Bits & pieces
4 October 2019
Lessons Learnt – Part 7. A lot has been learnt by market pundits since what is widely
acknowledged as being the world’s first stock exchange commenced business in 1602 in
Amsterdam.
This week I’ve once again aggregated the thoughts, rules and principles of a number of the
world’s most decorated investors, traders, businessmen and some others – this is the seventh
batch of lessons I’ve compiled. Links to the six previous editions are on page 2.
As you might expect there are numerous divergences in the views of these financial practitioners
but there are also more than a few overlaps. Some investors have been highlighted in previous
editions but return in this one with additional lessons. Hopefully you will find a couple of extra
financial mantras to work by as I once again did.
“In the stock market, the most important organ is the stomach. It's not the brain.” Vice Chairman Fidelity
Investments Peter Lynch
“If I had to single out one piece of advice that’s guided me through life, most likely it would be from my
grandmother, Nellie Molonson. She always made a point of making sure I understood that on the road to
success, there’s no point in blaming others when you fail. Here’s how she put it: “Sonny, I don’t care who
you are. Some day you’re going to have to sit on your own bottom.” Extract from the final message from T
Boone Pickens who passed last month
“H + W + P = E (Hoping + Wishing + Praying = Exit the trade)” Peak Performance coach Doug Hirschhorn
“An investor is aiming, or should be aiming primarily at long-period results, and should be solely judged by
these. The fact of holding shares which have fallen in a general decline of the market proves nothing and
should not be a subject of reproach… If we deal in equities, it is inevitable that there should be large
fluctuations. Some part of paper profits is certain to disappear in bad times. Results must be judged by what
one does on the round journey.” John Maynard Keynes
“I try to determine whether a company can create that wealth and, more important, whether management is
willing to share that wealth with shareholders ….. Whenever I meet a CEO, I try to determine if he or she is
trying to make me a partner or simply pitch me a stock.” Capital Group’s Bill Hurt
“In any given situation you’re either a ‘plus-one’, a ‘zero’ or a ‘minus-one’. If you’re a plus-one, you’re actively
adding value. If you’re a zero, you’re generally competent and don’t get in the way. Being a minus-one sucks,
because you’re a liability and actively cause problems.” Astronaut Chris Hadfield
“A key lesson from the history of investment markets is that they don’t seem to learn. The same mistakes are
repeated over and over as markets lurch from one extreme to another. This is even though after each bust
many say it will never happen again and the regulators move in to try and make sure it doesn’t. But it does!
Often just somewhere else. Sure, the details change but the pattern doesn’t.” AMP Investments Shane Oliver
on one of the key nine lessons he’s learnt over his 35 years in markets
“The biggest risk is not knowing what you are doing. The derivation of the word “risk” reaches back to the
early Italian risicare, which translates as “to dare.” Risk looked at from this viewpoint is a choice rather than
a fate. For a true long-term investor, the choice, by definition, must be survival, or you can forget that longterm stuff.” American financial historian, economist Peter Bernstein
“People who think they know all the answers probably don’t even know the questions. That was very astute.
He also said the four most dangerous words were, “This time is different.” But the one that really has stuck
with me is to buy when others are despondently selling and sell when others are greedily buying. That’s
what it’s all about, but it’s the most difficult thing to do.” Former head of Templeton Emerging Markets
Group Mark Mobius answering the question - What were some of the most important lessons you learned
from John Templeton?
Plus:
 Wisdom from Gerald Loeb, What Buffett wouldn’t do, Ned Davis: 9 Rules of Research, Rules for
Shorting, Howard Marks, Ten Hell’s of the Speculator, The art of speculation by Philip Carret, Bill
Gates lessons, Reid Hoffman 16 lessons, Lessons from Caddyshack, Bill Belichick ….. and more
 Last Word – Chicken science
Damian Kestel
Australian mobile: (+61) 401 362629
damian.kestel@clsa.com
Prepared for - RD: CapitalIQ
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Lessons Learnt - Part 7
A lot has been learnt by market pundits since what is widely acknowledged as being the world's first
stock exchange commenced business in 1602 .in Amsterdam.
This week I've once again aggregated the thoughts, rules and principles of a number of the world's
most decorated investors, traders, businessmen and some others - this is the seventh batch of lessons
I've compiled for some reading in recent years. Links to the six previous editions are below:
Lessons Learnt - Part 1 Link HERE
Lessons Learnt - Part 2 Link HERE
Lessons Learnt - Part 3 Link HERE
Lessons Learnt - Part 4 Link HERE
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Lessons Learnt - Part 5 Link HERE
Lessons Learnt - Part 6 Link HERE
As you might expect there are numerous divergences in the views of these financial practitioners but
there are also more than a few overlaps. Some investors have been highlighted in previous editions but
return in this one with additional lessons. Hopefully you will find a couple of extra financial mantras to
work by as I once again did.
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/N'/TH
Hirschhorn: 15 Best Practices for PMs by Barry Rithoitz
15 Best Practices Doug Hirschhorn observed over the years as a Peak Performance
Coach to PMs at Hedge Funds
1) Ask yourself, "Is today a day to make money, do very little or limit losses?"
2) Always think, "If I had no position on right now, what would I do?"
3) Learn to endure the pain of your gains.
4) The path of the trade is much more important than the idea behind the trade.
5) Listen to observations rather than opinions.
6) 45%-55% is the average winning% of Long/Short Discretionary traders (successful trading is not
about being "right," it is about making more when you are right and losing less when you are wrong.)
7) You can have 1000 reasons to get in a trade, but you only need 1 reason to get out.
8) Talk and think in terms of 0/o and BPS rather than $.
9) Make decisions based on Expected Values.
10) The market does not know your position or your P & Land the market is not out to "get you."
11) No Edge, No Trade Small Edge, Small Trade Big Edge, Big Trade
12) Trade your ideas, not someone else's.
13) Making money is easy, keeping it is hard.
14) The market does not "owe" you anything.
-,/
15) H + W = p = E? (Hoping+ Wishing+ Praying= Exit the Trade!)
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Wisdom from Gerald Loeb
Gerald Loeb (July 1899- April13, 1974) was a founding partner ofE.F. Hutton & Co., a renowned Wall Street trader and
brokerage ftnn. He is the author of The Battle For Investment Survival:
The most important thing I have learned over the last 40 years in Wall Street is to realize how little everyone
knows and how little I know.
Human nature being what it is, a person buying a stock at the wrong time is very apt to double his error and sell
it at the wrong time.
Almost every stock at some time or another is over-valued or under-valued, and generally once in its history
either grossly over-valued or at an extreme bargain price.
Stocks ordinarily make their highs at the moment that the greatest number of people visualize the greatest
® possible value, and not necessarily at the moment when the highest earnings or highest dividends or
highest values are actually achieved.
Stocks make their lows at that time and point when the greatest number of actjve investors think the worst of
them.
But remember, life is a succession of cycles. Day and night. Hot and cold. Good times and bad. High prices and
low. Dividends increased and dividends cut. So don't expect your investments to be the exception to the
rule.
Emotions have no place in investment decisions. Trouble is, we all have them to a greater or lesser degree.
For every example of a company that has compounded its growth by wise investment of its cash there are
several that would have done better to pass their surplus on to their stockholders.
It takes superior management to adapt to change. And it takes superior management to build worthy successors
to follow in their footsteps.
Bull markets are not generally recognized until they have run some distance. The great danger is that you are
apt to be very cautious in the early stages and then throw caution to the wind when the market keeps going
higher and your original opinion seems to be wrong.
(
To make money in the stock market you have to either be ahead of the crowd or very sure they are going)
in the same direction for some time to come.
Remember that stocks invariably become ''undervalued" or "overvalued." They overshoot their logical goals or
levels.
"Buy low, sell high" is one of those wonderful ideas which may work out well for those who can learn the
ropes. It can be a rather expensive idea if it is just applied as a generalization.
As in every other investment situation, market action never exactly coincides with realization. The average
stock goes up on great expectations. Very often the rise is excessive. It frequently occurs well ahead of
actualities. Sometimes the whole expectation is never realized.
It is true that, strictly speaking, short-term trading is speculative. But so is all intelligent investing.
Your best weapons against the forces that tend to clip your fortune are knowledge and experience.
It is my contention that none of us know what is going to happen to any stock regardless of quality or history.
?
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Prepared for - RD: CapitalIQ
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Gerald Loeb cont' d
It is human nature to feel optimistic and confident when prices go up. When prices go down people begin to
question whether they were correct in buying in the first place.
I feel that investing is a very inexact science or no science at all. I think it can only be successfully done by
feeling your way along, cutting short losses, concentrating on the profitable situations and certainly, above all,
avoiding being locked into an inflexible long-term program.
If you don't feel confident enough to invest a sum that is important to you, better look for something else.
Following trends is easier than trying to call turns in them.
Limiting losses is like paying worthwhile insurance premiums. The novice can limit his losses mathematically.
The expert will have his reasons. The fool will let them run.
The next time you think you see a bargain, take it as a red signal to look further and see if you have missed an
important weakness.
Making a commitment is many times easier than closing one.
It is the expectation of coming events, rather than the events when they materialize, that moves markets.
''What Buffett wouldn't do''
Interesting column at Bloomberg asking "What Buffett wouldn't do"
Investing:
• Don't be too fixated on daily moves in the stock market (from Berkshire letter
•
~(»/'J?
•
•
•
)' •
•
published in 2014)
Don't get excited about your investment gains when the market is climbing
(1996)
Don't be distracted by macroeconomic forecasts (2004)
Don't limit yourself to just one industry (2008)
Don't get taken by formulas (2009)
Don't be short on cash when you need it most (20 10)
Don't wager against the U.S. and its economic potential (2015)
Management:
•
•
•
•
•
•
•
Don't beat yourself up over wrong decisions; take responsibility for them (2001)
Don't have mandatory retirement ages (1992)
"Don't ask the barber whether you need a haircut" because the answer will be
what's best for the man with the scissors (1983)
Don't dawdle (2006)
Don't interfere with great managers (1994)
Don't succumb to the attitudes that undermine businesses (2015)
Don't be greedy about compensation, if you're my successor (2015)
Last, Buffett advises "Don't worry about my health"- because Berkshire's future success is is tied
to reinsurance lieutenant Ajit Jain. "Worry about his." (2001)
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Lessons from an investing legend
Former Fidelity fund manager Peter Lynch shares some of his secrets to success.
Fidelity Viewpoints – 09/18/2019
Brain
versus
Stomach
When Peter Lynch began work at Fidelity 50 years ago, you could buy lunch for less than a dollar, you had to wait for
the mail to read an annual report, and the Dow Jones Industrial Average hadn’t hit 1,000.
Much has changed—but not Peter Lynch's boyish fascination with stocks. Looking spry in a dark blue suit, yellow tie,
and sneakers, he recently popped into Fidelity's Chart Room (where market trends were once hand-drawn and posted on
the walls) to share some of his investing wisdom with Viewpoints.
