Warren Buffett's Best Advice Ever
By Morgan Housel
January 25, 2010
It's funny how often a prominent person's legacy is remembered with a single speech, or even a single phrase. Four score and seven years. I have a dream. Ask not what your country can do for you. One small step for man. Tear down this wall. You know what I mean.
Without comparing the contributions of those men, I wondered whether one speech could define the career of the world's greatest investor, Warren Buffett, and his creation Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B).
Turns out, it can. While Buffett had been dominating for decades, his talent wasn't truly apparent to the world until he gave a 1984 speech at Columbia University titled "The Superinvestors of Graham-and-Doddsville."
The lengthy speech can be found in its entirety here (opens PDF file), but I'll give you the Cliffs Notes version.
Dumb luck, pure skill, and flipping coins
Buffett begins by imagining a nationwide coin-flipping contest. Everyone in the country participates and calls the flip of a coin. Call correctly and move on to the next round, guess wrong and you're out.
After 20 days, about 215 lucky flippers will have correctly called 20 consecutive flips. They gloat in success, yet the nature of coin-flipping tells us they're just lucky. It's a game of random chance.
But what if all 215 flippers lived in the same town? What if they all hailed from the same school? The same fraternity? Then we'd get excited. The laws of probability suggest 215 winners after 20 days. But those same laws tell us that if all 215 belonged to an associated group, that almost certainly wouldn't be the product of random chance. These 215 flippers clearly would know something we don't.
Meet nine "lucky" flippers
The real flippers in Buffett speech are nine "superinvestors" -- himself included. All nine crushed the market averages over multiyear periods by between 8% and 22% per year.
In a world with millions of investors, such returns can occur by sheer luck -- just like the 215 coin-flippers appeared at first glance. But all nine superinvestors hailed from the investment school of Benjamin Graham and David Dodd -- Columbia professors now known as the fathers of value investing. That meant something big. It meant that their success wasn't the product of luck. It almost had to be attributable to the only common link they shared: the investing philosophy learned from Graham and Dodd. The "intellectual origin," as Buffett put it.
What set Graham and Dodd's philosophy apart? That's where the title of this article comes in. Explaining it was simply the best advice Buffett ever gave.
Here it is
Buffett states the superinvestors' core values quite succinctly:
The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in the market. Essentially, they exploit those discrepancies without the efficient market theorist's concern as to whether the stocks are bought on Monday or Thursday, or whether it is January or July, etc ...
It's very important to understand that this group has assumed far less risk than average ...While they differ greatly in style, these investors are, mentally, always buying the business, not buying the stock.
It's that simple
Most investors aren't superinvestors. To them, there's little distinction between price and value. A cratering stock means risk, while a soaring stock somehow indicates strength and safety -- all with little regard to other, more deeply rooted factors. This is akin to assuming that all attractive people make great spouses.
But a more philosophical view shows how crazy this is. Risk appears when market value equals or exceeds the long-term value of a company's discounted cash flows -- its intrinsic value. It then diminishes in proportion to how far market price drops below intrinsic value. Really simple. The relationship between price and risk is often the opposite of what it's comfortable to assume.
Here's an example: Was Google (Nasdaq: GOOG) riskier in 2007, when optimism was on fire and shares exploded, or in late 2008, after shares crashed and bottomed out at around 12 times forward earnings? The answer is easy. Google was enormously risky in 2007, when the market assumed it was a surefire bet, and steadily approaching riskless territory in late 2008, when market volatility made investing look suicidal. Same goes for companies such as Alcoa (NYSE: AA) and Dow Chemical (NYSE: DOW). Investing risk was lowest when the performance and volatility of their shares looked bleakest. That was when the gap between price and intrinsic value was widest. That's when you want to invest.
http://www.fool.com/investing/value/2010/01/25/warren-buffetts-best-advice-ever.aspx?source=ihpdspmra0000001&lidx=3
Friday, January 29, 2010
How to Never Lose Money
How to Never Lose Money
By Anand Chokkavelu, CFA
January 28, 2010
It's become an investing cliche.
