Novel Investor

Compounding investing wisdom...

Asset Allocation Drives Returns

by Jon

Sometimes it’s good to get back to the basics. The basics of investing are simple: a bias toward stocks, diversification, and a long time horizon. A portfolio tilted toward a diverse basket of stocks provides the engine for long-term growth.

Yet, investors have a knack for over-complicating investing by trying to do too much. The reason is due to three tools at our disposal. David Swensen described these tools as asset allocation, market timing, and security selection.

In theory, the tools allow us to “add value” and improve our returns. But only one does any real work. In fact, the other two are a net negative. Continue Reading…

How the South Sea Bubble Burst

by Jon

The South Sea Bubble got its name from the South Sea Company. Its soaring stock price generated an enthusiastic buying spree in the early 1700s but the company is only part of the story. Hundred of smaller companies created around the same time kept the bubble inflated.

Between 1719 and 1720, numerous joint-stock companies were formed to take advantage of investor enthusiasm. A handful were legitimate concerns in insurance. Some were based on new innovations like “Puckle’s Machine Gun” and different fishery projects.

The majority were schemes to take advantage of investors’ ignorance. Some of the wilder concerns involved “extracting silver from lead,” “trading in human hair,” “a wheel for a perpetual motion,” and “a subscription advertised, and actually opened, for an undertaking, which shall in due time be revealed.”

Somehow, investors ate it up.

But the directors of the South Sea Company had a problem. They needed to prop up their stock and saw the smaller issues as competition. They wanted a monopoly on investor capital. They reasoned that if investors dumped their money into these new companies, no money would be left to pump up South Sea stock. Continue Reading…

The Importance of Slugging Percentage in Investing

by Jon

Probably the most widely followed stat in baseball is batting average. It measures a player’s success rate for each at-bat. Whether they get a single or a home run, a hit is a successful at-bat.

The average batting average in Major League Baseball is .250. So the average player gets a hit one out of every four at-bats. The best baseball players hit a little better than a .300 batting average. A .400 average is the holy grail that hasn’t been achieved since Ted Williams did it in 1941.

Except, in baseball, not all hits are equal. And with such a low success rate, what the player does with each at-bat becomes important. That’s where slugging percentage comes in.

Slugging percentage measures a player’s ability to hit extra-base hits. A single is one base, a double is two bases, and so on. It measures the average bases earned per at-bat which you get by taking the total number of bases earned divided by total at-bats.

So if a player wants a high slugging percentage, they need to hit doubles or better fairly often. And a high slugging percentage tends to lead to scoring runs, which is how you win games.

What does this have to do with investing? Continue Reading…

Fred Schwed Jr.: The Dream Market

by Jon

Fred Schwed Jr.’s classic, Where are the Customers’ Yachts? was first published in 1940. The title was borrowed from a quip William Travers made in the late 1800s.

As the story goes, Travers was with some friends in Newport to watch a boat race. After learning several boats were owned by Wall Street brokers, he asked, “Where’s the customer’s yachts?”

Schwed’s book was one of the first to mix humor with finance to warn people of Wall Street’s shortcomings…starting with the title. Wall Street has a history of enriching itself at the customer’s expense. But he didn’t stop there. He knocked Wall Streeters for their continual need to predict the future — and continuously getting it wrong.

However, the book wasn’t the first time Schwed blasted Wall Street for its shortcomings. A short piece, he wrote, in the March 1939 issue of Forum and Century magazine offered a glimpse of what was to come.

Schwed went after Wall Street for the endless confidence in knowing what happens next, the ignorance of uncertainty, the endless search for patterns in the market, CEOs playing the blame game, and the customers for being gullible. Continue Reading…

Quarterly Reading – Spring ’22

by Jon

Here’s what I’ve been reading the past three months:

  • The Art of Wall Street Investing – John Moody’s classic offers a glimpse of what investing was like prior to 1906. Bucket shops, stock pools, and get-rich-quick schemes were regular features. But the common sense investing principles outlined in the book still work today. (notes)
  • Decision Under Uncertainty: Drilling Decisions by Oil and Gas Operators – The book deals with decision-making where uncertainty exists in oil drilling but translates to other business and investing decisions. The biggest takeaway is how to think about probabilities in an uncertain environment where an unlucky sequence of outcomes can lead to ruin. (notes)
  • Wiped Out: How I Lost a Fortune in the Stock Market While the Averages Were Making New Highs – An anonymous author tells his experience “investing” in the stock market from 1957 to 1964. He went from never investing in stocks, or even gambling at casinos, to trading $62,000 down to nothing. It’s a brutally honest take on speculative behavior.
  • Of Long Term Value & Wealth Creation from Equity Investing – Bharat Shah, an Indian investor and director of ASK Group, wrote this book on finding quality compounders. He focuses on companies showing signs of value but also long-term growth and earnings quality. The book is only available in PDF format.
  • The Great Depression: A Diary – Benjamin Roth kept a detailed diary of his experience and observations of what was going on around him during the Great Depression. His collection of diary entries offers a daily snapshot of the growing pessimistic view of the economy, markets, and daily life. I’ve only recently started it but the book is hard to put down.

Continue Reading…

Learning

Return Tables

Connect