You have to live it to believe it – Morgan Housel
Richard Held and Alan Hein raised 20 kittens in pitch black darkness. Which is the kind of thing you should only do if it’s necessary to prove a point critical to understanding how the world works. Thankfully they did just that. The two MIT cognitive scientists, working in the 1960s, showed that seeing the world…
▶ Seeing the world around you was not enough to understand how it works. You had to actually experience that world to learn how to operate in it.
▶ One of the most important topics in business and investing is whether all of us are, in some ways, like these blind cats. Sure, we’ve read about the Great Depression. But most of us didn’t live through it. So can we actually learn lessons from it that make us better with our money?
▶ Investor Michael Batnick says, “some lessons have to be experienced before they can be understood.” We are all victims, in different ways, to that truth.
▶ John F. Kennedy grew up in one of the wealthiest American families, and the rare clan whose wealth surged during the Great Depression. His father Joe Kennedy’s life goal was to make so much money that his kids could devote their life to politics. He did just that.
▶ Both campaigns used the same logic: someone who merely read about a big event cannot fully empathize with those who experienced that big event.
▶ That’s our history. That’s what we know. And what we know is more persuasive than what we read.
▶ You can’t expect countries whose experiences are that divergent from our own to have similar views about economic and social policies. And this goes beyond economics.
▶ the psychological scars of our experiences don’t discriminate on IQ. Or more specifically, they sit above IQ in the information hierarchy that people use to make decisions.
▶ People with different experience than us aren’t necessarily smarter. They just see the investing world through a different lens.
▶ Daniel Kahneman calls this the “experiencing self” and the “remembering self.” They can be two completely different minds. Memories of big events are influenced by a few punctuated oments, not the full story.
▶ The hardest part of studying history is that you know how the story ends, often before you begin researching a topic.
▶ They highlight the badass success and glory, because that’s how the story ended. But no one knew that before or during the raid.
▶ “The customer is always right” and “customers don’t know what they want” are both accepted business wisdom. Examples of both are only known with hindsight, and it’s impossible to think about these topics with an open mind when you know the eventual outcome of how certain products perform.
▶ Going out of your way to speak with people whose backgrounds are different than yours, knowing that their view of the world may look nothing like your own, though they are just as sure of their views as you are of yours, is a humbling thing. But it’s so important to expand your mind to the range of possibilities you may come across as an investor.
▶ As Jim Grant says, “Successful investing is getting others to agree with you … later.”
▶ Another takeaway is remembering that people whose views and decisions look crazy to you may be less crazy than you think, because they’re being made by people whose views on risk and reward were shaped in a different world than you’ve experienced.
▶ When you realize that other people can make decisions that look crazy to you but make perfect sense to them because they’ve experienced something you haven’t, you become less cynical about the investing industry and more focused on whatever works for you.
▶ When the study was over the blind cats were left in a fully lit room. Forty-eight hours later, all were effectively normal, regaining their “vision” and learning how to match the world around them to their movements. Eight weeks of seeing their world taught them virtually nothing. Two days of experiencing it, and they had it all figured out.😀
Fives Crashes – Jonathan Clements
WE GET MORE pain from losses than pleasure from gains—which might explain why I often think back on the five major market crashes that have occurred during my investing lifetime. There’s something about the massive hemorrhaging of money that has a way of focusing the mind and sticking in the memory. Here are those five…
▶ WE GET MORE pain from losses than pleasure from gains—which might explain why I often think back on the five major market crashes that have occurred during my investing lifetime. There’s something about the massive hemorrhaging of money that has a way of focusing the mind and sticking in the memory.
▶ To invest successfully, we need to stand apart from the crowd, never purchasing something we don’t understand and never buying just because others are doing so. That doesn’t mean we should be knee-jerk contrarians. But it’s crucial to diversify broadly, while shunning big bets on the market’s most popular merchandise.
▶ In fact, the housing mania was arguably even worse than the tech mania that preceded it. It affected far more people. Barely half of Americans own stocks, while—at the time—almost seven out of 10 owned their home.
▶ The financial pain of the housing bust was exacerbated by the psychological shock: Folks expect stocks to be risky, but they’d long viewed homes as the safest of investments.
▶ As we learned from the 17th century philosopher Blaise Pascal, when we ponder the risks we face, we need to think not only about probabilities, but also about consequences.
Danger Zone: Traditonal value investors – David Trainer
Unfortunately, much of what passes for value investing today relies on accounting book value and other metrics whose utility has atrophied significantly over the years.
▶ 99.8% of “Value” ETFs Rely on Book Value
▶ As Warren Buffett noted above, he was wrong on Kraft. He overestimated the value of the company’s brands and distribution networks and underestimated the significance of changing consumer tastes.
▶ Investing capital that earns a return below your cost of capital destroys value for shareholders.
▶ Very few investors these days can truly be classified as “value” investors. Value investing, in theory, is a comprehensive strategy that involves thoroughly analyzing assets and cash flows to identify companies that are trading below their fair value. In practice, almost no one does that work. 🧐
▶ For many other investors, value is merely a component of their portfolio, a bucket to fill, rather than an overall strategy for selecting stocks. This way of thinking leads investors to abdicate their responsibility to perform the diligence upon which the value investing philosophy was built. As long as investors have exposure to the “value“ factor, they don’t feel they need to know the details of that exposure.
▶ Many tech companies rely heavily on intangible assets that the balance sheet doesn’t capture, which is why value indexes systematically underweight tech.
Investingin shipping stocks: Lessons from Walter Schhloss
He knows how to identify securities that sell at considerably less than their value to a private owner; And that’s all he does … He owns many more stocks than I do and is far less interested in the underlying nature of the business; I don’t seem to have very much influence on [him]. That…
▶ Investment Philosophy: Buy Stocks Like Groceries, Not Perfume
▶ This approach can be surmised in the following bullets:
▶ “Basically, it’s a contrarian philosophy, and people really like buying things that are doing well.” I wish Schloss was more complicated — it would help me get more pages out of the piece — but that’s really all there was to it.
▶ Unlike Buffett, Schloss made a point of not talking to management or factoring them in at all. His reason was that good management would eventually show up in a higher stock price and a higher multiple.
Smart people saying smart things – Michael Batnick
I’m not really into motivational quotes, but I am all about smart people saying smart things. Below are a few I’ve compiled over the years. “History never tells us what would have happened, only what did happen.” -H.W. Baird, The Age of Gold “We must be careful in praising or condemning because the future may...