For the 13 years that Lynch ran Fidelity's Magellan® Fund (1977–1990), he earned a reputation as a top performer,
increasing assets under management from $18 million to $14 billion (as of 1990). Since then, Lynch has mentored
virtually every equity analyst at Fidelity. He also authored several top-selling books on investing, including One Up on
Wall Street and Beating the Street, and has been a generous contributor to the Boston community, the Catholic Schools
Foundation and the Inner City Scholarship Fund.
Whether you enjoy picking individual stocks, aspire to it, or prefer to rely on professional management in the form of
mutual funds, ETFs, or managed accounts, his plain-spoken wisdom can help you become a better investor.
What do you need to become a great investor?
Lynch: In the stock market, the most important organ is the stomach. It's not the brain.
On the way to work, the amount of bad news you could hear is almost infinite now. So the question is: Can you take
that? Do you really have faith that 10 years, 20 years, 30 years from now common stocks are the place to be. If you
believe in that, you should have some money in equity funds.
It's a question of what's your tolerance for pain. There will still be declines. It might be tomorrow. It might be a year
from now. Who knows when it's going to happen? The question is: Are you ready—do you have the stomach for this?
Most people do really well because they just hang in there.
The stock market has been on a bull run for more than 10 years now.
Is it time for investors to trim their exposure to stocks?
Lynch: Long term, the stock market's a very good place to be. But I could toss a coin now. Is it going to be
lower 2 years from now? Higher? I don't know.
But more people have lost money waiting for corrections and anticipating corrections than in the actual
corrections. I mean, trying to predict market highs and lows is not productive.
Cont'd >
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How do you feel when the market drops?
Peter Lynch Q&A cont'd
Lynch: Over the 13 years I ran Magellan ® the market went down 9 times 10% or more. Every time it went down, the
fund went down more. So I just didn't worry about it.
The stock market's been the best place to be over the last 10 years, 30 years, 100 years. But if you need the money in 1
or 2 years, you shouldn't be buying stocks. You should think about being in a money market fund.
What should investors do when the market eventually tanks?
Lynch: You've got to look in the mirror every day and say: What am I going to do if the market goes down 10%? What
do I do if it goes down 20%? Am I going to sell? Am I going to get out? If that's your answer, you should consider
reducing your stock holdings today.
What's the biggest mistake you see individual investors making?
Lynch: The public's careful when they buy a house, when they buy a refrigerator, when they buy a car. They'll work
hours to save a hundred dollars on a roundtrip air ticket. They'll put $5,000 or $10,000 on some zany idea they heard on
the bus. That's gambling. That's not investing. That's not research. That's just total speculation.
What do you look for when shopping for stocks to buy?
Lynch: In baseball terms, you want to buy in the second or third inning and get out in the seventh or eighth.
Walmart was in only 15% of the United States when they were a 10-year-old public company. All they did for the next
30 years was go from 15% to 100%. The stock went up 50-fold. They had a great formula, and they just rolled with it in
the United States.
How do you think about the economy's impact on stocks?
Lynch: I think if you spent over 13 minutes a year on economics, you've wasted over 10 minutes. I mean, it's not
helpful. Everybody wants to predict the future, and I've tried to call the 1-800 psychic hotlines. It hasn't helped. The
only thing I would look at is what's happening right now. Ha ha
Have you ever had a big flop?
Lynch: I've had so many flops. One time I bought a retailer with these great dresses. They were on the cover of Vogue 3
times, and the company had no debt, which is really important. It's hard to go backward if you have no debt. You get an
award for that. So they had everything right and all of a sudden this movie Bonnie and Clyde comes out and the hemline
goes from above the knee by two inches to the ankle. So the stuff they had was useless, and they didn't have new stuff
for the next season. Two years later, things calmed down, but the company was gone.
So you have flops. Maybe you're right 5 or 6 times out of 10. But if your winners go up 4- or 10- or 20-fold, it
makes up for the ones where you lost 50%, 75%, or 100%.
You have just celebrated your 50th anniversary at Fidelity. As you
look back, what do you feel has changed most?
Lynch: The data now is so good. I remember waiting for the mail to come to our library to check Nike's annual report.
Now when somebody reports earnings, it's telecast all over the world. They have an investor presentation. They show a
balance sheet. The data's there. And it's free.
So theoretically the individual's edge has improved in the last 20, 30 years versus the professional. The problem is
people have so many biases. They won't look at a railroad, an oil company, a steel company. They’re only going to look
at companies growing 40% a year. They won't look at turn-arounds. Or companies with unions. You have to really be
agnostic
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Ned Davis: 9 Rules of Research by Barry Ritholtz
Ned Davis’ 9 Rules of Research
1. Don’t Fight the Tape – the trend is your friend, go with Mo (Momentum that is)
2. Don’t Fight the Fed – Fed policy influences interest rates and liquidity – money
moves markets.
3. Beware of the Crowd at Extremes – psychology and liquidity are linked, relative
relationships revert, valuation = long‐term extremes in psychology, general crowd
psychology impacts the markets
4. Rely on Objective Indicators – indicators are not perfect but objectively give you
consistency, use observable evidence not theoretical
5. Be Disciplined – anchor exposure to facts not gut reaction
6. Practice Risk Management – being right is very difficult…thus, making money
needs risk management
7. Remain Flexible – adapt to changes in data, the environment, and the markets
8. Money Management Rules – be humble and flexible – be able to turn emotions
upside down, let profits run and cut losses short, think in terms of risk including
opportunity risk of missing a bull market, buy the rumor and sell the news
9. Those Who Do Not Study History Are Condemned to Repeat Its Mistakes
Rules for Shorting – Barry Ritholtz
1. Shorting Momentum names is dangerous: Unless you are Superman, never step in front of a speeding
locomotive
2. Valuation alone is insufficient reason to get short a stock — History teaches us that cheap stocks can
get cheaper, dear stocks can get more expensive
3. ALWAYS work with a pre‐determined loss — either a physical or mental stop loss — Never leave
yourself open to infinite losses
4. Fundamentals tell you WHY to short something, not WHEN to short it. ALWAYS have some technical
confirmation before shorting. Make a short selling wish list, then WAIT for technical confirmation. (We
use Money Flow, Short Term Trend lines, Institutional Ownership, Analyst Ratings).
5. It is tough to be a contrarian: During Bull and Bear cycles, the Crowd IS the market.
You have to figure out two things:
…a) When the crowd is wrong — Doug Kass calls it “Variant Perception”
…b) When the crowd starts to get an inkling they are wrong
At the turns — not the major trends — is where contrarians clean up.
6. Look for Over‐owned, Over‐loved stocks: 95% Institutional ownership, All buys or Strong Buys (no
sells), and 700% gains over the past few years are reasons to put names on your short selling wish
list. (That is how my partner Kevin Lane found and shorted Enron and Tyco back in the 1990s).
7. Beware the “Crowded Short“– they tend to become targets of the squeeze!
8. You can use Options to either juice your short returns, or pre‐define your risk capital (options)
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A final message from T. Boone Pickens shared before his
passing on September 11, 2019 Published on 19 September, 2019
T. Boone Pickens
"Whaddya got?"
The following message from T. Boone Pickens was written prior to his passing on September 11, 2019.
If you are reading this, I have passed on from this world — not as big a deal for you as it was for me.
In my final months, I came to the sad reality that my life really did have a fourth quarter and the clock really would
run out on me. I took the time to convey some thoughts that reflect back on my rich and full life.
I was able to amass 1.9 million Linkedin followers. On Twitter, more than 145,000 (thanks, Drake). This is my
goodbye to each of you.
One question I was asked time and again: What is it that you will leave behind?
That’s at the heart of one of my favorite poems, "Indispensable Man," which Saxon White Kessinger wrote in 1959.
Here are a few stanzas that get to the heart of the matter:
Sometime when you feel that your going
Would leave an unfillable hole,
Just follow these simple instructions
And see how they humble your soul;
Take a bucket and fill it with water,
Put your hand in it up to the wrist,
Pull it out and the hole that’s remaining
Is a measure of how you’ll be missed.
You can splash all you wish when you enter,
You may stir up the water galore,
But stop and you’ll find that in no time
It looks quite the same as before.
You be the judge of how long the bucket remembers me.
I’ve long recognized the power of effective communication. That’s why in my later years I began to reflect on the
many life lessons I learned along the way, and shared them with all who would listen.
Fortunately, I found the young have a thirst for this message. Many times over the years, I was fortunate enough to
speak at student commencement ceremonies, and that gave me the chance to look out into a sea of the future and
share some of these thoughts with young minds. My favorite of these speeches included my grandchildren in the
audience.
What I would tell them was this Depression-era baby from tiny Holdenville, Oklahoma — that wide expanse where
the pavement ends, the West begins, and the Rock Island crosses the Frisco — lived a pretty good life.
In those speeches, I’d always offer these future leaders a deal: I would trade them my wealth and success, my
68,000-acre ranch and private jet, in exchange for their seat in the audience. That way, I told them, I’d get
the opportunity to start over, experience every opportunity America has to offer.
It’s your shot now.
MORE >>>
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If I had to single out one piece of advice that’s guided me through life, most likely it would be from my
grandmother, Nellie Molonson. She always made a point of making sure I understood that on the road to success,
there’s no point in blaming others when you fail.
Here’s how she put it:
T Boone Pickens (cont'd)
“Sonny, I don’t care who you are. Some day you’re going to have to sit on your own bottom.”
After more than half a century in the energy business, her advice has proven itself to be spot-on time and time
again. My failures? I never have any doubt whom they can be traced back to. My successes? Most likely the same
guy.
Never forget where you come from. I was fortunate to receive the right kind of direction, leadership, and work
ethic — first in Holdenville, then as a teen in Amarillo, Texas, and continuing in college at what became Oklahoma
State University. I honored the values my family instilled in me, and was honored many times over by the success
they allowed me to achieve.
I also long practiced what my mother preached to me throughout her life — be generous. Those values came into
play throughout my career, but especially so as my philanthropic giving exceeded my substantial net worth in recent
years.
For most of my adult life, I’ve believed that I was put on Earth to make money and be generous with it. I’ve never
been a fan of inherited wealth. My family is taken care of, but I was far down this philanthropic road when, in 2010,
Warren Buffet and Bill Gates asked me to take their Giving Pledge, a commitment by the world's wealthiest to
dedicate the majority of their wealth to philanthropy. I agreed immediately.
I liked knowing that I helped a lot of people. I received letters every day thanking me for what I did, the change I
fostered in other people’s lives. Those people should know that I appreciated their letters.
My wealth was built through some key principles, including:
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KEY PRINCIPLES
A good work ethic is critical.
Don’t think competition is bad, but play by the rules. I loved to compete and win. I never wanted the other
guy to do badly; I just wanted to do a little better than he did.
Learn to analyze well. Assess the risks and the prospective rewards, and keep it simple.
