- “Investing successfully is really hard.” (Tadas Viskanta).
- “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” (Mark Twain).
- Manage risk first.
- In the shorter-term, markets are voting machines; in the longer-term, they are weighing machines.
- “Markets can remain irrational longer than you can remain solvent.” (John Maynard Keynes).
- We like to think we see things as they really are, but we actually see things as we really are.
- Information is cheap; meaning is expensive.
- There is always someone on the other side of a trade and that someone is often smarter and more well-informed than you are.
- Investing is both probabilistic and mean-reverting.
- Cut your losses; let your winners run.
- “Investment success accrues not so much to the brilliant as to the disciplined.” (William J. Bernstein).
- When you’ve won, stop playing.
- Diversification is the only free lunch in the markets.
- Data is more reliable than your gut.
- “The big money is not in the buying or the selling, but in the sitting.” (Jesse Livermore).
- Various market approaches work…until they don’t.
- Value process over outcome.
- “We must base our asset allocation not on the probabilities of choosing the right allocation but on the consequences of choosing the wrong allocation.” (Jack Bogle).
- It probably isn’t different this time.
- Fight the current war, not the last one.
- Make sure your facts are right and your data is good.
- “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” (Franklin Templeton).
- Being exceptional requires doing things differently.
- You can be and often are wrong.
- Plan (and have contingency plans).
- “For the simplicity on this side of complexity, I wouldn’t give you a fig. But for simplicity on the other side of complexity, for that I would give you anything I have.” (Oliver Wendell Holmes, Sr.).
- Correlation is not causation; consensus is not truth; and what is conventional is rarely wisdom.
- We always know less than we think.
- “Never confuse genius with a bull market.” (Humphrey B. Neill).
- History doesn’t repeat, but it often rhymes.
My first baseball memory is from October 16, 1962, the day after my sixth birthday, by which time I was already hooked on what was then the National Pastime. In those days, all World Series games were played during the day. So I hurried home from school on that Tuesday afternoon to turn on the (black-and-white) television and catch what I could of the seventh and deciding game of a great Series at the then-new Candlestick Park in San Francisco between the Giants and the New York Yankees.
Game seven matched New York’s 23-game winner, Ralph Terry (who in 1960 had given up perhaps the most famous home run in World Series history to lose the climatic seventh game), against San Francisco’s 24-game-winner, Jack Sanford. Sanford had pitched a three-hit shutout against Terry in game two, winning 2-0, while Terry had returned the favor in game five, defeating Sanford in a 5-3, complete game win. Game seven was brilliantly pitched on both sides. While Terry carried a perfect game into the sixth inning (broken up by Sanford) and a two-hit shutout into the ninth, Sanford was almost as good. The Yankees pushed their only run across in the fifth on singles by Bill “Moose” Skowron and Clete Boyer, a walk to Terry and a double-play grounder by Tony Kubek.
When Terry took the mound for the bottom of the ninth, clutching to that 1-0 lead (the idea of a “closer” had not been concocted yet), he faced pinch-hitter Matty Alou, who drag-bunted his way aboard. His brother Felipe Alou and Chuck Hiller struck out, bringing the great future Hall-of-Famer Willie Mays to the plate, who had led the National League in batting, runs and homers that year, as the Giants’ sought desperately to stay alive. Mays doubled to right, but Roger Maris (who had famously hit 61 homers the year before and who was a better fielder than is commonly assumed) cut the ball off at the line. His quick throw to Bobby Richardson and Richardson’s relay home forced Alou to hold at third base.
With first base open, Giants cleanup hitter and future Hall-of-Famer Willie McCovey stepped into the batter’s box while another future Hall-of-Famer, Orlando Cepeda, waited on deck. Yankees Manager Ralph Houk decided to let the right-handed Terry pitch to the left-handed-hitting McCovey, who had tripled in his previous at-bat and homered off Terry in game two, even though Cepeda was a right-handed hitter. With the count at one-and-one, McCovey got an inside fastball and rifled a blistering shot toward right field but low and just a step to Richardson’s left. The second baseman, who Terry had thought was out of position, snagged it and the Series was over. McCovey would later say that it was among the hardest balls he ever hit.