Warren Buffett's two rules for investing:
1. Never lose money.
2. Never forget rule No. 1.
I've personally heard that advice so many times, it's begun to sound as inane as "Buy low, sell high." Just as no one goes into an investment trying to buy high and then sell low, no one intends to lose money. But like most clichés, especially those originated by Buffett, there's a great lesson here -- if you can parse the words correctly.
The moment of illumination
I finally understood exactly what Buffett meant by "never lose money" when I heard about the home run opportunity he passed up in 1968.
Back then, he served as a trustee of Grinnell College alongside a man named Bob Noyce. You may know Noyce better as one of the co-founders of Intel (Nasdaq: INTC).
Believe it or not, Buffett had the opportunity to get in on Intel on the ground floor. It would have been one of the greatest investments on his packed list of great investments.
But he passed it up.
Why? He knew it lay outside his circle of competence (another well-worn Buffettism).
In his words: "We will not go into businesses where technology which is way over my head is crucial to the investment decision."
Buffett's spurning of the Intel motherlode reminds us that if never losing money is our goal, we have to avoid some individual investments that have tremendous market-beating potential.
It sounds counterintuitive, but it's true. Just because an investment works out in our favor doesn't mean there was skill involved. To truly follow Buffett's lead, we need to invest in companies about which we have above-market knowledge.
A tech example that worked out
But just in case you think I'm picking on tech stocks, I'll share a counterpoint. A contrast to Buffett is someone like Jeff Bezos, the founder of Amazon.com. Not only has he built Amazon.com into an Internet retail powerhouse, but he was also one of the initial investors in Google (Nasdaq: GOOG), getting in at about a nickel a share. Wow.
Two things to note here: First, tech companies are within Bezos' circle of competence. Second, he has more of an entrepreneur's risk tolerance than does Buffett. Rather than "never lose money," it's more "make up for any losses with the killings you make on your winners."
To be clear, the "circle of competence" lesson applies not only to technology companies, but also to all industries.
For example, in the energy space, an educated choice among Big Oil titan Exxon (NYSE: XOM) and alternative energy player First Solar (Nasdaq: FSLR) requires knowledge of global supply constraints, a projection of consumer demand, insight into the technologies employed, and a feel for government regulations and subsidies. All this does not include digging into the companies themselves, which is complex enough.
General Electric (NYSE: GE) showed us how complicated a company can get. The losses at GE's financial arm are painful proof that not knowing can cost you big money as an investor.
More of what it takes
But following Buffett's "never lose money" credo takes more than just sticking within industries you know more about than the next guy. Just because an Exxon or a General Electric is within your circle of competence, and you've determined that its business model is superior, doesn't mean you should invest in it.
Nope, you need a margin of safety as well. In other words, the price must be right.
That sounds obvious, but it never sinks in for many investors. Just because a company is poised for success doesn't mean investors will profit from the success. At some point, even the best businesses are too expensive for investment purposes.
To use a non-stock example, an art investor would gladly buy a Van Gogh for $10,000. But he'd be a small-f fool to buy one at $10 billion.
Even Buffett loses money
Here's a secret: Every investor loses money at some point. Even Buffett. Remember that his company's name, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), hearkens back to the ill-fated textile mills that helped solidify his philosophy.
His admonition to never lose money is less a rule, and more a way of thinking. It's a reminder not to stretch for the siren song of too-good-to-be-true returns. This requires:
* Staying within your circle of competence.
* Opportunistically buying in at a good price.
http://www.fool.com/investing/value/2010/01/28/how-to-never-lose-money.aspx
By Anand Chokkavelu, CFA
January 28, 2010
It's become an investing cliche.
Warren Buffett's two rules for investing:
1. Never lose money.
2. Never forget rule No. 1.
I've personally heard that advice so many times, it's begun to sound as inane as "Buy low, sell high." Just as no one goes into an investment trying to buy high and then sell low, no one intends to lose money. But like most clichés, especially those originated by Buffett, there's a great lesson here -- if you can parse the words correctly.
The moment of illumination
I finally understood exactly what Buffett meant by "never lose money" when I heard about the home run opportunity he passed up in 1968.
