Novel Investor

Compounding investing wisdom...

Happy Hour: 4 Investing Principles

by Jon

The folks at SumZero published a great interview with  Micheal Mauboussin this week that is worth reading this weekend.

The interview is not too long, but it focuses on the opportunities for active management going forward. So things like value investing, market inefficiencies, systematic strategies, and more were discussed.

However, the final question reflected on a great piece Mauboussin wrote in 2016 on ten principles that make a great investor. He was asked which of the principles were the most important to his success as an investor.

Here’s what he said: Continue Reading…

Seth Klarman on Risk Management

by Jon

For whatever reason, investors have a hard time dreaming of the high returns they can earn from an investment while also thinking about its risks. A deficiency in multitasking, I guess.

But it plays a big enough role in poor investment performance that Seth Klarman spent a chapter in his book explaining why risk management – avoiding losses – is the cornerstone of a value philosophy.

His explanation starts with the one thing we’re all terrible at, yet so many investors try to do it anyway. Continue Reading…

Happy Hour: Official Correction

by Jon

We have an official correction!

Sorry if that comes off a bit too happy about the market’s poor performance. As great as last year’s performance was, it was frustratingly boring for someone looking for bargain prices.

Yesterday, the Dow and S&P 500 both finished 10% below their previous high from two weeks ago.

If we learned anything this week, it’s that market volatility still exists. In other words, the past year was abnormal for volatility.

But for those of us with a long-term perspective, this is good news (net buyers of stocks should want lower prices). Continue Reading…

Oh Yeah? Forecasting Follies Around the ’29 Crash

by Jon

Irving Fisher on the Stock Market 10/16/29

Irving Fisher summed up the attitude of the late 1920s perfectly. His “permanently high plateau” epitomized the euphoria of the time and called for the end of financial cycles.

There was a lot to be excited about.

The ’20s economy offered only brief, mild recessions with exceptional growth and an extended bull market. One new innovation after another led a belief that scientific invention would cure all of life’s problems…and it was right around the corner.

And new financial “innovations” – investment trusts (new for the U.S.) and buying on margin (investors and trusts could buy stocks for 10-20% down with the other 80-90% paid back after selling for a tidy profit) – made it easier for average people to profit from the stock market.

In the heat of it all, some of the smartest financial minds, business leaders, and politicians were certain the 1920s brought about a new economic age. Continue Reading…

Howard Marks: Lessons from a Crisis

by Jon

The best lessons are about learning what not to do. Great investors like Buffett and Klarman and others drill home the point of avoiding big mistakes. They understand how a loss can be compounded by a mental or emotional misstep, making recovery that much harder.

Like a lot of us, the great investors start out learning this first-hand. Painful experience — from time in the market — can be a great teacher. Mistakes are part of the process.

But they quickly realize there are more efficient, less painful ways of learning from other’s mistakes. As Howard Marks says, you just have to pay attention:

The markets are a classroom where lessons are taught every day. The keys to investment success lie in observing and learning.

The great thing about hindsight is, it always points out what everyone did wrong. Continue Reading…

Happy Hour: Latest Marks Memo on Weighing the Risk

by Jon

Howard Marks is out with a new Memo this week. He offers his view on where the market’s stand today and a lengthy discussion on the impact of the tax cuts.

The short version on tax cuts is it’s short-term positive, long-term negative – mostly good for businesses, but for individuals it depends. He covers some second-order consequences for the tax in general and the new state and local tax deduction limit specifically. It’s worth reading through.

The rest of the memo is spent reviewing things he’s repeated the last few years. So if you’ve read any Memos the last couple years, it will sound familiar: Continue Reading…

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