“It was one of those split-second things. ‘Yeah! No!’ “
Had McCovey’s frozen rope been hit just a bit higher or just a bit to either side, the Giants would have been crowned champions. As recounted by Henry Schulman in the San Francisco Chronicle, it was a matter of “[f]ive stinkin’ feet.”
Tremendous skill was exhibited by the players on that October afternoon over half a century ago. But the game – and ultimately the World Series championship – was decided by a bit of luck: that “five stinkin’ feet.” Continue reading
With a new report out from the Yale Endowment, now is a good time to do a heat check on how the so-called “Yale Model” of investing is doing. I have written about the Yale Model numerous times (see here, here, here and here, for example). It emphasizes broad and deep diversification and seeks to exploit the risk premiums offered by equity-oriented and illiquid investments to investors with an investment horizon that’s sufficiently long – in Yale’s case, essentially forever. It has worked exceptionally well for Yale. For others…not so much. Continue reading
Investment Belief #3: We aren’t nearly as rational as we assume
Traditional economic theory insists that we humans are rational actors making rational decisions amidst uncertainty in order to maximize our marginal utility. Sometimes we even try to believe it. But we aren’t nearly as rational as we tend to assume. We frequently delude ourselves and are readily manipulated – a fact that the advertising industry is eager to exploit.1
Watch Mad Men‘s Don Draper (Jon Hamm) use the emotional power of words to sell a couple of Kodak executives on himself and his firm while turning what they perceive to be a technological achievement (the “wheel”) into something much richer and more compelling – the “carousel.”
Those Kodak guys will hire Draper, of course, but their decision-making will hardly be rational. Homo economicus is thus a myth. But, of course, we already knew that. Even young and inexperienced investors can recognize that after just a brief exposure to the real world markets. The “rational man” is as non-existent as the Loch Ness Monster, Bigfoot and (perhaps) moderate Republicans. Yet the idea that we’re essentially rational creatures is a very seductive myth, especially as and when we relate the concept to ourselves (few lose money preying on another’s ego). We love to think that we’re rational actors carefully examining and weighing the available evidence in order to reach the best possible conclusions.
Oh that it were so. If we aren’t really careful, we will remain deluded that we see things as they really are. The truth is that we see things the way we really are. I frequently note that investing successfully is very difficult. And so it is. But the reasons why that is so go well beyond the technical aspects of investing. Sometimes it is retaining honesty, lucidity and simplicity – seeing what is really there – that is what’s so hard. Continue reading
Investment Belief #2: Smart Investing is Reality-Based
Anytime is a good time to talk baseball. I’ve done it pretty much my whole life. If you’re watching a game, its pace is perfectly conducive to discussing (arguing about) players, managers, strategy, tactics, the standings, the pennant races, the quality of ballpark peanuts, and pretty much anything else. In the off-season, the “hot stove league” allows for myriad possible conversations (arguments) about how to make one’s favorite team better. And now that spring training camps have opened, baseball talk about the upcoming season and its prospects has officially begun again in earnest. The coming of Spring means the return of hope — maybe this will finally be the year (Go Padres!) — which of course means talking (arguing) about it.
Our neighborhood quarrels about the National Pastime when I was a kid were incessant and invigorating, and didn’t have to include the vagaries of team revenues and revenue-sharing, player contracts, free agency and the luxury tax, as they do now. We could focus on more important stuff. Who should be the new catcher? Who should we trade for? Do we have any hot phenoms? Who’s the best player? The best pitcher? The best hitter? The best third baseman? Who belongs in the Hall of Fame? Which team will win at all this year? How do the new baseball cards look? Is the new Strat-O-Matic edition out yet?