Back then, he served as a trustee of Grinnell College alongside a man named Bob Noyce. You may know Noyce better as one of the co-founders of Intel (Nasdaq: INTC).
Believe it or not, Buffett had the opportunity to get in on Intel on the ground floor. It would have been one of the greatest investments on his packed list of great investments.
But he passed it up.
Why? He knew it lay outside his circle of competence (another well-worn Buffettism).
In his words: "We will not go into businesses where technology which is way over my head is crucial to the investment decision."
Buffett's spurning of the Intel motherlode reminds us that if never losing money is our goal, we have to avoid some individual investments that have tremendous market-beating potential.
It sounds counterintuitive, but it's true. Just because an investment works out in our favor doesn't mean there was skill involved. To truly follow Buffett's lead, we need to invest in companies about which we have above-market knowledge.
A tech example that worked out
But just in case you think I'm picking on tech stocks, I'll share a counterpoint. A contrast to Buffett is someone like Jeff Bezos, the founder of Amazon.com. Not only has he built Amazon.com into an Internet retail powerhouse, but he was also one of the initial investors in Google (Nasdaq: GOOG), getting in at about a nickel a share. Wow.
Two things to note here: First, tech companies are within Bezos' circle of competence. Second, he has more of an entrepreneur's risk tolerance than does Buffett. Rather than "never lose money," it's more "make up for any losses with the killings you make on your winners."
To be clear, the "circle of competence" lesson applies not only to technology companies, but also to all industries.
For example, in the energy space, an educated choice among Big Oil titan Exxon (NYSE: XOM) and alternative energy player First Solar (Nasdaq: FSLR) requires knowledge of global supply constraints, a projection of consumer demand, insight into the technologies employed, and a feel for government regulations and subsidies. All this does not include digging into the companies themselves, which is complex enough.
General Electric (NYSE: GE) showed us how complicated a company can get. The losses at GE's financial arm are painful proof that not knowing can cost you big money as an investor.
More of what it takes
But following Buffett's "never lose money" credo takes more than just sticking within industries you know more about than the next guy. Just because an Exxon or a General Electric is within your circle of competence, and you've determined that its business model is superior, doesn't mean you should invest in it.
Nope, you need a margin of safety as well. In other words, the price must be right.
That sounds obvious, but it never sinks in for many investors. Just because a company is poised for success doesn't mean investors will profit from the success. At some point, even the best businesses are too expensive for investment purposes.
To use a non-stock example, an art investor would gladly buy a Van Gogh for $10,000. But he'd be a small-f fool to buy one at $10 billion.
Even Buffett loses money
Here's a secret: Every investor loses money at some point. Even Buffett. Remember that his company's name, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), hearkens back to the ill-fated textile mills that helped solidify his philosophy.
His admonition to never lose money is less a rule, and more a way of thinking. It's a reminder not to stretch for the siren song of too-good-to-be-true returns. This requires:
* Staying within your circle of competence.
* Opportunistically buying in at a good price.
http://www.fool.com/investing/value/2010/01/28/how-to-never-lose-money.aspx
Tuesday, January 12, 2010
Cheap Is No Longer Good Enough
Cheap Is No Longer Good Enough
By Toby Shute
January 11, 2010
http://www.fool.com/investing/value/2010/01/11/cheap-is-no-longer-good-enough.aspx
By Toby Shute
January 11, 2010
http://www.fool.com/investing/value/2010/01/11/cheap-is-no-longer-good-enough.aspx
Friday, January 8, 2010
Saturday, January 2, 2010
Google, Berkshire Hathaway Share Common Ground
Google, Berkshire Hathaway Share Common Ground
by William Freehling
It's hard to think of two companies that on the surface have less in common than Google and Berkshire Hathaway.
One is at the cutting-edge of the seismic technological shifts affecting the way people consume media and gather information online.
The other focuses on slow-changing industries and companies that have been around for generations or more, and has a 79-year-old CEO who famously avoids technology investments.
But in many ways Google and Berkshire Hathaway have some interesting similarities, Ken Auletta shows in his excellent book "Googled: The End of the World As We Know It."