Be willing to make decisions. That’s the most important quality in a good leader: Avoid the “Ready-aimaim-aim-aim” syndrome. You have to be willing to fire.
Learn from mistakes. That’s not just a cliché. I sure made my share. Remember the doors that smashed your
fingers the first time and be more careful the next trip through.
Be humble. I always believed the higher a monkey climbs in the tree, the more people below can see his ass.
You don’t have to be that monkey.
Don’t look to government to solve problems — the strength of this country is in its people.
Stay fit. You don’t want to get old and feel bad. You’ll also get a lot more accomplished and feel better
about yourself if you stay fit. I didn’t make it to 91 by neglecting my health.
Embrace change. Although older people are generally threatened by change, young people loved me
because I embraced change rather than running from it. Change creates opportunity.
Have faith, both in spiritual matters and in humanity, and in yourself. That faith will see you through
the dark times we all navigate.
Over the years, my staff got used to hearing me in a meeting or on the phone asking, “Whaddya got?” That’s
probably what my Maker is asking me about now.
Here’s my best answer.
I left an undying love for America, and the hope it presents for all. I left a passion for entrepreneurship, and the
promise it sustains. I left the belief that future generations can and will do better than my own.
Thank you. It’s time we all move on.
Prepared for - RD: CapitalIQ
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Lessons front Keynes the Investor
March 27,2019 by Jon at the Novel Investor
He didn't have a great start but he learned quickly and finished strong .. .for the most part. His professional
track record was great, running the Chest Fund and advising for two insurance companies and several
investment trusts.
On the Action
If I sell Americans at this juncture, what am I aiming at?
(I) buying back at a substantial profit
C
(2) buying back at a loss when the bull market is more clearly established
(3) not buying back at all
( 4) helping the brokers with their overhead or
(5) enjoying the pleasurable sensations of activity?
It is only (5) that really appeals to me. (3) is next best but isn't it too soon for that?
The game of professional investment is intolerably boring and over-exacting to anyone who is
entirely exempt from the gambling instinct: whilst he who has it must pay to this propensity the
appropriate toll.
On Holding On
I do not believe that selling at very low prices is a remedy for having failed to sell at high ones.
Mistakes are easily compounded, as Keynes points out here. Having recognized the mistake of not selling at
the top, the last thing anyone should do is make another mistake of selling near the bottom. By then it's likely
already too late. Keynes repeats this idea numerous times while pointing out how market tops are incredibly
easier to see after the fact, than before it happens. That is why investors are usually better off waiting than
acting.
On Handling the Short Run with a Long Run View
YeP
@
An investor is aiming, or should be aiming primarily at long-period results. and should be solely
judged by these. The fact of holding shares which have fallen in a general decline of the market
proves nothing and should not be a subject of reproach ... If we deal in equities, it is inevitable that
there should be large fluctuations. Some part of paper profits is certain to disappear in bad times.
Results must be judged by what one does on the round journey.
Keynes wrote a lot about market fluctuations and the importance of maintaining a long term view. It's easy to
say that market fluctuations are a feature not to be obsessed or worried about but accepted as normal. But
Keynes knew that's not easy to do.
The modern habit of concentrating on calculations of appreciation and depreciation tends to
interfere with what should be the proper habit of mind that the object of an investment policy is
averaging through time.
A lot about investing is counterintuitive. Decisions based on the short run often conflict with what's best for
the long run. That's why chasing returns appear right in the short term but lead to worse returns in the long
run.
It seems to me to be most important not to be upset out of one's permanent holdings by being too
attentive to market movements. It is indeed awfully bad for all of us to be constantly revaluing our
investments according to market movements. Of course. it would be silly to ignore such things. but
one's whole tendency is to be too much influenced by them.
Keynes also believed that it was important to pay attention to the short term, even though you shouldn't be
acting on. More to the point, you need to be prepared for whatever the short run throws at you because
surviving the short run is how you succeed in the long run.
Source: The Collected Writings of]ohn Maynard Keynes
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Lessons from Howard Marks' Book: "Mastering the
Market Cycle- Getting the Odds on Your Side"
Tren Griffin
"Recognizing and dealing with risk and understanding where we are in the cycle are really the two keys
to success."
"Recent performance doesn't tell us anything we can rely on about the short-term future," he says, "but it
does tell us something about the longer-term probabilities or tendencies."
Marks explains in his new book that by doing things like reading widely, studying history and paying close
attention to the state of the world right now, an investor or business person can be generally aware of
where the cycle might be even though they can't predict precisely when it will shift in the short term. By
doing this work an investor or business person can increase their margin of safety by "getting the odds on
their side." Marks believes that the right way make this analysis is to think probabilistically." Marks
suggested that investors calibrate their exposure to risk using: "a continuum from 0 to 100, he says, with OJ
being completely out of the market and 100 being completely in using aggressive techniques like
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investing with borrowed money."
"while they may not know what lies ahead, investors can enhance their likelihood of success if they base
their actions on a sense for where the market stands in its cycle .... there is no single reliable gauge that one
can look to for an indication of whether market participants' behavior at a point in time is prudent or
imprudent. All we can do is assemble anecdotal evidence and try to draw the correct inferences from
it."
"Experience is what you got
when you didn't get what
you Wan ted" Howard Marks
"While the details of market cycles (such as their timing, amplitude and speed of fluctuations) differ from
one to the next, as do their particular causes and effects, there are certain themes that prove relevant in
cycle after cycle." Marks believes that if you read widely and pay attention to what is happening in the
world by reading and doing the right research is it possible to see patterns that can inform an investor
about the current state of the cycle.
"Nobody ever says, "My opinion is X, and I think I'm wrong." We all think that our opinions are correct." It
is one thing to have an opinion, but quite another to believe that it is necessarily right."
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"There are two things 1would never say when referring to the market: "get out" and "it's time." I'm not
that smart, and I'm never that sure. The media like to hear people say "get in" or "get out," but most of
the time the correct action is somewhere in between. Investing is not black or white, in or out, risky or
safe. The key word is "calibrate." The amount you have invested, your allocation of capital among the
various possibilities, and the riskiness of the things you own all should be calibrated along a continuum
that runs from aggressive to defensive."
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" ... you can prepare; you can't predict. The thing that caused the bubble to burst was the insubstantiality
of mortgage-backed securities, especially subprime. If you read the memos, you won't find a word about
it. We didn't predict that. We didn't even know about it. It was occurring in an odd corner of the securities
market. Most of us didn't know about it, but it is what brought the house down and we had no idea. But
we were prepared because we simply knew that we were on dangerous ground, and that required
cautious preparation."
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This graphic below appears on page 216 of the new book. It is a graphic representation of why Marks
believes that there is value in knowing roughly where the cycle might be even if you can make short term
forecasts about where it is going. Marks explains:
"Since market cycles vary from one to the next in terms of amplitude, pace and duration of their
fluctuations, they're not regular enough to enable us to be sure what' II happen next on the basis of what
has gone on before. Thus from a given point in the cycle, the market is capable of moving in any directions,
up flat or down. But that does not mean that all three are equally likely. Where we stand influences the
tendencies or probabilities, even if it does not determine future developments with certainty .... Assessing
our cycle position doesn't tell is what will happen next, just what's more or less likely. But that's a lot."
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{lJ "One of those most important things is knowing where we stand in the cycle. I don't believe in forecasts.
We always say, "We never know where we're going, but we sure as hell ought to know where we are." I
can't tell you what's going to happen tomorrow, but I should be able to assess the current environment,
and that's the kind of thinking that helped us prepare for the crisis. I think that the two most important
things are where we stand in the cycle and the broad subject of risk, and in fact, where we stand in the
cycle is the primary determinant of risk."
"The themes that provide warning signals in every boom/bust are the general ones: that excessive
optimism is a dangerous thing; that risk aversion is an essential ingredient for the market to be safe; and
that overly generous capital markets ultimately lead to unwise financing, and thus to danger for
participants."
Investors in Turbulent Markets
Mohamed A. El-Erian, gives these three bulleted lessons investors should be learning
from the current shift in volatility:
1. Long periods of market calm create the technical conditions for violent air pockets.
2. Crowded trades can be a lot more unstable than most investors expect.
3. During market turmoil, investor differentiation gives way to indiscriminate action.
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10 Life Lessons from Astronaut Chris Hadfield
Chris Hadfield is an amazing human being. He commanded the International Space
Station. He used YouTube to teach us about life in orbit. He used Twitter to give
us a new perspective on our planet. He did that viral cover of Bowie’s Space
Oddity. Then he came home. He wrote a book called An Astronaut’s Guide to Life on
Earth. Here are some lessons from it.
1. Have an attitude
In NASA terminology, your attitude is your orientation relative to two positions, for example your spaceship
relative to the Earth and a satellite. Losing your attitude is bad, because you could end up drifting, lost and
alone in outer space.
Chris Hadfield also thinks of life trajectory like attitude control – you need to stay on the right path to achieve
your goals. It’s always not in your control whether you get there or not, but you can do everything in your
power to make it happen. In life, losing your attitude – drifting from your path – is way worse than not
reaching your destination.
2. Aim for zero
DON'T BE A MINUS-ONE
In any given situation, according to Hadfield, you’re either a ‘plus-one’, a ‘zero’ or a ‘minus-one’. If
you’re a plus-one, you’re actively adding value. If you’re a zero, you’re generally competent and don’t get in
the way. Being a minus-one sucks, because you’re a liability and actively cause problems.
However, if you’re a plus-one and you walk into a situation trying to prove how great you are, you can go
from a plus one to a minus one – your ‘I got this’ mentality might easily irritate and prove detrimental to the
dynamic.
So the best thing to do in a new situation? Aim for zero. Listen. Observe. Offer advice. Don’t try
to take control of everything. If you know what you’re doing, you won’t need to tell people you’re a plus one.
They’ll know it.
3. Utilise the power of negative thinking
‘Negative thinking’ sounds pessimistic. Defeatist. But when you think about it, planning for the worst can
actually be energising and confidence-boosting. How? Well, if you always prepare a contingency for every
scenario you’ll never be caught off-guard.
Chris Hadfield’s approach is to ask: “What’s the next thing that could kill me?” It sounds exhausting
and masochistic. But actually, it isn’t. By thinking about what could go wrong in any specific situation, you
preempt problems with your own solutions. And that means you can actually relax and enjoy life, knowing
you’re ready to act if things go wrong.
4. Sweat the small stuff
“An astronaut who doesn’t sweat the small stuff is a dead astronaut,” says Hadfield. The lesson: averting
disaster isn’t about making one-off life-or-death decisions – it’s about learning and understanding all the
little things that develop into a bigger issue. An example of astronaut small stuff is knowing the ‘boldface’ –
the tried-and-tested instructions that make up NASA’s Flight Rules manual.
Not sweating the small stuff runs counter to conventional wisdom, yet there’s truth in it. Yes, an astronaut’s
work environment is radically more hostile and dangerous than most people’s. But the point is that paying
attention to the granular details – like physical health symptoms or signs of car trouble – makes you
incrementally safer.
