Novel Investor

Compounding investing wisdom...

Speculative Market Myopia

by Jon

The stock market, in the early 1980s, experienced a speculative bubble in hard disk drive manufacturers. All the ingredients existed for the new industry to succeed and for investors to lose money.

The computer industry has a long history with new technology that increased performance coupled with gradually declining costs. Hard drive technology was no different.

From the start, hard drives were complex and expensive, so they were mostly used on mainframe computers. But that changed in the early ’80s. Technology improvements throughout the late 1970s lowered costs and better computer performance drove a need for more storage. Hard drives were in demand.

Industry analysts, in 1979, projected OEM sales at $700 million by 1983, up from $27 million in 1978. The next year, they raised the ’83 forecast to $1.1 billion. Actual sales didn’t disappoint.

The projections set the industry into overdrive. And the industry had all the necessary ingredients for success: high growth projections, rising valuations, easy access to capital, new technology innovation, cost reductions, and new uses for drives. Continue Reading…

Buffett: Why Smart People Do Dumb Things

by Jon

Warren Buffett appeared on Adam Smith’s Money Game in 1998. It was the follow-up show to Adam Smith’s Money World that ended a year or two earlier. Smith (aka George Goodman) interviewed Buffett around the time of the 1998 annual meeting.

One of the questions Smith asked was related to I.Q. – combining brilliance and investing won’t guarantee success. Smith wanted to know why. Buffett felt an important third ingredient was needed. Here’s what he had to say:

Adam Smith: Why do smart people do dumb things?

Warren Buffett: That’s the big question. Why do they do it in investing? Why do they do it in managing businesses? Because you have all these smart people out there. The money doesn’t go to the people with the highest I.Q. There would be a very poor correlation between I.Q. and investing and results. And you say to yourself why does somebody with a 500-horsepower motor only get 100-horsepower out of it? And I would say that if you look at the intellect as being the horsepower that’s available, but you look at the output as reflecting the efficiency of that motor, it is rationality that causes the capacity to be translated in output.

Now, what interferes with rationality? It’s ego. It’s greed. It’s envy. It’s fear. It’s mindless imitation of other people. I mean, there are a variety of factors that cause that horsepower of the mind to get diminished dramatically before the output turns out. And I would say if Charlie and I have any advantage it’s not because we’re so smart, it is because we’re rational and we very seldom let extraneous factors interfere with our thoughts. We don’t let other people’s opinion interfere with it. We don’t get– we try to get fearful when others are greedy. We try to get greedy when others are fearful. We try to avoid any kind of imitation of other people’s behavior. And those are the factors that cause smart people to get bad results. Continue Reading…

Margin of Safety by Seth Klarman

by

Margin of Safety book coverBuy the Book: Print

Seth Klarman’s rare classic is about managing risk. Borrowing Ben Graham’s primary concept for the title, the book teaches how to think about the value investing philosophy and why it works.

The Notes

Continue Reading…

Repeated Lessons in Buffett’s Partnership Letters

by Jon

Buffett’s Partnership Letters hold a number of lessons for everyone. Some stand out more than others because Warren Buffett repeats them throughout the letters. Those lessons are worth repeating again.

It is always startling to see how relatively small differences in rates add up to very significant sums over a period of years.

Exponential growth doesn’t come naturally to everyone. Mostly because it’s hard to imagine the huge amount of growth that happens on the backend based on what we see on the frontend.

To help his partners understand it, Buffett wrote three versions of alternate history to explain it. He rewrote the history of Christopher Columbus, da Vinci’s Mona Lisa, and the sale of Manhattan. His stories offer a fun way to rewrite historical outcomes and show the power of compounding. Continue Reading…

Buying the Bottom?

by Jon

Howard Marks has been on a tear with his memos lately. In the latest, out this week, he answers the important question, “Should I wait for the bottom?”

In short, the answer is no. Since bottoms are only found out after the fact, buying on the downswing offers more opportunities than the alternative — waiting for some “all clear” signal.

The old saying goes, “The perfect is the enemy of the good.” Likewise, waiting for the bottom can keep investors from making good purchases. The investor’s goal should be to make a large number of good buys, not just a few perfect ones. Think about your normal behavior. Before every purchase, do you insist on being sure the thing in question will never be available lower? That is, that you’re buying at the bottom? I doubt it. You probably buy because you think you’re getting a good asset at an attractive price. Isn’t that enough? And I trust you sell because you think the selling price is adequate or more, not becaue you’re convinced the price can never go higher. To insist on buying only at bottoms and selling only at tops would be paralyzing…

The bottom line for me is that I’m not at all troubled saying (a) markets may be considerably lower sometime in the coming months and (b) we’re buying today when we find good value. I don’t find these statements inconsistent.

With as fast as the market’ moved in the past two weeks, the question might be updated to: “Did I miss the bottom?” Continue Reading…

Learning

Return Tables

Connect