"Googled" gives the history of the search giant and shows the ways the company has greatly disrupted businesses including television, newspapers, telephones, advertising, movies and book publishing.
Berkshire Hathaway is never mentioned, and there's just one reference to Warren Buffett -- when Auletta reveals that Google co-founder (and fellow multi-billionaire) Sergey Brin considers Buffett one of his heroes.
Andrew Ross Sorkin shows in "Too Big to Fail" that Buffett was having dinner with Brin and Brin's wife on the night that Lehman Brothers failed in September 2008. The two have apparently cultivated a friendship, which itself is interesting considering that one of Buffett's closest pals is Bill Gates, whose Microsoft Corp. is in a fierce battle with Google over control of Internet search.
Whether the similarities between Berkshire and Google are due to Brin's relationship with and admiration for Buffett or are purely coincidental, they are unmistakable in "Googled." Here are 10 of these common grounds:
1. The leaders of both companies generally consider stock splits pointless, which (along with strong earnings) has led each company's stock price to rise far above the per-share market norm. Of course Berkshire appears to be set to split the B stock 50-to-1 to facilitate the Burlington Northern Santa Fe deal, but the A shares won't be split.
2. Buffett, Brin, Google co-founder Larry Page and Google CEO Eric Schmidt have gotten fabulously wealthy through their large stakes in the companies, but they pay themselves a relative pittance to run the firms. Buffett gets $100,000 a year, and the Google troika gets $1 each. None of the four takes bonuses or stock options.
3. The leaders rely on logic and data to make decisions, not emotion or subjective information.
4. Neither company puts much focus on public relations or marketing, considering that for the most part a waste of time and resources.
5. Brin and Page frequently appear on stage before Google's employees to take questions, much like Buffett and partner Charlie Munger do at Berkshire. Brin appears to play the role of Buffett, answering the bulk of the questions and serving as a more natural showman, while Page is akin to the more reserved and serious Munger.
6. Both companies hate Wall Street's short-term focus and generally disdain investment bankers. Instead they focus on the long-term and are unfazed by short-term fluctuations in the company's stock price.
7. Each company has a dual class of stock that allows Brin, Buffett and Page to keep a large amount of voting power. In both cases the men own an unusually large percentage of the company stock.
8. Neither company pays a dividend despite swimming in cash. Instead the cash is used to make investments toward the company's growth.
9. The leading men have tried to use their wealth to benefit society through charitable programs and foundations -- Buffett with his donations to The Bill & Melinda Gates Foundation and Google through Google.org.
10. Management empowers and praises the people doing the real work -- in Google's case the engineers, and in Buffett's case the people running Berkshire's operating units.
So are we likely to see Buffett invest in Google due to these common grounds? Don't bet on it. Buffett says he doesn't understand technology well enough to invest in it, and he doesn't like industries that change so rapidly.
But one could make the case that Buffett has considered Google and companies like it when making recent investments.
For example Auletta shows that Google spends billions of dollars a year on the huge data centers that are packed with the computers and servers where Google's reams of data are stored. Google is pushing hard toward cloud computing -- in which the Internet browser, not the personal computer, is where people store their documents. These data centers are energy hogs, which is partly why Google makes investments in the alternative energy space.
Some of Buffett's interest in utility companies may derive from the trend toward cloud computing (though it likely goes far beyond that). Burlington Northern is also the leading shipper of coal in the country, and coal is what produces a huge percentage of the country's electricity -- which will be even more in need as hybrid automobiles become more common.
Further, as Auletta shows, Google has had a highly disruptive effect on newspapers, for which Buffett has had a lifelong love. But Buffett has turned extremely bearish on newspapers over the past decade. Berkshire's purchase of Business Wire could be one way to hedge the company's ownership of The Buffalo News and nearly 20 percent stake in The Washington Post. As newspapers cut back on their staffs, services like Business Wire become more crucial for disseminating information.
http://www.gurufocus.com/news.php?id=80422
by William Freehling
It's hard to think of two companies that on the surface have less in common than Google and Berkshire Hathaway.
One is at the cutting-edge of the seismic technological shifts affecting the way people consume media and gather information online.