CONT'D >>>
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5. Do care what others think
Astronaut Chris Hadfield continues .....
It’s hard to accept we’re not in control of our own destiny. But the fact is other people have more
influence over the course of our careers and lives than we do. Chris Hadfield has been to space
three times – in 1995 and 2001 on the Space Shuttle and 2013 on the ISS. Yet no matter how hard he worked,
it was always someone else’s decision to put him on a mission.
Which means it makes sense to care what people think about you and your performance. So get feedback.
Learn from it. Improve. If the only opinion you’re worried about is your own, you’re probably going to limit
your progress.
6. When the stakes are high, preparation is everything
We can’t always control what happens to us in life when big moments come around. But we can control how
prepared we are. It might seem obvious to prepare if you’re planning to pilot a Soyuz rocket to the ISS, but
many of us fail to prepare for normal stuff in life – even if we know there are big moments are coming up.
So whether it’s a big exam, a job interview or sports final, when the high-stakes situations arise planning
for success is key. In most scenarios, Hadfield argues that you’ve passed or failed before you even begin,
depending on your level of preparation.
7. Good leadership means leading the way, not bullying other people to do things your way
Some people are very successful at intimidating people into going along with their plans. It’s the brute force
approach to getting things done. But leading through coercion and bullying others means you’re building
your leadership credentials on very weak foundations.
Chris Hadfield reckons the better way to lead is by proving the best course of action. Setting an example. It’s
the consensus-building approach. By showing people the right path, you’re creating a stronger platform for
teamwork and leadership. People will follow you because they want to, not because they have to.
8. Put groupthink at the core of your teamwork
There's no "I" in team
For Hadfield, the key question to ask when you’re part of a team is: “How can I help get us to where we need
to go?” It’s beautifully simple: put the team before yourself, and you’re more likely to win.
Hadfield argues that you really don’t need to be a superhero to be a valuable member of a team – empathy
and a sense of humour are often more important. He also suggests that searching for ways to lighten the
mood is never a waste of time, because it encourages expeditionary spirit – everyone pulling together in
extraordinary circumstances to collectively accomplish a shared goal.
Conversely, while sharing common gripes can create a bond between team mates, excessive whining is
corrosive and the antithesis of expeditionary behaviour.
9. Criticise the problem, never the person
Chris Hadfield believes that if you need to make a strong criticism, it’s better to pinpoint the problem rather
than attack the person. Yes, it can be frustrating when you suffer for someone’s mistake, but ridiculing or
berating a colleague is counter-productive. ‘Work the problem’ is a core mantra of NASA culture. It’s not
about ego.
In fact, Hadfield advocates going out of your way to help colleagues improve in all areas. This seems strange
coming from the hyper-competitive world of NASA, but Hadfield argues that promoting colleagues’ interests
helps you stay competitive. Plus you have a vested interest in your colleagues’ success – the better they are,
the more they can help you succeed.
10. Be ready. Work. Hard. Enjoy it!
Ultimately, Chris Hadfield’s life lessons boil down to being the best that you can be through hard work and
preparation. This approach has taken him from being a fighter pilot and test pilot right through to a 20-year
astronaut career. It’s not a ground-breaking philosophy, admittedly, but then how often do we truly earn the
things we want by working for them? How often do we just wish or hope they’d happen?
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Q&A with Equity Portfolio Manager Bill Hurt (Capital Group)
After a long and distinguished career as a global equity portfolio manager, Bill Hurt is retiring this
summer from Capital Group. In addition to overseeing investments, Bill has been a mentor to many
research analysts and portfolio managers.
What are some of the strategies you’ve developed and lessons you’ve tried to impart
to analysts over the years?
Always think outside the box. Step back and look at what’s happening in a big-picture sense. The natural
instinct is to think narrowly, often too narrowly. I’ve always tried to focus on innovation and on what may
be around the corner. By definition, the future is not plainly evident. You have to make a concerted effort
to be on the lookout for it.
Along those lines, it’s also important to think about what can go right, in society and the world as well as
with companies. It’s in our nature to focus on what could go wrong. Of course, you always want to be
aware of the risks and potential downside in anything. But pessimism — focusing too much on what
could go wrong — can crowd out an awareness of what could go right. And what goes right is where
the future values are. I’m actually not an optimist by nature; I’m inherently a negative thinker. But I have
structured the way I approach investing to force myself to look at what could go right.
Please discuss your approach to analyzing companies and selecting investments.
My objective has always been to identify good companies and to partner with them. When you buy the
stock of a company, you’re effectively becoming its partner. I want to partner with creative enterprises
that are going to create genuine wealth.
I try to determine whether a company can create that wealth and, more important, whether management
is willing to share that wealth with shareholders. Is management focused on taking the right long-term
steps to grow earnings for the benefit of all shareholders rather than simply maximizing short-term returns
for the enrichment of the executives themselves? Whenever I meet a CEO, I try to determine if he or
she is trying to make me a partner or simply pitch me a stock. In many ways, it all comes down to the
quality and intent of management.
How do you assess that?
I look at how realistic the person is about what can be done and can’t be done, and how creative the
person is in thinking about tomorrow. Those are all qualitative sorts of things. I ask open-ended questions
to see what people choose to say. It’s a bit of an art form. I look as much for what they don’t say as what
they do. My definition of a good interview is 90/10, in which he or she spends 90% of the time talking.
When I meet someone, my first question is “Before we start, can you talk about yourself?” You can tell a
lot from how they react. You can tell if they’re thinking, “Oh boy, how do I work that into the pitch I want
to give?” With other people, however, their sincerity shines through. They’ll say: “Well, I’ve done this job
and that job. Now I’m working with this company, and I have all these employees who are counting on
me, and we have to solve this problem and that problem.” You know that person is real and genuine.
That’s who I want to partner with.
Prepared for - RD: CapitalIQ
Ten Hell’s of the Speculator
Seven years before Edwin Lefevre began a series of articles that would become Reminiscences
of a Stock Operator, he warned of the perils in speculation. He likened it to gambling on an
unbeatable game. Greed, vanity, and ignorance make for a bad combination for speculators. It
leads to all the familiar mistakes — chasing “easy money,” over trading, unable to quit while
ahead — that inevitably lead to their downfall.
Lefevre warned readers about all of this in 1915, then relayed the 10 Hells:
1. A good tip that was not followed.
2. A profit that was taken too soon — that is, the money he did not make because he
was in too great a hurry to cash in.
3. Of two tips, following the wrong one.
4. To see your stock motionless while others are rising.
5. The “stop order” just reached before a rise — that is, where caution was a crime.
6. A bull market ruined by avarice.
7. A bull market ruined by accident.
8. Playing for a reaction and losing stock.
9. A bull market clearly foreseen — when you are broke and unable to back your
convictions.
10. Thrown out of the market by “inside information.”
The Ten Harsh Financial Commandments
Mike Batnick is the head of research for RWM. This was one of my favorite pieces of his:
The Ten Harsh Financial Commandments
I) You will not buy low or sell high.
II) You will cut your winners and let your losers run.
III) You will wish you owned more of what’s going up and less of what’s going
down.
IV) You will be fearful when others are fearful.
V) You will fight the trend.
VI) You will not buy when there is blood in the streets.
VII) You will spend too much time worrying about low probability outcomes.
VII) You will invest for the long-term, or until we get a ten percent correction,
whichever comes first.
IX) You will go broke taking small profits.
X) You will not just sit there, you’ll do something.
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The Art of Speculation by Philip Carret
Buffett was a big fan of his. Carret would base a book on the series of article — The Art of
Speculation — titled with the same name.
Despite the title, Carret was a value investor.
He would go on to found one of the first mutual funds
in 1928, ran it for the next 55 years while beating the
market in the process. He also had a solid
understanding of market history, market cycles, and
the tendencies of its participants. – Jon @ The Novel
Investor
"The road to success in speculation
is the study of values"
Notes from the book
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The line between investor and speculator is blurry because every investment comes with some
speculative risk.
“Just like water always seeks its level, answering the pull of gravity, so in the securities markets, prices
are always seeking a level of values. Speculation is the agency by which the adjustment is made.”
Even the most conservative investor must speculate with a portion of their funds in order to offset any
rise in the cost of living.
“The road to success in speculation is the study of values. The successful speculator must purchase or
hold securities which are selling for less than their real value, avoid or sell securities which are selling
for more than their real value. The successful investor must pursue exactly the same policy. The one
seeks primarily the increased return over a period of years which may be expected from an undervalued
as compared with a fully valued security; the other seeks primarily the capital gains which will accrue to
him when the price of the undervalued security adjusts itself to the line of value… There are styles in
securities as there are in clothes. A security may be undervalued, but if it is also out of style it is of
little interest to the speculator. He is, therefore, compelled to study the psychology of the stock
market as well as the elements of real value.”
The difference between bond owners and stock owners is that stock owners share in the unlimited
possibilities of growth in a company, while the bond owner is limited to the agreed upon yield and
principal. On the downside, in general, bond owners have a legal claim should they not be paid, while
stocks owners could easily buy into a business that never sees profits. Stock owners are “compensated”
for that extra risk. This is where the original distinction between investor and speculator began. One
invested in bonds and speculated in stocks.
Mistake #1: Knowing that prices fluctuate, a novice speculator might analyze the cause behind price
movements, then analyze stocks that are best positioned to produce a favorable outcome. That same
speculator might, instead, realize just how much time and energy that takes and skip it entirely because a
friend made a small fortune from a stock tip. If a friend can do it with a stock tip, it must be easy.
Mistake #2: Having bought on a tip, the novice has no clue when to sell. The novice is just as likely to a
quick profit should the price rise, as they are to hold on — try to break even — should the price fall.
Not grasping the difference between price and value, the novice fixates all decision making based on the
price paid.
CONT'd >>>
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PHILIP CARRET – THE ART OF SPECULATION CONT’D
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Mistake #3: When the stock tip strategy fails, the novice speculator looks for a “system” to time the
markets that predict future prices based on past price movements.
Mistake #4: The novice speculator ends up fighting against themselves. They are impatient to buy,
impatient to sell. — “Impatience is his dominating characteristic.”
IF the novice lasts long enough, they eventually realize the market goes through cycles — the markets
tend to maintain longer periods of upward and downward trends.
But while the market may go through cycles, not all individual stocks follow the same path.
On the market cycle: “prosperity contains the seeds of its own destruction.”
“For the purposes of the stock speculator who is seeking some guide to tell him when to buy and when to
sell it is somewhat unfortunate that the turn in stocks — accepting the 1906-1909 cycle as typical —
precedes the turn in business thus does not forecast the course of stock prices except in the apparently
paradoxical fashion that great prosperity affords an advantageous time for selling stocks, extreme
business depression an opportunity for purchase.”
Knowing that the market swings through cycles won’t make it any easier to forecast. You can’t expect
the current cycle to mirror the past exactly. Each is unique.
