What Other Industries Teach Us About Investing

By Morgan Housel

The Collaborative Fund

“Since it is more productive

to read around one’s field rather

than in one’s field, there are no investing books on this list.”

“The Best Investing Books of 2016”

#1 What Baby Brain Development Teaches Us About Investing

Newborn 6 months 2 years 4 years 6 years

University of Vermont

Median stock underperformed by 54%

2/3 of all stocks underperformed the overall index return

40% of companies lost money over the period

7% of companies outperformed by more than 2,000%0

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1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Russell 3000

8.19%

4.67%

S&P 500 Average US Equity InvestorDalbar

5% Drawdown 10% Drawdown 20% Drawdown

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

“The man who can do the average thing when everyone else around him is losing his mind.”

Good investing is not about making great decisions; it’s about consistently not screwing up.

#2 What Running Teaches Us About Investing

“Our bodies are machines, whose energy expenditures may be closely measured.”

“To tell you the truth, we don’t do it because it is useful, but because it’s amusing.”

“There is more in athletics than sheer chemistry.”

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1Very strong predictability

0Very weak predictability

What makes the market tick?

Barron's, Nov. 2009: "The Easy Money's Been Made"

Morningstar, Dec. 2010: "The Easy Money Has been Made"

MarketWatch, Nov. 2011: "The easy money has already been made"

TheStreet, May 2012: "The Easy Money Has Been Made"

Morningstar, Dec. 2013: "The Easy Money Has Been Made"

Barron's, Oct. 2014: "The Easy Money Has Been Made"

CNBC, March 2015: "The easy Money has been made”

Globe and Mail, April 2016: “The Easy Money has been made”

Barron’s, October 2016: “The Easy Money has been made”

The Fool-Proof Investing Formula

Dividend Yield + Earnings Growth +/- Change in Valuations

“The purpose of the margin of safety is to render the forecast unnecessary.”

Room for error is the only way to navigate a world that is impossible to predict.

Compounding only works when you give it time.

#3 What Nuclear Energy Teaches Us About Investing

What stocks did in your teens and 20s

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15%

5%

-3%1980s 2000s 1920s Germany

South Africa Average Annual Inflation

Luck of the draw

•Grew up during the Great Depression = Half as likely to invest in stocks compared to growing up in the 1960s.

•Grew up during 1970s = 1/3 as likely to invest in bonds later in life compared to growing up in the 1950s.

•Grew up during the 1980s = 2x more likely to buy stocks compared to growing up in the 1970s.

"Our findings suggest that individual investors'

willingness to bear risk depends on personal history.”

Daniel Kahneman

•Talk to as many people as you can.

•Talk to people you disagree with.

•Talk to people who are in different emotional states than you are.

#4 What the War on Cancer Teaches Us About Investing

• Spend less money than you make

• Save the difference

• Buy a diverse portfolio of great companies

• Be patient

Assessment of Confidence Limits of Selected Values of Complex-Valued Models

How to Succeed at investing How Investing is Taught

5.1% Annual Outperformance

Berkshire Hathaway Annual Outperformance

Average PE Fund: 13.5%

Berkshire Hathaway: 18.6%

Fees (4%)

"More investors don’t copy our model because our model is too simple. Most people believe you

can't be an expert if it's too simple.“

“How did Berkshire's track record happen? If you were an observer, you'd see that Warren did most of it sitting on his ass and reading.”

“I visualized my grief if the stock market went way up and I wasn’t in

it — or if it went way down and I was completely in it. So I split my

contributions 50/50 between stocks and bonds.”

Take a simple idea and take it seriously.

The goal of investing isn’t to minimize boredom; it’s to maximize returns.

No investment is worth it if clients can’t stick with it.

#5 What the Wright Brothers Teach Us About Investing Mistakes

"I used to chat with them in a friendly way, because I sort of felt sorry for them. They seemed like well-meaning, decent enough young men. Yet there they

were, wasting their time day after day on that ridiculous flying machine.”

-- Luther Beard, managing editor of the Dayton Herald

“Not one reporter bothered to attend during this time. Nor did public interest increase. With few

exceptions there seemed no public interest at all, no local excitement or curiosity or sense of wonder over

the miraculous thing happening right in Dayton’s own backyard.”

-- David McCullough

108%

67%

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1 Year 2 Years 5 Years 10 Years 20 Years 50 Years

JSE Minimum and Maximum Annual Returns By Holding Period1900-2013

The central problem investors have with stocks is underestimating the amount of time needed to put the odds of long-term success in their favor.

When progress is measured generationally, results shouldn’t be measured quarterly.

People don’t get what they want or what they expect from markets,

they get what they deserve.