The other focuses on slow-changing industries and companies that have been around for generations or more, and has a 79-year-old CEO who famously avoids technology investments.
But in many ways Google and Berkshire Hathaway have some interesting similarities, Ken Auletta shows in his excellent book "Googled: The End of the World As We Know It."
"Googled" gives the history of the search giant and shows the ways the company has greatly disrupted businesses including television, newspapers, telephones, advertising, movies and book publishing.
Berkshire Hathaway is never mentioned, and there's just one reference to Warren Buffett -- when Auletta reveals that Google co-founder (and fellow multi-billionaire) Sergey Brin considers Buffett one of his heroes.
Andrew Ross Sorkin shows in "Too Big to Fail" that Buffett was having dinner with Brin and Brin's wife on the night that Lehman Brothers failed in September 2008. The two have apparently cultivated a friendship, which itself is interesting considering that one of Buffett's closest pals is Bill Gates, whose Microsoft Corp. is in a fierce battle with Google over control of Internet search.
Whether the similarities between Berkshire and Google are due to Brin's relationship with and admiration for Buffett or are purely coincidental, they are unmistakable in "Googled." Here are 10 of these common grounds:
1. The leaders of both companies generally consider stock splits pointless, which (along with strong earnings) has led each company's stock price to rise far above the per-share market norm. Of course Berkshire appears to be set to split the B stock 50-to-1 to facilitate the Burlington Northern Santa Fe deal, but the A shares won't be split.
2. Buffett, Brin, Google co-founder Larry Page and Google CEO Eric Schmidt have gotten fabulously wealthy through their large stakes in the companies, but they pay themselves a relative pittance to run the firms. Buffett gets $100,000 a year, and the Google troika gets $1 each. None of the four takes bonuses or stock options.
3. The leaders rely on logic and data to make decisions, not emotion or subjective information.
4. Neither company puts much focus on public relations or marketing, considering that for the most part a waste of time and resources.
5. Brin and Page frequently appear on stage before Google's employees to take questions, much like Buffett and partner Charlie Munger do at Berkshire. Brin appears to play the role of Buffett, answering the bulk of the questions and serving as a more natural showman, while Page is akin to the more reserved and serious Munger.
6. Both companies hate Wall Street's short-term focus and generally disdain investment bankers. Instead they focus on the long-term and are unfazed by short-term fluctuations in the company's stock price.
7. Each company has a dual class of stock that allows Brin, Buffett and Page to keep a large amount of voting power. In both cases the men own an unusually large percentage of the company stock.
8. Neither company pays a dividend despite swimming in cash. Instead the cash is used to make investments toward the company's growth.
9. The leading men have tried to use their wealth to benefit society through charitable programs and foundations -- Buffett with his donations to The Bill & Melinda Gates Foundation and Google through Google.org.
10. Management empowers and praises the people doing the real work -- in Google's case the engineers, and in Buffett's case the people running Berkshire's operating units.
So are we likely to see Buffett invest in Google due to these common grounds? Don't bet on it. Buffett says he doesn't understand technology well enough to invest in it, and he doesn't like industries that change so rapidly.
But one could make the case that Buffett has considered Google and companies like it when making recent investments.
For example Auletta shows that Google spends billions of dollars a year on the huge data centers that are packed with the computers and servers where Google's reams of data are stored. Google is pushing hard toward cloud computing -- in which the Internet browser, not the personal computer, is where people store their documents. These data centers are energy hogs, which is partly why Google makes investments in the alternative energy space.
Some of Buffett's interest in utility companies may derive from the trend toward cloud computing (though it likely goes far beyond that). Burlington Northern is also the leading shipper of coal in the country, and coal is what produces a huge percentage of the country's electricity -- which will be even more in need as hybrid automobiles become more common.