There are no hard and fast rules for calling the turn. If there was a rule, it would be useless. If everyone
knew the market would fall, no one would be a buyer. The best you can do is weigh the multitude of
factors to determine a probability of direction.
Still, you have to deal with the psychology of the market cycle at the time: Selling stocks at the height of
prosperity, when business is great, and everyone is optimistic. Or buying stocks when business is
terrible, failure seems imminent, and pessimism rules.
“It is usually a much simpler matter to forecast a bull market than to call the turn at its end.”
Mistake #5: Forgetting/ignoring that the market cycle exists. Bull markets and bear markets end.
Mistake #6: Conclude that because prices rise so high, that “ordinary rules of value do not after all
apply to certain favored groups.”
Mistake #7: Conclude that the bull market can’t end until all the laggards “have had their day.”
“The average trader is naturally a chronic bull. It is human nature to prefer optimism to pessimism.
Moreover, fortunes are usually made by expansion of values, not by their destruction. The man in the
street associates the acquisition of wealth with rising markets; failures, ruin, depression, panics with
falling markets.”
A short sale is a bet on pessimism in the face of optimism. The upside gain is limited (the stock can
only go to zero). The downside is unlimited losses.
Since bull markets are longer than bear markets, short selling “the market” is more likely to be wrong
than right.
Stocks, industries, sectors, go in and out of fashion.
Stocks can remain out of favor longer than an investors patience.
An increasing profit margin will eventually attract competition. The dynamic nature of business means
great companies can become weaker. Weak companies can be made stronger. New companies emerge to
fill the gaps overlooked by existing business. And new industries arise through innovation.
A stock’s liquidity — low available float, low avg trading volume — has a big impact on volatility and
returns.
“In finance as in other fields theory and practice sometimes differ.”
“Stocks often sell at ridiculously low levels for considerable periods merely because few people know
anything about them. The speculator who discovers a stock in this situation does not need to foresee
future growth in the company’s earnings. If the stock is selling well below the level which current
earnings and position justify, and there is nothing in sight to impair its position in the near future, he may
be sure that others will discover it and that in time it will rise to a reasonable price level.”
Diversification lowers the impact of chance and the unknown while allowing room for error.
Mistake #8: Becoming emotionally attached to an investment and/or the price paid.
A good question to ask for stocks you currently own, “If I had the cash today, would I pick that stock
over every other stock available?” If no, then probably best to sell.
Patience is one of the most important qualities of success.
“Be quick to take losses, reluctant to take profits.”
A falling stock price doesn’t necessarily equate to being wrong. < That makes me feel better
Prepared for - RD: CapitalIQ
Nine investment lessons from the past 35 years
AMP Investment management |Author Shane Oliver - 07 June 2019
Introduction
"There is always a cycle"
I have been working in and around investment markets for 35 years now. A lot has happened over that time. The 1987
crash, the recession Australia had to have, the Asian crisis, the tech boom/tech wreck, the mining boom, the Global
Financial Crisis, the Eurozone crisis. Financial deregulation, financial reregulation. The end of the cold war, US
domination, the rise of Asia and then China. And so on. But as someone once observed the more things change the more
they stay the same. And this is particularly true in relation to investing. So, what I have done here is put some thought
into the nine most important things I have learned over the past 35 years.
1. There is always a cycle
Droll as it sounds, the one big thing I have seen over and over in the past 35 years is that investment markets constantly
go through cyclical phases of good times and bad. Some are short term, such as those that relate to the 3 to 5 year
business cycle. Some are longer, such as the secular swings seen over 10 to 20 year periods in shares. Some get stuck in
certain phases for long periods. Debate is endless about what drives cycles, but they continue. But all eventually contain
the seeds of their own reversal. Ultimately there is no such thing as new eras, new paradigms and new normal as all
things must pass. What’s more share markets often lead economic cycles, so economic data is often of no use in timing
turning points in shares.
2. The crowd gets it wrong at extremes
What’s more is that these cycles in markets get magnified by bouts of investor irrationality that take them well away from
fundamentally justified levels. This is rooted in investor psychology and flows from a range of behavioural biases
investors suffer from. These include the tendency to project the current state of the world into the future, the tendency to
look for evidence that confirms your views, overconfidence and a lower tolerance for losses than gains. So, while
fundamentals may be at the core of cyclical swings in markets, they are often magnified by investor psychology if
enough people suffer from the same irrational biases at the same time. From this it follows that what the investor crowd is
doing is often not good for you to do too. We often feel safest when investing in an asset when neighbours and friends are
doing the same and media commentary is reinforcing the message that it’s the right thing to do. This “safety in numbers”
approach is often doomed to failure. Whether its investors piling into Japanese shares at the end of the 1980s, Asian
shares into the mid 1990s, IT stocks in the late 1990s, US housing and dodgy credit in the mid 2000s or Bitcoin in
2017. The problem is that when everyone is bullish and has bought into an asset in euphoria there is no one left to buy
but lots of people who can sell on bad news. So, the point of maximum opportunity is when the crowd is pessimistic, and
the point of maximum risk is when the crowd is euphoric.
3. What you pay for an investment matters a lot
Price is what you pay
Value is what you get
The cheaper you buy an asset the higher its prospective return. Guides to this are price to earnings ratios for share
markets (the lower the better – see the next chart) and yields, ie the ratio of dividends, rents or interest payments to the
value of the asset (the higher the better). Flowing from this it follows that yesterday’s winners are often tomorrows
losers – because they became overvalued and over loved and vice versa. But while this seems obvious, the reality is that
many find it easier to buy after shares have had a strong run because confidence is high and sell when they have had a big
fall because confidence is low. But the key point is that the more you pay for an asset the lower its potential return and
vice versa.
Cont'd >>>
Prepared for - RD: CapitalIQ
Shane Oliver (AMP) cont'd
4. Getting markets right is not as easy as you think
In hindsight it all looks easy. Looking back, it always looks obvious that a particular boom would go bust when it did.
But that’s just Harry hindsight talking! Looking forward no-one has a perfect crystal ball. As JK Galbraith observed
“there are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” Usually
the grander the forecast – calls for “great booms” or “great crashes ahead” – the greater the need for scepticism as such
calls invariably get the timing wrong (in which case you lose before it comes right) or are dead wrong. Market
prognosticators suffer from the same psychological biases as everyone else. If getting markets right were easy, then the
prognosticators would be mega rich and would have stopped doing it long ago. Related to this many get it wrong by
letting blind faith - “there is too much debt”, “house prices are too high and are guaranteed to crash”, “the Eurozone will
break up” – get in the way of good investment decisions. They may be right one day, but an investor can lose a lot of
money in the interim. The problem for ordinary investors is that it’s not getting easier as the world is getting noisier as
the flow of information and opinion has turned from a trickle to a flood and the prognosticators have had to get shriller to
get heard.
5. Investment markets don’t learn
A key lesson from the history of investment markets is that they don’t seem to learn. The same mistakes are repeated
over and over as markets lurch from one extreme to another. This is even though after each bust many say it will never
happen again and the regulators move in to try and make sure it doesn’t. But it does! Often just somewhere else. Sure,
the details change but the pattern doesn’t. As Mark Twain is said to have said: “history doesn’t repeat, but it rhymes.”
Sure, individuals learn and the bigger the blow up the longer the learning lasts. But there’s always a fresh stream of
newcomers to markets and in time collective memory dims.
Reinvest those dividends?
6. Compound interest is like magic
This one goes way back to my good friend Dr Don Stammer. One dollar invested in Australian cash in 1900 would today
be worth $240 and if it had been invested in bonds it would be worth $950, but if it was allocated to Australian shares it
would be worth $593,169. Although the average annual return on Australian shares (11.8% pa) is just double that on
Australian bonds (5.9% pa) over the last 119 years, the magic of compounding higher returns leads to a substantially
higher balance over long periods. Yes, there were lots of rough periods along the way for shares as highlighted by arrows
on the chart, but the impact of compounding at a higher long-term return is huge over long periods of time. The same
applies to other growth-related assets such as property.
7. It pays to be optimistic
The well-known advocate of value investing Benjamin Graham observed that “To be an investor you must be a
believer in a better tomorrow.” If you don’t believe the bank will look after your deposits, that most borrowers will pay
their debts, that most companies will grow their profits, that properties will earn rents, etc then you should not invest.
Since 1900 the Australian share market has had a positive return in roughly eight years out of ten and for the US share
market it’s roughly seven years out of 10. So getting too hung up worrying about the next two or three years in 10 that the
market will fall risks missing out on the seven or eight years out of 10 when it rises.
8. Keep it simple stupid
KISS
Investing should be simple, but we have a knack for overcomplicating it. And it’s getting worse with more options, more
information, more apps and platforms, more opportunities for gearing and more rules & regulations around investing. But
when we overcomplicate investments we can’t see the wood for the trees. You spend too much time on second order
issues like this share versus that share or this fund manager versus that fund manager, so you end up ignoring the key
driver of your portfolio’s performance – which is its high-level asset allocation across shares, bonds, property, etc. Or
you have investments you don’t understand or get too highly geared. So, it’s best to keep it simple, don’t fret the small
stuff, keep the gearing manageable and don’t invest in products you don’t understand.
lastly >>>
Prepared for - RD: CapitalIQ
Shane Oliver (AMP) - the last bit
9. You need to know yourself to succeed at investing
We all suffer from the psychological weaknesses referred to earlier. But smart investors are aware of them and seek to
manage them. One way to do this is to take a long-term approach to investing. But this is also about knowing what you
want to do. If you want to take a day to day role in managing your investments then regular trading and/or a self managed
super fund (SMSF) may work, but you need to recognise that will require a lot of effort to get right and will need a
rigorous process. If you don't have the time and would rather do other things like sailing, working at your day job, or
having fun with the kids then it may be best to use managed funds. It’s also about knowing how you would react if
your investment suddenly dropped 20% in value. If your reaction were to be to want to get out then you will either
have to find a way to avoid that as you would just be selling low and locking in a loss or if you can’t then you may have
to consider an investment strategy offering greater stability over time (which would probably mean accepting lower
returns).
So what does all this mean for investors?
IN SUMMARY
All of this underpins what I call the Nine Keys to Successful Investing which are:
1. Make the most of the power of compound interest. This is one of the best ways to build wealth and this means
making sure you have the right asset mix.
2. Don’t get thrown off by the cycle. The trouble is that cycles can throw investors out of a well thought out
investment strategy. But they also create opportunities.
3. Invest for the long term. Given the difficulty in getting market and stock moves right in the short-term, for most it’s
best to get a long-term plan that suits your level of wealth, age, tolerance of volatility, etc, and stick to it.
4. Diversify. Don’t put all your eggs in one basket. But also, don’t over diversify as this will just complicate for no
benefit.
5. Turn down the noise. After having worked out a strategy thats right for you, it’s important to turn down the noise on
the information flow and prognosticating babble now surrounding investment markets and stay focussed. In the digital
world we now live in this is getting harder.
