.