Further, as Auletta shows, Google has had a highly disruptive effect on newspapers, for which Buffett has had a lifelong love. But Buffett has turned extremely bearish on newspapers over the past decade. Berkshire's purchase of Business Wire could be one way to hedge the company's ownership of The Buffalo News and nearly 20 percent stake in The Washington Post. As newspapers cut back on their staffs, services like Business Wire become more crucial for disseminating information.
http://www.gurufocus.com/news.php?id=80422
Words Of Wisdom
Words Of Wisdom
from: charles@viewpointsofacommoditytrader.com
Posted: 30 Dec 2009 10:31 AM PST
I would like to take this opportunity to thank our subscribers and to wish you all a wonderful and prosperous 2010.
Vince Lombardi once said, “It is a reality of life that men are competitive and the most competitive games draw the most competitive men. That’s why they are there – to compete. The object is to win fairly, squarely, by the rules – but to win.”
Well, we have seen another year come and go and I hope most of you will continue to compete in the most interesting and challenging game in the world. As far as I am concerned, there is nothing like the trading game.
To wrap up 2009 here are a few words of wisdom from Viewpoints Of A Commodity Trader for 2009.
“Analysis can be equated with poker. Security analysts carefully follow the table talk of the game and examine the up-cards. Although analysts effectively follow and communicate these two aspects of the game, they either ignore or ineffectively guess at the other major element-the down-cards.”
“The most important rule of trading is to play good defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible draw down.”
“Gamblers think they are betting on red or seven but in reality they are betting on the clock. The loser wants a short run to look like a long run so the odds will prevail. The winner wants a long run to look like a short run so the odds will be suspended.”
“Many major problems people have in trading are caused by their expectations – of where the market is headed, how much money will they make from this trade, etc. One thing I learned that has helped me: it is wrong for a person to enter any market with any preconceived expectations.”
“The great danger is in confusing courage with bravery. The market is no place for heroics. That is for another battlefield. In the market place it often takes more courage to live than it does to die. The greatest courage is the one that lets you graciously admit that you are wrong when you no longer have a good reason to trade. The courage associated with the hero often destroys the courage that is needed to be successful. I have witnessed cases where temporarily successful traders have lost their touch because they lost their courage.”
“As people find out more about a situation, the accuracy of their judgments is not likely to increase, but their confidence does increase, as they fallaciously equate the quantity of information with its quality.” This can cause us to put the blinders on when we see negative information. It can also cause us to have a larger position than we should, or be over weighted to one position. Most important, it seems the more we overestimate what we think we know, we simultaneously underestimate what we don’t know ……the downside risk.
“Great decision makers aren’t those who process the most information, or spend the most time deliberating, but those that have perfected the art of “thin slicing”- filtering the very few factors that matter from an overwhelming number of variables”.
“We have seen how good we are at narrating backwards, at inventing stories that convince us we understand the past. In spite of the empirical record we continue to project into the future as if we were good at it, using tools and methods that exclude the rare events.” Funny isn’t it, since the big, rare, unpredictable events are precisely what shape the world. Events like the automobile and the World Wars, the internet and the Beatles.
“Systems trading is ultimately discretionary. The manager still has to decide how much risk to accept, which markets to play, and how aggressively to increase the trading base as a function of equity change. These decisions are quite important, often more important than trade timing.”
http://viewpointsofacommoditytrader.com/
from: charles@viewpointsofacommoditytrader.com
Posted: 30 Dec 2009 10:31 AM PST
I would like to take this opportunity to thank our subscribers and to wish you all a wonderful and prosperous 2010.
Vince Lombardi once said, “It is a reality of life that men are competitive and the most competitive games draw the most competitive men. That’s why they are there – to compete. The object is to win fairly, squarely, by the rules – but to win.”
Well, we have seen another year come and go and I hope most of you will continue to compete in the most interesting and challenging game in the world. As far as I am concerned, there is nothing like the trading game.
To wrap up 2009 here are a few words of wisdom from Viewpoints Of A Commodity Trader for 2009.
“Analysis can be equated with poker. Security analysts carefully follow the table talk of the game and examine the up-cards. Although analysts effectively follow and communicate these two aspects of the game, they either ignore or ineffectively guess at the other major element-the down-cards.”
“The most important rule of trading is to play good defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible draw down.”
“Gamblers think they are betting on red or seven but in reality they are betting on the clock. The loser wants a short run to look like a long run so the odds will prevail. The winner wants a long run to look like a short run so the odds will be suspended.”