6. Buy low, sell high. The cheaper you buy an asset, the higher its prospective return will likely be and vice versa.
7. Beware the crowd at extremes. Don’t get sucked into the euphoria or doom and gloom around an asset.
8. Focus on investments that you understand and that offer sustainable cash flow. If it looks dodgy, hard to
understand or has to be based on odd valuation measures or lots of debt to stack up then it’s best to stay away.
9. Seek advice. Given the psychological traps we are all susceptible too and the fact that investing is not easy, a good
approach is to seek advice
Ritholtz’s Rules of Valuations
1. Overvalued stocks and markets can continue to get overvalued, often for a long time. (Think back to 1996,
when so many strategists became cautious. Markets powered higher for four more years.) Cheap stocks can
get even cheaper.
2. Ratios such as price to earnings or price to book are merely pictures; what you need to consider is the full
context — the film version.
3. Fair value is an abstract concept, which stocks just wave hello to as they career past on their way
toward becoming dirt cheap or wildly overvalued. However, I am hard-pressed to recall an extended
period when stocks stayed at fair value for any appreciable period of time.
4. Using a single variable to identify whether a stock is cheap or expensive so radically oversimplifies the
concept of valuation as to be worthless. Markets are simply too complex to be adequately reduced to one
variable that can tell you whether to buy or sell.
5. There are many variables to consider: Economic growth rate, inflation, rising or falling interest rates, income
tax increases or cuts, corporate profit growth, war and geopolitics all affect whether stocks are cheap or dear.
6. Psychology explains much of what takes place during bull and bear markets. Indeed, I have argued that the
psychology of valuation is what defines each!
Prepared for - RD: CapitalIQ
Life Lessons From Bill Gates
"Patience is a key element of success."
('This is a fantastic time to be entering the business world, because business is going to change more in the
next 10 years than it has in the last 50."
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"You will NOT make $60,000 a year right out of high school. You won't be a vice-president with a car
phone until you earn both."
"To win big, you sometimes have to take big risks."
"Technology is just a tool. In terms of getting the kids working together and motivating them, the teacher is
the most important."
"People always fear change. People feared electricity when it was invented, didn't they?"
"If you mess up, it's not your parents' fault, so don't whine about your mistakes, learn from them."
"Flipping burgers is not beneath your dignity. Your Grandparents had a different word for burger flippingthey called it opportunity."
"We've got to put a lot of money into changing behavior."
"There's only one trick in software, and that is using a piece of software that's already been written."
"I really had a lot of dreams when I was a kid, and I think a great deal of that grew out of the fact that I had
a chance to read a lot."
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"Television is not real life. In real life people actually have to leave the coffee shop and go to jobs."
"It's fine to celebrate success but it is more important to heed the lessons of failure."
"We always overestimate the change that will occur in the next two years and underestimate the change that
will occur in the next ten. Don't let yourselfbe lulled into inaction."
"Success is a lousy teacher. It seduces smart people into thinking they can't lose."
"If geek means you're willing to study things, and if you think science and engineering matter, I plead
guilty. If your culture doesn't like geeks, you are in real trouble."
"If you can't make it good, at least make it look good."
"I have been struck again and again by how important measurement is to improving the human condition."
"If I'd had some set idea of a finish line, don't you think I would have crossed it years ago?"
"Of my mental cycles, I devote maybe 10% to business thinking. Business isn't that complicated. I wouldn't
want that on my business card."
"I choose a lazy person to do a hard job. Because a lazy person will find an easy way to do it."
"Life is not fair- get used to it!"
"The Internet is becoming the town square for the global village of tomorrow."
"Don't compare yourself with anyone in this world. If you do so, you are insulting yourself."
!J1ol¢---?
Prepared for - RD: CapitalIQ
L
Life Lessons From Bill Gates (coot' d)
"The world won't care about your self-esteem. The world will expect you to accomplish something
BEFORE you feel good about yourself."
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"Your most unhappy customers are your greatest source of learning."
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"If you thmk your teacher is tough, wait till you get a boss."
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"In three years, every product my company makes will be obsolete. The only question is whether we will
make them obsolete or somebody else will."
"Expectations are a form of first-class truth: If people believe it, it's true."
"We all need people who will give us feedback. That's how we improve."
"As we look ahead into the next century, leaders will be those who empower others."
"Intellectual propert has the shelflife of a banana."
"'I don't know' has become 'I don't know yet'."
Reid Hoffman: 16 Lessons Learned by Barry Ritholtz
16 Lessons Learned (Among Many!) from Linkedln's co-founder and Exec Chairman
-People are complicated and flawed. Root for their better angels.
-The best way to get a busy person's attention: Help them.
-Keep it simple and move fast when conceiving strategies and making decisions.
-Every weakness has a corresponding strength.
-The values that actually shape a culture have both upside and downside.
-Understand someone's "alpha" tendencies and how that drives them.
-Self-deception watch: even those who say they don't need or want flattery, sometimes still need it.
-Be clear on your specific level of engagement on a project.
-Sketch three possible outcomes for a project: the likely upside, likely 'regular', and likely
downside scenarios.
-A key to making good partnerships great: Identify and emphasize any misaligned incentives.
-Reason is the steering wheel. Emotion is the gas pedal.
~
:Trade up on trust even if it means you trade down on competency. V
-Tell the truth. Don't reflexively kiss ass to powerful people.
-Respect the shadow power.
-Make people genuine partners and they'll work harder.
-Final: The people around you change you in myriad unconscious ways
Prepared for - RD: CapitalIQ
Barron's Exit Interview:
Mark Mobius on
30 Years of Emerging
Markets
Mobius, who retired at the end of January last year as executive chairman of
Templeton Emerging Markets Group, made a name for himself with on-the-ground
research.
When legendary value investor John Templeton asked Mobius in 1987 to run one of the
world’s first emerging markets fund, the closed-end Templeton Emerging Markets
(ticker: EMF), he took on the task to invest $100 million in what then were just six
markets. Since then, Templeton’s emerging markets strategy has grown to $30 billion,
invested in 70 markets.
Mobius offered Barron’s some parting lessons.
What is a mistake you made that others can learn from?
I was too rigid at times. We would focus too much on metrics like price/earnings and
price/book ratios, and didn’t pay enough attention to the total picture. We didn’t have
the imagination of what could happen over five or 10 years and missed a lot of
technology stocks during the boom. The spread of the internet—and knowledge—is
another revolutionary change in the market. More than one billion smartphones will be
sold this year, 70% of those in emerging countries like China and India. That’s an
incredible development, not just from an economic standpoint, but also because people
can learn what is going on and demonstrate against governments they don’t like.
You have often ventured into frontier markets, more recently Vietnam. What’s the
best way to invest there?
In many of these smaller countries, private equity has offered some of our best results
because you can go after smaller companies and bring them to market. The advantage
of private equity is also the ability to go in depth with the people, deal with them face to
face, and demand information you can’t always get as a public shareholder.
Where do you look for signs of trouble?
The biggest hits to our performance have been related to corporate governance, such
as with an Indonesian company where management was stealing. Auditors report what
they are told and can themselves be corrupt. We have one person dedicated to paying
more attention to the people behind a company. We look for signs like management’s
unwillingness to explain items, particularly related to depreciation and valuation of
assets, or owners or management deeply involved in politics that could put the
business in jeopardy if there is a change in government. We also avoid companies
where the cost of debt exceeds the company’s profit margins.
Cont'd >
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You’ve gone through countless uprisings and geopolitical conflicts. What
lessons have you learned?
Sometimes you have a warning—you’d better listen. When Hugo Chávez came into
power in Venezuela, he stated what he was going to do: Take over enterprises. We
immediately sold all our assets—later on they were selling for half or less. You also
have to sense the mood. In Argentina, [President Cristina Fernández de] Kirschner
tried to kill the press and dismantle a big broadcasting conglomerate. In talking to
management and looking at the situation, I thought they would survive because there
was enough popular support for the broadcaster and against the Kirschner move.
Sometimes, you have to take a calculated risk.
So a good gut instinct is key?
Mark Mobius cont'd
Well, I’ve been kicked in the gut so many times! It’s about the experience, but the most
important thing is to stay optimistic. You can’t become negative about the terrible things
you have gone through and the losses you have suffered.
What were some of the most important lessons you learned from John
Templeton?
People who think they know all the answers probably don’t even know the questions.
That was very astute. He also said the four most dangerous words were, “This time is
different.” But the one that really has stuck with me is to buy when others are
despondently selling and sell when others are greedily buying. That’s what it’s all about,
but it’s the most difficult thing to do.
The 10 Laws of Insider Trading – So Far
No. 1 says it all: Don't do it.
Matt Levine is a Bloomberg Opinion columnist covering finance. He was an editor of Dealbreaker, an
investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz,
and a clerk for the U.S. Court of Appeals for the 3rd Circuit.
The Laws:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Don’t do it.
Don’t do it by buying short‐dated out‐of‐the‐money call options on merger targets.
Don’t text or email about it.
Don’t do it in your mother’s account.
Don’t do it by planting bombs at a company and shorting its stock.
Don’t do it while employed at the Securities and Exchange Commission.
Don’t Google “how to insider trade without getting caught” before doing it.
If you didn’t insider trade, don’t forget and accidentally confess to insider trading.
If you are going to insider trade, do it in a company that is far away from a Securities and
Exchange Commission office. Like, physically.
10. If you are already under a federal ethics investigation about your ownership or promotion of a
stock, don’t insider trade that stock.
Prepared for - RD: CapitalIQ
7 Moats of Great Investors
Seven Traits of
the greats
Buffett is unique in that he has his own moat. All great investors do. They have a competitive
advantage over everyone else that produces phenomenal performance over extended periods.
Without their moat, they’d be like everyone else.
You might think their moat is IQ, the right college degree, or experience. It’s not.
Those things are important because they keep you in the game but all those things can be
copied to some degree. It’s a temporary edge until a similarly smart, experienced person comes
along. Besides, up to a certain point, an extra IQ point or one more experience brings less to the
table.
So it has to be something else. Marks Sellers believes it’s psychological:
So what are the sources of competitive advantage for an investor? Just as with a
company or an industry, the moats for investors are structural. They have to do with
psychology, and psychology is hard wired into your brain. It’s a part of you. You can’t
do much to change it even if you read a lot of books on the subject.
He would go on to identify 7 traits all great investors share that give them an edge over
everyone else.
Buy in a panic and sell during a bubble.
Trait #1 is the ability to buy stocks while others are panicking and sell stocks while
others are euphoric. Everyone thinks they can do this, but then when October 19,
1987 comes around and the market is crashing all around you, almost no one has the
stomach to buy. When the year 1999 comes around and the market is going up
almost every day, you can’t bring yourself to sell because if you do, you may fall
behind your peers.
It’s an obsession.
The second character trait of a great investor is that he is obsessive about playing
the game and wanting to win. These people don’t just enjoy investing; they live it.
