Novel Investor

Compounding investing wisdom...

Seth Klarman: Why Investors Should Be More Like Athletes

by Jon

Athletes have routines. They have routines within routines.

From practices to pre-game to game time to post-game, from getting up in the morning, to the meals they eat, to the music they listen to, to getting taped up and dressed, stepping into the batters box (baseball), shooting free throws (basketball), getting into and out of the blocks (track, swimming), or starting their approach (too long to list), athletes have a process for everything.

It’s habitual, muscle memory stuff for the body and mind. It’s repetition at its finest.

It’s done for one simple reason: it helps with intense focus on the task at hand because it’s one of the few things athletes can control.

Good outcomes are the product of a sound process repeated often. But good outcomes are not always guaranteed.

Seth Klarman explains why investors should be more like athletes, with the help of James Montier: Continue Reading…

Happy Hour: Ben Graham’s 1920’s Hedging Strategy

by Jon

Out of curiosity, I went digging for more info on the strategy Ben Graham used in his early fund back in the 1920s.

As was pointed out in the last post, he was buying undervalued stocks (the long-only portion) found through his own fundamental analysis, along with a separate hedging strategy, and some margin debt thrown in for good measure.

There’s was nothing really funky going on beyond that. Graham was very much focused on risk — minimizing losses — but, unlike his post ’29 strategies, he clearly was trying to maximize gains too.

In an article written in 1920, Graham outlined his hedging strategy. Continue Reading…

Happy Hour: Quarterly Reading – Summer ’18

by Jon

We’re halfway through the year, so this is another quarterly update on my attempt to read more books this year.

Mostly, this is for my own accountability but if you see something interesting, even better. You can find the last quarter’s reading list here.

These are the books I’ve read over the last quarter. Continue Reading…

Total Returns for the First Half of 2018

by Jon

Anyone expecting a repeat of last year’s performance has to be disappointed. Global stock markets left much to be desired for the first half of 2018. Of course, markets can crush high hopes sometimes.

Usually, when that happens, bond markets offer a little recompense. That didn’t happen over the last six months. The few bond indexes I track for the asset tables (and many others) have all performed worse than 3-month T-Bills YTD.

That shouldn’t be a surprise though. Broadly, global stock markets have performed well since 2008. That wasn’t going to continue forever. And it’s hard to squeeze a high return out of low-yield bonds. Those two things combined are enough to reset expectations for the next several years.

The brings me to a few ultimate unanswered questions. How do investors react if low expected stock returns materialize in a low bond yield world? How many “long-term” investors stick with their strategy? Will investors take on more risk in the hopes of getting a higher return? Are they prepared if they’re wrong? Will they accept low or negative returns over the next few years? Continue Reading…

Happy Hour: What Drives Cycles to Extremes?

by Jon

Michael Mauboussin is out with a new piece. In it, he lays out the ingredients that drive market cycles, both normally and to extremes, and how to cope with it.

The normal fundamentals that drive market cycles, when combined with our own biases, can lead to extreme asset prices.

Procyclical feedback loops commonly start with fundamental economic strenght taht becomes virtuously self-reforcing. For example, an increase in consumer demand leads to greater business investment, which leads to higher employment, which spurs additional demand. The process also works in the opposite direction.

Whether up or down, a trend in fundamentals can morph into a feedback loop that pushes asset prices to an extreme. While it is difficult to isolate the exact cause of a procyclical extreme, we can offer a taxonomy that captures much of the behavior we observe. The boundaries between these categories are blurred, but they reflect most of what we see in markets.

This is a normal part of the cycle. It’s only when irrational thought permeates that you see extremes like the Dotcom and the housing bubble and busts. Continue Reading…

Seth Klarman on Being Ready for What’s Next

by Jon

Bull markets can play tricks on investors perception of risk. So much so, that the end result can be costly.

Since the instant people recognized markets move in cycles, it’s been a recurring theme. Each bull market produces a fresh crop of investors — new investors absent experience and experienced, but absent-minded investors — believing it can never get worse.

It leads investors into a false sense of security through optimism and overconfidence, confusing skills with luck, “brains with a bull market,” believing high returns are easily earned and risk is nonexistent.

The longer a bull market drags on, it gets easier to forget what came before it. The result is investors take chances they normally wouldn’t take but leave themselves dangerously exposed to what inevitably comes next.

It’s one of the easiest mistakes to make. It’s probably one of the most warned about too.

Seth Klarman did exactly that to the MIT Sloan Investment Club in October 2007. Continue Reading…

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