“Many major problems people have in trading are caused by their expectations – of where the market is headed, how much money will they make from this trade, etc. One thing I learned that has helped me: it is wrong for a person to enter any market with any preconceived expectations.”
“The great danger is in confusing courage with bravery. The market is no place for heroics. That is for another battlefield. In the market place it often takes more courage to live than it does to die. The greatest courage is the one that lets you graciously admit that you are wrong when you no longer have a good reason to trade. The courage associated with the hero often destroys the courage that is needed to be successful. I have witnessed cases where temporarily successful traders have lost their touch because they lost their courage.”
“As people find out more about a situation, the accuracy of their judgments is not likely to increase, but their confidence does increase, as they fallaciously equate the quantity of information with its quality.” This can cause us to put the blinders on when we see negative information. It can also cause us to have a larger position than we should, or be over weighted to one position. Most important, it seems the more we overestimate what we think we know, we simultaneously underestimate what we don’t know ……the downside risk.
“Great decision makers aren’t those who process the most information, or spend the most time deliberating, but those that have perfected the art of “thin slicing”- filtering the very few factors that matter from an overwhelming number of variables”.
“We have seen how good we are at narrating backwards, at inventing stories that convince us we understand the past. In spite of the empirical record we continue to project into the future as if we were good at it, using tools and methods that exclude the rare events.” Funny isn’t it, since the big, rare, unpredictable events are precisely what shape the world. Events like the automobile and the World Wars, the internet and the Beatles.
“Systems trading is ultimately discretionary. The manager still has to decide how much risk to accept, which markets to play, and how aggressively to increase the trading base as a function of equity change. These decisions are quite important, often more important than trade timing.”
http://viewpointsofacommoditytrader.com/
Friday, January 1, 2010
The New Year's No. 1 Investing Tip
The New Year's No. 1 Investing Tip
By Tim Hanson
December 31, 2009
What I'm about to tell you could be the most important investing tip you get this year -- even better than if I gave you the name of some race-car growth stock that might double in 2010. But for you to appreciate its importance, I need to tell you two true stories.
True story No. 1
2007 had been a flat year for the market, but we started getting signs at the end of the year that all was not well with the housing market. The S&P took a sharp 10% dive from October to December and newspapers were reporting more and more about a looming "subprime" crisis. Yes, Ben Bernanke cut interest rates, but by the end of 2007, though the scale of the eventual crisis was not yet clear, it was obvious that there were at least a few weak links in the financial sector.
It was at this time that I took a look at my portfolio and realized that I was more than 25% weighted in the financial sector stocks such as Berkshire Hathaway (NYSE: BRK-A), optionsXpress (Nasdaq: OXPS), and International Assets Holding (Nasdaq: IAAC).
Before you call me daft, let me explain how such a thing could happen. First, financial sector stocks were coming out of a period of healthy growth, and my holdings had grown in size from their original positions. Second, financial stocks generally look like attractive buys because of their asset-light business models and high returns on capital. And third, I hadn't paid attention to my overweighting in real-time because these companies weren't operating in the same parts of the financial sector.
Yet overweight position across financials scared me when I saw it at the end of 2007 since my outlook for financials in 2008 wasn't all that rosy.
What happened? I rebalanced my portfolio by selling some of my financial stocks and saved myself a lot of pain as a result.
True story No. 2
Fast-forward to the end of 2008. The entire stock market had dropped nearly 50% and stocks with higher risk profiles -- such emerging markets names -- were down even more than that.
As a consequence, when I looked at my portfolio, I realized I now had less than 10% of my money invested in emerging markets even though I believed countries such as China, India, and Brazil were going to lead the world into recovery in 2009. After all, these countries were still posting positive GDP growth and had attributes -- such as a higher savings rate in China, a younger population in India, and a wealth of natural resources in Brazil -- that seemed like they could better help them survive and perhaps even thrive through the downturn.
So what did I do? I rebalanced my portfolio by selling some U.S. stocks and buying more shares of promising emerging markets names such as America Movil (NYSE: AMX), Mercadolibre (Nasdaq: MELI), China Fire & Security (Nasdaq: CFSG), and Yongye International (Nasdaq: YONG).