They wake up in the morning and the first thing they think about, while they’re still
half asleep, is a stock they have been researching, or one of the stocks they are
thinking about selling, or what the greatest risk to their portfolio is and how they’re
going to neutralize that risk.
Learn from mistakes.
A third trait is the willingness to learn from past mistakes. The thing that is so hard
for people and what sets some investors apart is an intense desire to learn from their
own mistakes so they can avoid repeating them. Most people would much rather just
move on and ignore the dumb things they’ve done in the past.
Cont'd >
Prepared for - RD: CapitalIQ
7 Traits of The Greats
Common sense view of risk.
A fourth trait is an inherent sense of risk based on common sense. Most people know
the story of Long Term Capital Management… They never stepped back and said to
themselves, “Hey, even though the computer says this is ok, does it really make sense
in real life?” The ability to do this is not as prevalent among human beings as you
might think. I believe the greatest risk control is common sense, but people fall into
the habit of sleeping well at night because the computer says they should.
Conviction
5. Great investors have confidence in their own convictions and stick with them, even
when facing criticism… Personally, I’m amazed at how little conviction most investors
have in the stocks they buy.
Use their entire brain, not just the math side.
I believe a great investor needs to have both sides turned on. As an investor, you
need to perform calculations and have a logical investment thesis. This is your left
brain working. But you also need to be able to do things such as judging a
management team from subtle cues they give off. You need to be able to step back
and take a big picture view of certain situations rather than analyzing them to death.
You need to have a sense of humor and humility and common sense. And most
important, I believe you need to be a good writer… If you can’t write clearly, it is my
opinion that you don’t think very clearly. And if you don’t think clearly, you’re in
trouble.
Live through volatility.
The most important, and rarest, trait of all: The ability to live through volatility
without changing your investment thought process… People don’t like short‐term
pain even if it would result in better long‐term results. Very few investors can handle
the volatility required for high portfolio returns. They equate short‐term volatility
with risk. This is irrational; risk means that if you are wrong about a bet you make,
you lose money… But most people just can’t see it that way; their brains won’t let
them. Their panic instinct steps in and shuts down the normal brain function.
Prepared for - RD: CapitalIQ
The 24 Rules for Success Left Behind by a
Legendary Wall Street Banker ByKatiaPorzecanski/Bloomberg
Richard Jenrette, who co-founded the investment bank Donaldson, Lufkin & Jenrette in 1959,
spent four decades on Wall Street. When he died at the age of 89, he left behind on his desk 24
rules to succeed- in finance, and in life. The list, titled "What I Learned," was shared at an
intimate memorial service for family and local friends. Here's what it said:
What I Learned (How to Succeed) (and have a Long and Happy Life)
1. Stay in the game. That's often all you need to do- don't quit. Stick around! Don't be a quitter!
2. Don't burn bridges (behind you)
3. Remember- Life has no blessing like a good friend! You can't get enough of them. Don't leave old
friends behind - you may need them
4. Try to be nice and say "thank you" a lot!
5. Stay informed/KEEP LEARNING!
6. Study- Stay Educated. Do Your Home Work!! Keep learning!
7. Cultivate friends of all ages - especially younger
8. Run Scared- over-prepare
9. Be proud- no Uriah Heep for you! But not conceited. Know your own worth.
10. Plan ahead but be prepared to allow when opportunity presents itself.
11. Turn Problems into Opportunities. Very often it can be done. Problems create opportunities for
change - people willing to consider change when there are problems.
12. Present yourself well. Clean, clean-shaven, dress "classically" to age. Beware style, trends. Look
for charm. Good grammar. Don't swear so much- it's not cute.
13. But be open to change- don't be stuck in mud. Be willing to consider what's new but don't
blindly follow it. USE YOUR HEAD - COMMON SENSE.
14. Have some fun- but not all the time!
15. Be on the side of the Angels. Wear the White Hat.
16. Have a fall-back position. Heir and the spare. Don't leave all your money in one place.
17. Learn a foreign language.
18. Travel a lot -
around the world, if possible.
19. Don't criticize someone in front of others.
20. Don't forget to praise ajob well done (but don't praise a poor job)
21. I don't like to lose -
but don't be a poor loser if you do.
22. It helps to have someone to love who loves you.
23. Keep your standards high in all you do.
24. Look for the big picture but don't forget the small details.
Prepared for - RD: CapitalIQ
Business and Investing Lessons from Caddyshack
25IQ – Tren Griffen
The four biggest stars in the movie are Bill Murray (Carl Spackler), Chevy Chase (TyWebb), Rodney
Dangerfield (Al Czervik) and Ted Knight (Judge Smails).
1. Carl Spackler: “This crowd has gone deadly silent, a Cinderella story outta nowhere. Former
greenskeeper and now about to become the masters champion. It looks like a mirac… It’s in the hole!
It’s in the hole! It’s in the hole!”
This scene was almost completely improvised by Bill Murray, like many other key parts of Caddyshack.
Ramis openly encouraged what he called: “guided improvisation, not just ad‐libbing. Ad‐libbing with a
purpose.” The scene was filmed in one take as a profile of Ramis in The New Yorker describes here:
The classic “Cinderella story” speech from “Caddyshack” had been written as an interstitial camera shot:
Murray’s character, the greenskeeper, was to be “absently lopping the heads off bedded tulips as he
practices his golf swing with a grass whip.” Ramis took Murray aside and said, “When you’re playing sports,
do you ever just talk to yourself like you’re the announcer?” Murray said, “Say no more.”
The Cinderella story scene in the movie represents a reminder to viewers about the value of dreaming big.
Have a north star to maintain your motivation during tough times is a very valuable thing. Taking this big
dream approach one step further, there are some people, including a number of famous investors, who
believe in the power of visualization. The visualization approach leaves me a bit cold, but if acting like Bill
Murray in the Cinderella story scene about something important to you works for you, well, just do it.
One of the other lessons someone can take away from watching Caddyshack is that the movie itself is a
Cinderella story. It was panned by critics when it came out. And yet it has become a cultural icon for some
people over time.
The movie demonstrates that can take a really long time for something to become an overnight success.
CONt'D >>>
Prepared for - RD: CapitalIQ
2. Carl Spackler: “So I jump ship in Hong Kong and I make my way over to Tibet, and I get on as a looper at
a course over in the Himalayas“
Tony D’Annunzio: “A looper?”
Carl Spackler: “A looper, you know, a caddy, a looper, a jock. So, I tell them I’m a pro jock, and who do you
think they give me? The Dalai Lama, himself. Twelfth son of the Lama. The flowing robes, the grace, bald…
striking. So, I’m on the first tee with him. I give him the driver. He hauls off and whacks one – big hitter,
the Lama – long, into a ten‐thousand foot crevasse, right at the base of this glacier. Do you know what the
Lama says? Gunga galunga… gunga, gunga‐lagunga. So we finish the eighteenth and he’s gonna stiff me.
And I say, “Hey, Lama, hey, how about a little something, you know, for the effort, you know.” And he
says, “Oh, uh, there won’t be any money, but when you die, on your deathbed, you will receive total
consciousness.” So I got that goin’ for me, which is nice.”
It's easy to grin
When your ship comes in
And you've got the stock market
beat
But the man worthwhile
Is the man who can smile
When his shorts are too tight in
the seat
(Judge Smails)
A number of very small parts of the dialogue in Lama scene have become a shorthand for the full scene
itself. One of the hardest things to do in business is to create strong word‐of‐mouth that inexpensively
creates brand value. Caddyshack was the beneficiary of some favorable tailwinds that kicked off a
powerful positive feedback loop. Because the movie was available for home viewing before streaming
services like Netflix, people often watched it multiple times. These people naturally started quoting lines
from the movie and the more people did it the more people wanted to do it. This is just one example of
feedback creating a self‐reinforcing phenomenon. The more people say: “which is nice, the Lama” the more
people say it. Of course, stories get embellished with time which further spreads the brand or meme:
3. Carl Spackler: “I have to laugh, because I’ve outsmarted even myself. My enemy, my foe, is an animal.
In order to conquer the animal, I have to learn to think like an animal. And, whenever possible, to look
like one. I’ve gotta get inside this guy’s pelt and crawl around for a few days.”
As you probably know, this portion of the script is quite a controversial part of the movie since it brings up
the fundamental schism between: (1) the followers of Andy Grove’s “Only The Paranoid Survive” dictum and
(2) people like Reed Hastings who believe that worrying about competitors is a bad idea. The Hasting’s views
is:
“We need more sophisticated metaphors than ‘only the paranoid survive.’ Paranoid people are delusional.”
“We spend almost no time [at Netflix] thinking about competitors. We spend almost all our time thinking
about customers.”
The Andy Grove said:
“Success breeds complacency. Complacency breeds failure. Only the paranoid survive.” “I believe in the
value of paranoia. Business success contains the seeds of its own destruction. The more successful you are,
the more people want a chunk of your business and then another chunk and then another until there is
nothing left.”
LASTLY >>>
Prepared for - RD: CapitalIQ
4. Al Czervik: “Buy, buy, buy! Oh, everyone is buying? Then sell, sell,sell!”
Al Czervik is a devotee of the contrarian investing “stylings” of business people and investors like Howard
Marks. Most of the time being contrarian is suicidal but occasionally you can acquire an edge of some kind
(analytical, informational or behavioral) and make a contrarian bet. The key to out‐performance of an
investing or business benchmark is having a variant perception that eventually is proven right soon enough
that the investment pays off. Andy Rachleff puts it this way: “Investment can be explained with a 2×2 matrix.
On one axis you can be right or wrong. And on the other axis you can be consensus or non‐consensus. Now
obviously if you’re wrong you don’t make money. The only way as an investor and as an entrepreneur to
make outsized returns is by being right and non‐consensus.”
If you have views which always reflect the consensus of the crowd you will not outperform a market since a
market by definition reflects the consensus view. Sometimes waves of social proof and other dysfunctional
heuristics create a significant gap between price and value, which creates an opportunity for a patient
investor who is at the same time aggressive about making the investment when the time is right.
5. Carl Spackler: “Well, I got a lot of stuff on order. You know… credit trouble.”
Spackler knows, like you do, that the only unforgivable sin in business is to run out of cash. Inventory can tie
up a lot of capital in a business which can create significant problems in terms of cash flow and credit. If the
business is viewed as a credit risk the struggle to operate the business can get worse. Charlie Munger has
talked about the dangers of contracts “full of clauses that say if one party’s credit gets downgraded, then
they have to put up collateral. It’s like margin – you can go broke.” Munger has also said that leverage is
as dangerous as liquor when taken to excess,
6. Danny Noonan: “I haven’t even told my father about the scholarship I didn’t get. I’m gonna end up
working in a lumberyard the rest of my life.”
Ty Webb: “What’s wrong with lumber? I own two lumberyards.”
Danny Noonan: “I notice you don’t spend too much time there.”
Ty Webb: “I’m not quite sure where they are.”
