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Orley Ashenfelter
• Age of the vintage.
• Average temperature during growing season.
• Amount of rain at harvest.
• Amount of rain in the months before harvest.
…. predicts 80% of future price variability.
Four variables predict the future value of wine.
John Reed:
“When you first start to study a field, it seems like you have to memorize a zillion things. You
don't. What you need is to identify the core principles -- generally 3 to 12 of them -- that
govern the field. The million things you thought you had to memorize are simply
various combinations of the core principles.”
#1 Compound interest is what builds wealth. And it takes time.
There are four ways to invest:
• Unsuccessfully• Long term (varying degrees to success)• Short term, successful due to luck• Short-term, successful due to manipulation/fraud
That's the complete list. Numbers 3 and 4 eventually become number 1.
Time is the most important variable in investing, but the one we have the least respect for. Buffett: "I think slowness turns off more people than anything else.“
Of Warren Buffett’s $60 billion net worth, $59.7 billion came after his 50th birthday, $57 billion came after his 60th.
Most investors’ definition of long term is the time between now and the next bear market.
Real estate feels like the best investment only because people hold it for the longest time.
Time is your last remaining edge on Wall Street.
This is your competition, folks …
#2 You have never been able to predict what the market will do next. This doesn't stop you from predicting what the market will do next.
Kenneth Arrow: “The Commanding General is well aware the forecast are no good. However, he needs them for planning purposes.”
Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations).
Current dividend yield we know. Earnings growth we can reasonably forecast. Change in multiples is totally unknowable.
If someone said, "I think most people will be in a 8.67% better mood in the year 2024," we'd call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.
Official forecasts for where the Dow would end in 2008:
• William Greiner, UMB Financial: 14,400• Tobias Levkovich, Citigroup: 15,100• Bernie Schaeffer, Schaeffer’s Investment Research: 15,300• Leo Grohowski, BNY Mellon Wealth Management: 14,800• Thomas McManus, Banc of America Securities: 14,700• David Bianco, UBS Investment Research: 15,250
Actual close: 8,776
Always wrong, never in doubt.
Always wrong, never in doubt.
• 2000: Congressional Budget Office projects the government will effectively be debt free by 2009.
• Newsweek, 2000: Bush win could "help banks, brokers and other investment firms." By the end of second term, the KBW Bank Index had dropped 85%.
• Newsweek, 2008: If Obama wins, sell bank stocks: regulation will kill them. KBW Bank Index up 186% since.
• The Money Channel, 2000: Bush win: “A broad tax cut ... has the tendency to increase discretionary spending." By 2005, four of the six largest airlines were bankrupt.
Life without predictions
• Thinking we can predict leads to overconfidence. Overconfidence leads to misery.
• Knowing you can’t predict automatically forces you to plan for contingencies. It forces diversification.
• Investing works best with a wide margin of error. (This is true for most things in life).
• Graham: “The purpose of the margin of safety is to render the forecast unnecessary.”
#3 You don't respect the idea that "do nothing" are the two most powerful words in investing.
• “The big money is not in the buying or the selling, but in the sitting.” -- Jesse Livermore
• Anyone who bought an index fund 20 years ago and checked for first time this morning can call themselves one of the best investors in the world.
• Sell your house in May and buy it back in October? Insane. But people do the same with stocks.
• Doing nothing isn’t an option for pros. So advisors trade, shuffle, rotate, panic, sell in May and go away, and generally make idiots of themselves.
• Investors think dollar-cost averaging is boring without realizing that the purpose of investing isn't to minimize boredom; it's to maximize returns.
• Effort in investing increases confidence more than ability.
• Barber and Odean: “Investors who trade the most realize, by far, the worst performance.”
• “All men's miseries derive from not being able to sit in a quiet room alone." - Blaise Pascal
• The best investors in the world have more of an edge in psychology than in finance.
Try doing less.
#4 You fail to respect reversion to the mean.
•Reversion to the mean is the simple idea something happens to keep both good and bad news from going on forever. Capitalism does not tolerate outliers for very long.
•It’s the second most powerful force in investing, next to compound interest.
•“Your margin is my opportunity.” – Jeff Bezos
•Boom and bust cycle is a necessity of capitalism. Markets must always crash and rally, because stability is destabilizing.
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000-5%
0%
5%
10%
15%
20%
Total Real Annualized Return
#5 You associate all of your financial success with skill and all of your financial failures with bad luck.
• Most investors suffer a chronic failure to learn. Far too much finger pointing. October 2008 headlines:
• “Who Should Go to Jail?”• “Who Is to Blame for This Mess?”• “The American People Have Been Robbed.”
• The best investors are learning machines. They focus more on mistakes than wins.
• “It’s a learning process, and mistakes made in one year often contribute to competence and success in succeeding years.” –Buffett
Tom Meheras
Paid $97 million from 2004 to 2007 to run Citigroup’s structured credit division.
After his division blew up, Meheras explained: "Even in the summer and fall of 2007, I continued to believe, based upon what I understood from the experts in the business, that the bank's [CDO] holdings were safe."
“Based in part on a careful study from outside consultants … the company decided to expand certain areas of our fixed income business that we believed at the time offered opportunities for long-term growth.“
#6 Every five to seven years, you forget that recessions occur every five to seven years.
There will be seven to 10 recessions over the next 50 years. Don't act surprised when they come.
#7 You say you'll be greedy when others are fearful, then seek the fetal position when the market falls 2%.
99% of long-term investing is doing nothing; the other 1% will change your life.
• Napoleon’s definition of military genius: “The man who can do the average thing when everyone else around him is losing his mind.” Same with investing.
• Pilot’s job: “Hours and hours of boredom punctuated by moments of sheer terror."
• Same in investing. Your success as an investor is determined by how you respond to punctuated moments of terror, not the years and years spent on autopilot.
#8 You’re a pessimist in a world where pessimists almost always lose.
Since 1850 ….• 1.3 million Americans died while fighting nine major wars.• Four U.S. presidents were assassinated.• 675,000 Americans died in a single year from a flu pandemic.• 30 separate natural disasters killed at least 400 Americans each• 33 recessions lasted a cumulative 48 years.• The stock market fell more than 10% from a recent high at least 97 times.• Stocks lost a third of their value at least 12 times.• Inflation exceeded 7% in 20 separate years.• The words "economic pessimism" appeared in newspapers at least 29,000
times, according to Google.
Our Standard of living increased 20-fold.
#9 Your expectations grow faster than your money
Gary Kremen, Match.com Pete, retired
Pete:
“The quickest way to turn around your financial life is to realize that you are in much more control than you realize. The moment you can learn to live a less expensive life, suddenly the clouds clear up and the financial picture brightens considerably.”
The Ultimate Goal: Enough
"Yes, but I have something he will never have: enough."
Joseph Heller