As you can see from the returns below, my emerging markets thesis played out as expected and my decision to buy more of those stocks helped make my returns dramatically better than they would have been otherwise.
Stock 2009 Return
America Movil 55%
Mercadolibre 217%
China Fire & Security 103%
Yongye International 425%
The New Year's No. 1 investing tip
Now that you know those two true stories, I hope you can appreciate the importance of taking time at the end of each calendar year to take a close look at your portfolio and your asset allocation to make sure that it matches your expectations for the next year and beyond.
If it doesn't -- and this is the most important part -- then make sure you take the time to rebalance. Not only could rebalancing save you a lot of pain (as it did me in 2008), but it can also help you make a lot more money (as it did me in 2009).
http://www.fool.com/investing/international/2009/12/31/the-new-years-no-1-investing-tip.aspx
By Tim Hanson
December 31, 2009
What I'm about to tell you could be the most important investing tip you get this year -- even better than if I gave you the name of some race-car growth stock that might double in 2010. But for you to appreciate its importance, I need to tell you two true stories.
True story No. 1
2007 had been a flat year for the market, but we started getting signs at the end of the year that all was not well with the housing market. The S&P took a sharp 10% dive from October to December and newspapers were reporting more and more about a looming "subprime" crisis. Yes, Ben Bernanke cut interest rates, but by the end of 2007, though the scale of the eventual crisis was not yet clear, it was obvious that there were at least a few weak links in the financial sector.
It was at this time that I took a look at my portfolio and realized that I was more than 25% weighted in the financial sector stocks such as Berkshire Hathaway (NYSE: BRK-A), optionsXpress (Nasdaq: OXPS), and International Assets Holding (Nasdaq: IAAC).
Before you call me daft, let me explain how such a thing could happen. First, financial sector stocks were coming out of a period of healthy growth, and my holdings had grown in size from their original positions. Second, financial stocks generally look like attractive buys because of their asset-light business models and high returns on capital. And third, I hadn't paid attention to my overweighting in real-time because these companies weren't operating in the same parts of the financial sector.
Yet overweight position across financials scared me when I saw it at the end of 2007 since my outlook for financials in 2008 wasn't all that rosy.
What happened? I rebalanced my portfolio by selling some of my financial stocks and saved myself a lot of pain as a result.
True story No. 2
Fast-forward to the end of 2008. The entire stock market had dropped nearly 50% and stocks with higher risk profiles -- such emerging markets names -- were down even more than that.
As a consequence, when I looked at my portfolio, I realized I now had less than 10% of my money invested in emerging markets even though I believed countries such as China, India, and Brazil were going to lead the world into recovery in 2009. After all, these countries were still posting positive GDP growth and had attributes -- such as a higher savings rate in China, a younger population in India, and a wealth of natural resources in Brazil -- that seemed like they could better help them survive and perhaps even thrive through the downturn.
So what did I do? I rebalanced my portfolio by selling some U.S. stocks and buying more shares of promising emerging markets names such as America Movil (NYSE: AMX), Mercadolibre (Nasdaq: MELI), China Fire & Security (Nasdaq: CFSG), and Yongye International (Nasdaq: YONG).
As you can see from the returns below, my emerging markets thesis played out as expected and my decision to buy more of those stocks helped make my returns dramatically better than they would have been otherwise.
Stock 2009 Return
America Movil 55%
Mercadolibre 217%
China Fire & Security 103%
Yongye International 425%
The New Year's No. 1 investing tip
Now that you know those two true stories, I hope you can appreciate the importance of taking time at the end of each calendar year to take a close look at your portfolio and your asset allocation to make sure that it matches your expectations for the next year and beyond.
If it doesn't -- and this is the most important part -- then make sure you take the time to rebalance. Not only could rebalancing save you a lot of pain (as it did me in 2008), but it can also help you make a lot more money (as it did me in 2009).
http://www.fool.com/investing/international/2009/12/31/the-new-years-no-1-investing-tip.aspx
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