Owning a business which earns a significant profit while you are doing something like playing golf (or
whatever else makes you happy), is a very good thing. I have a friend who leases commercial properties for a
percentage of revenue of the business. He literally is earning money while he plays golf.
7. Ty Webb: “Don’t be obsessed with your desires Danny. The Zen philosopher, Basho, once wrote, ‘A
flute with no holes, is not a flute. A donut with no hole, is a Danish.’ He was a funny guy.”
Web is telling Noonan that there is a lot of power in a focused approach to business and investing. Stories
about a topic like the power of focus can be a wonderful way to teach a lesson. But they can be interpreted
in different ways.
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Lessons on Risk From Peter Bernstein
Peter Lewyn Bernstein (January 22, 1919- June 5, 2009) was an American financial historian, economist and educator
whose development and refinement of the efficient-market hypothesis made him one of the country's best known
authorities in popularizing and presenting investment economics to the general public
On survival.
?
CL. ve.GSS •
The biggest risk is not knowing what you are doing. The derivation of the word "risk" reaches
back to the early Italian risicare, which translates as "to dare." Risk looked at from this
viewpoint is a choice rather than a fate. For a true long-term investor, the choice, by
definition, must be survival, or you can forget that long-term stuff
On risk management.
Risk means the chance of being wrong - not always in an adverse direction. but always in a
direction different from what we expected...
RISK management, then, should be a process of dealing with the consequences of being
wrong. Sometimes, these consequences are minimal- encountering rain after leaving home
without an umbrella, for example. But betting the ranch on the assumption that home prices
can only go up should tell you the consequences would be much more than minimal if home
prices started to fall.
Under those conditions, risk management should concentrate either on limiting the size ofbets
or on finding ways to hedge the bet so you are not wiped out ifyou take the wrong side.
Volatility is often a symptom of risk but is not a risk in and of itself. Volatility obscures the
future but does not necessarily determine the future.
Onhumility.
A/~HT
W~oN6
Someday I'm going to write a piece called "The Perils of Brilliance." The times I have been
most wrong are the times I thought I was most right. You asked me at the beginning about
the things I've learned from all of this, and I have to repeat: It's humility. I think the reason I've
been able to survive 55 years in this business is because I developed humility... It's the only way
to survive.
+
On the "long run."
THE
11~1(/JoWAIJlE
While we can learn from the long run about how bonds and stocks respond to changing
environments and to each other, the long run can tell us perilously little about what kinds
of environments lie ahead. On that point, I maintain, we have to accept uncertainty rather
than fight it: we must rely more on judgment than on econometric models. I agree with Nobel
Laureate Kenneth Arrow that "Our knowledge of the way things work, in society or in nature,
comes trailing clouds of vagueness. Vast ills have followed a belief in certainty."
On the lesson of history.
The constant lesson of history is the dominant role played by surprise. just when we are most
comfortable with an environment and .come to believe we finally understand it, the ground
shifts under our feet. Surprise is the rule, not the exception. That's a fancy way ofsaying we
don't know what the future holds. Even the most serious efforts to make predictions can end up
so far from the mark as to be more dangerous than useless ...
-___.;~,.All of history and all of life is stuffed full of the unexpected and the unthinkable. 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. Something very simple but very penetrating stems from this observation.
If we never know what the future holds, we can never be right all the time. Being wrong on
occasion is inescapable. As the great English economist john Maynard Keynes expressed it some
80 years ago, '11 proposition is not probable because we think it so." The most important
lesson an investor can learn is to be..dispassionate when confronted by unexpected and
unfavorable outcomes
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Favorite Lines from Fred Schwed’s Classic
Fred Schwed’s classic Where are the Customers’ Yachts? delivers simple financial truths with a side a
satire. He presents the unvarnished view of Wall Street as he saw it:
…thousands of erring humans, of varying degrees of good will, solemnly engaged in the
business of predicting the unpredictable.
The book is filled with more great lines about timeless lessons on investing, speculating, and Wall Street.
It seems that the immature mind has a regrettable tendency to believe, as actually true, that
which it only hopes to be true.
Your average Wall Streeter, faced with nothing profitable to do, does nothing for only a brief
time. Then, suddenly and hysterically, he does something which turns out to be extremely
unprofitable. He is not a lazy man.
There have always been a considerable number of pathetic people who busy themselves
examining the last thousand numbers which have appeared on a roulette wheel, in search of
some repeating pattern. Sadly enough, they have usually found it.
History does in a vague way repeat itself, but it does it slowly and ponderously, and with an
infinite number of surprising variations.
Accounting is not even an art, but just a state of mind.
The man who chooses to take his money and churn it furiously…cannot in any way predict
his fate, save for a single assurance. So long as any of the money still clings to the sides of
the churn, he will not be bored.
Those classes of investments considered “best” change from period to period. The pathetic
fallacy is that what are thought to be the best are in truth only the most popular — the
most active, the most talked of, the most boosted, and consequently, the highest in
price at that time. It’s very much a matter of fashion.
Choosing the proper stock, at the proper time, for the proper move, is difficult. But the
greater difficulty, I am grieved to report, arises after that has all been successfully done.
Booms go boom.
Speculation is an effort, probably unsuccessfully, to turn a little money into a lot. Investment
is an effort, which should be successful, to prevent a lot of money from becoming a
little.
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5 LEADERSHIP LESSONS OF BILL BELICHICK
by JT Ayers
This past Super Bowl was very exciting…for the defense. Regardless of who you were rooting for, we
all were watching something truly historic. Bill Belichick, who now has more Super Bowl wins as a
head coach than anyone ever, is a different type of leader. He doesn't have a book of quotes on
wisdom or a pyramid of success, he is not on social media, he is not personable with the press
and even dresses questionable for the occasion (typically in a game he wears a sweatshirt with the
sleeves cut off with hoodie up). Yet, you can not deny he is successful in his endeavors. How and why?
Taking from Coach Belichick's quotes, here are 6 lessons on Leadership after his 6th Super Bowl win
and supplanting himself as the Greatest NFL Coach of All Time.
1. "I THINK PRACTICE PREPARATION IS ALWAYS AN INDICATOR OF GAME
PERFORMANCE.”
Belichick took a job with the Baltimore Colts right out of college for a measly $25 a week. He served as
a sort of gopher for head coach Ted Marchibroda. He would also volunteer his free time to watch
endless hours of game film for the team. He soon became an expert in finding tendencies and weakness
of the other teams. Belichick developed a skill in his first job that most delegate out and he uses it to
his advantage now. What are you learning now that can serve you in the future? What sets you
apart from the rest of the crowd?
2. "NO ONE PLAYER IS GREATER THAN THE TEAM"
There is really only one superstar on the Patriots. That is Tom Brady. So Bill Belichick, who also serves
as the Manager of personnel on the team, finds players that fit into what he is trying to accomplish.
Everyone has a job and everyone fits into a team. No one individual is above another. They always have
a great offensive line and skill players on short contracts. Keeps them accountable. Want too much
money or think you are worth more than anyone else on the team, traded! The players know that.
3. “I GREW UP WATCHING MY DAD SCOUT GAMES LIVE”
If anything Coach Belichick is a student and master of the game. He changes his tactics and schemes
constantly. The one thing the Patriots always do so well, they play to their competition. They
practice so many different fronts, looks, and formations. His dad was a long time Assitant coach and
college football scout. Belichick studied how his father dissected game film and drew up plays, and
often accompanied him to coaches meetings. By his early teens, Belichick was a regular part of the
team's practices and was well‐versed in the game's schemes and formations. In this last Super Bowl,
the Patriots were losing 28 ‐ 3 and everytime the camera found Belichick on the sideline he was talking
with his players showing them formations and notes. Lineman, defensive safeties, running backs, it
didn't matter. Everyone was getting coached by the greatest in the game.
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4. “TALENT SETS THE FLOOR, CHARACTER SETS THE CEILING”
I once heard Belichick say he looks for players that Love the Game of Football and care about
winning. Character is important to Belichick. Everyone in the NFL is talented. They are some of the
most athletic human beings on the planet. However, unless you are willing to go beyond yourself and
work for a common goal you will not last in Belichick's team. That is literally the "Patriot way."
People that work hard and legitimately do everything that they can, they tend to be
luckier. ‐ Julian Edelman (Super Bowl 53 MVP)
5. “I DON'T TWITTER, I DON'T MYFACE, I DON'T YEARBOOK"
Another quote that I could have put here is, "ignore the noise." Belichick is famous for not giving the
press the time of day with his short dry answers. He is not going to give the "noise" opportunities to
distract his team toward their goal. It is not my style, however you notice that his team loves playing
for him. He isn't your typical Ra‐Ra football coach who is overly emotional. Every member of the team
knows their role and is (like Belichick is famous for stating often) "Doing their job."
The Patriots are not well liked. It is easy to root against them. However, there isn't a player in the
league that will not want to play for that team. They take care of everything in‐house. There are no
facebook live videos inside the locker room, or dumb quotes on social media, or even fights inside their
organization. It is professional and they have a set vision with clear expectations.
Louis Ehrenkrantz’ 7 Golden Rules for Investing
GOLDEN INVESTING RULES
In nearly 40 years on Wall Street, the late Louis Ehrenkrantz, dean of American stock pickers,
was known for his ability to predict social and political developments — and identify companies
that would benefit most from those events.
First rule: develop a large appetite for reading; it will hone your instincts for
finding successful companies.
Second rule: don’t overdiversify; ten stocks, in at least three sectors, are enough
for the average investor.
Third rule: stick with your winners and sell your losers; do not automatically sell
when a stock hits a target price, but continue to hold it as long as it performs well
and has good prospects for the future.
Fourth rule: look for top-quality, out-of-favor companies; look for companies
that produce an array of high-quality products and/or services.
Fifth rule: don’t worry about earnings if a company makes a popular product;
strong earnings growth will follow.
Sixth rule: don’t tinker with your portfolio; check your portfolio’s performance
only once or twice a year.
Seventh rule: don’t be afraid to hold cash; it’s okay to be prepared to purchase
stocks with beaten-down prices after a correction
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Scientists at Rolls Royce built a gun specifically to laWlch dead chickens at the windshields
.of airliners and military jets all travelling at maximum velocity.
The idea is to simulate the frequent incidents of collisions with airborne fowl
to test the strength ofthe windshields. American engineers heard about the gun and were
eager to test it on the Windshields of their new high speed trains.
Arrangements were made, and a gun was sent to the American engineers.
When the gun was frred, the engineers stood shocked as the chicken shot out of the barrel
crashed into the shatterproof shield, smashed it to smithereens, blasted through the controi
console, snapped the engineer's back-rest in two and embedded itself in the back wall of the
cabin like an arrow shot from a bow. The same thing happened on several subsequent trials.
The ho?ified Ameri~ans ~ent Rolls Royce the disastrous results of the experiment, along with
the destgns of the wmdshield and begged the British scientists for suggestions.
Rolls Royce responded with a one-line memo:
"Defrost the chicken."
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