Early on, my arguments were rudimentary and, truth be told, plenty stupid. They were ideological (the players on my team were always better than those on your team), authority-laden (“The guy in the paper says…”), narrative-driven (“Remember that time…”), overly influenced by the recent (“Did you see what Jim Northrup did last night?”) and loaded with confirmation bias.
Quickly I came to realize that it’s really hard to change an entrenched opinion, and not just because I was arguing with dopes. Slowly it became clear that if I wanted to have at least a chance of winning my arguments, I needed to argue for a position that was reality-based. I needed to bring facts, data and just-plain solid evidence to the table if I wanted to make a reasonable claim to being right, much less of convincing anyone. Arguments and beliefs that are not reality-based are bound to fail, and to fail sooner rather than later.
In the investing world as elsewhere, we face the all-too-human tendency to jump to immediate conclusions, to accept conventional wisdom too eagerly and to fall prey to hyperbolic discounting – valuing now too highly and not yet not enough. But as I often say, hope is not a strategy and lunch is not a long-range plan. This problem was illustrated in a fantastically funny way recently by Super Bowl winning quarterback Russell Wilson of the Seattle Seahawks on Twitter.
I never miss Jeremy Grantham’s quarterly GMO letter, the newest version of which is just out. You shouldn’t miss it either. This time he looks at a variety of issues including energy, commodities, U.S. GDP, an early (then legal) foray into insider trading and eight investment lessons he has learned. All the lessons are valuable, but I was particularly struck by #6, perhaps because it’s a point I make often: painful errors teach you more than success does. Here’s the list, but don’t miss the entire letter.
- Inside advice, legal in those days, from friends in the company is a particularly dangerous basis for decisions; you know little how limited their knowledge really is and you are overexposed to sustained enthusiasm;
- Always diversify, particularly for your pension fund;
- Fraud, near-fraud, or colossal incompetence can always strike;
- Don’t buy stocks yourself if you’re an amateur: invest with a relatively rare expert or in a low-cost index;
- Investing when young will start your brain turning on things financial;
- Painful errors teach you more than success does;
- Luck helps; and finally,
- Have a convenient mother to be the fall guy.
I have often warned against making investment decisions based upon political commitments, and I am hardly alone. A wonderful/dreadful example is provided by Stephen Moore, who announced this week that he is leaving The Wall Street Journal to become Chief Economist for the Heritage Foundation. Quite obviously, Moore opposes the policies of President Obama vociferously (“Everything he’s done has been such a massive failure…”).
That is his right, of course, and I take pains to keep Above the Market away from politics as much as possible. My point is that Moore’s political commitments foolishly override more objective analysis and thus impact his economic and investment outlooks negatively. Continue reading
This past week has offered multiple chances for reflection and retrospective as we saw the 150th anniversary of the Gettysburg Address and the 50th anniversary of the JFK assassination. Five years ago today was significant too, if not nearly at the level of those others.
Five years ago today, the markets were reeling. The most common emotions were fear and dread. Even though no less an authority than Warren Buffet had noticed the buying opportunity just over a month earlier, almost nobody was anxious to buy stocks.
But the Federal Reserve announced an $800 billion stimulus package in an effort to stabilize the financial system that day. This announcement came on the heels of the federal government’s decision to spend over $300 million to rescue Citigroup by agreeing to shoulder possibly hundreds of billions in losses at the stricken bank and to inject $20 billion into the company.
Things would get worse before they got better (the low would come in March of 2009), but an investor who bought the market five years ago would be very happy indeed today.
Taking this sort of look back is a helpful reminder of how our emotions and biases can work against our best interests. Five years ago today, the predominant mood was panic, but buying would have been a very good thing. Today — at much, much higher levels – it’s hard to find many bears. My point here is not that the markets won’t go up from here. They may well go higher and perhaps a lot higher. My point is that market risks are much higher today that they were five years ago. For example, CAPE today is 25.43; it was barely above 15 five years ago. My analytical self tells me to be fearful when others are greedy and to be careful, to hedge, to lighten up or to take profits when others are doubling down.
Even though it feels like I should do exactly the opposite.