If GE investors had been told about the recent challenges at the company 15 years ago, would any of them have believed them to be possible? Investors who invested in GE stock 15 years ago have lost more than 40% of their capital through the end of October 2018. This compares with a gain of over 250% over the same time period in the S&P 500 index, which tracks the performance of large U.S. stocks. What can we learn from the challenges at GE to become better investors?Read More
“It’s different this time.” This phrase has likely cost many investors far more than they realize. Each period of time is indeed different. However, there are many insights that we can learn from history that should inform how we invest today. Failing to learn from the past mistakes of others can be hazardous to your wealth.Read More
Warren Buffett wrote in his 1996 letter to Berkshire Hathaway shareholders: “You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.” He also said on a separate occasion: “What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know.” How should you define your circle of competence and to what degree should you try to expand it over time?Read More
Optimism abounds in the capital markets. They are full of people who either 1) have an interest in selling you on the prospects of a security or 2) are genuinely optimistic about a company’s future but hold a biased perspective. It is helpful to have a checklist to make sure that you are being as objective as possible to guard against developing behavioral biases after being inundated with one-sided views. Before you succumb to the charms of a charismatic management team or fall for someone pitching you on another “story stock,” read the skeptic’s checklist. It won’t give you all the answers, but it will give you a fighting chance against the biases that you are likely frequently exposed to.Read More
What makes a great annual letter from the CEO to the shareholders? The typical, generic annual letter that I read adds little to the numbers and sometimes obfuscates more than it illuminates. The best letters go beyond the numbers and help shareholders get a deeper understanding of the company, how it is performing and the decision-making process the management team employs. In this article I examine the aspects of a great annual letter and provide five examples.Read More
Listening to Warren Buffett, Charlie Munger and other smart investors over the course of the weekend surrounding the Berkshire Hathaway meeting in Omaha is always informative. This year was marked by the usually laconic Charlie Munger, known for his typical “I have nothing to add” answer, answering many questions in depth. Below I examine my 10 insights from this year’s trip, which are a combination of new ideas and helpful reminders about those from the past that are still important today.Read More
Diversification is sometimes described as “the only free lunch” in investing. But is it? Not in the kind of fundamental value investing that I do.
Increased diversification comes with two potential costs:
At a certain point, new investments are likely to yield increasingly lower returns.
The time required to underwrite new investments reduces the quality of the underwriting of existing investments.
Value investing involves buying a business for substantially less than its intrinsic value. So what causes businesses to occasionally become available at such a large discount? Once in a while the prevailing market mood is so pessimistic that you can look around and find many quality companies at low valuations based on readily apparent levels of profits. Such instances are rare. The rest of the time mis-pricings arise because of hidden profits – future profit levels that are reasonably predictable based on currently available information that are substantially higher than the current levels of profitability. If you know where to look, even in a market environment like the current one, with relatively few attractive opportunities, you stand a better chance of uncovering attractive bargains.Read More
At the 2017 Berkshire Hathaway Annual Meeting, Charlie Munger, Warren Buffett’s partner, said: “A lot of other people are trying to be brilliant and we are just trying to stay rational. And it’s a big advantage.” It’s a simple, but crucial insight – a lot of the edge in investing can be traced to the ability to stay rational and execute your approach at moments of highest pressure and uncertainty. So what is the “mental game” in investing, and how do you make sure that yours helps your investing results?Read More
Conviction is a necessary quality for any investor – lack thereof can lead to an inability to stay the course on a successful contrarian investment. Yet without flexibility investors can easily fall prey to various behavioral biases such as anchoring and overconfidence and fail to correctly change their minds when the evidence merits doing so. The ability to properly navigate the tension between conviction and flexibility is one of the distinguishing traits of superb investors. This article explores the question of when we should stick with our convictions and when we should be flexible and change our minds.Read More
- Don’t invest in anything that you don’t understand. Yourself. Not because someone sold it to you or because others are doing it.
- Don’t pay high fees for investment products unless you know why the product is worth it. Many are not.
Conventional financial wisdom considers volatility to be one of the greatest risks in investing. A small minority of investors, mostly among value investors – a group to which I belong, take a completely opposite view and believe that it is the probability of permanent capital loss, not volatility that constitutes risk. Neither group is entirely correct, nor should the only two options be a view that considers volatility as the main investment risk or the one that views it as unimportant. Instead, the right question to ask is when does volatility equal risk?Read More
Charlie Munger, the Vice Chairman of Berkshire Hathaway and Warren Buffett’s partner said something simple yet profound at the 2017 Berkshire Hathaway Annual Meeting: “A lot of other people are trying to be brilliant and we are just trying to stay rational. And it’s a big advantage.” Some might think that becoming an excellent investor requires off-the-charts intelligence or some highly proprietary model that leads to an edge that nobody else can replicate. That is not what experience has shown.Read More
“We already see resurgent the age-old frailty of the investor – that his money burns a hole in his pocket.” Thus wrote Benjamin Graham in his seminal work on value investing, Security Analysis, written in 1934. Yet those words are just as relevant in today’s investment climate where many once again think that all they need to do to succeed in investing is to buy stocks of glamorous, high-growth companies. Valuation is once again perceived to be only of passing interest, a topic focused on by those unsophisticates that have not evolved to a higher level of understanding, one that allows the true investing gurus to pinpoint the future of rapidly growing companies 15+ years out.
If you have been paying any attention to the rising stock market in the last couple of years, you might be tempted to succumb to this siren-song and relax your investment criteria in order to join those appearing to make money quarter after quarter in high-expectation growth stocks. Don’t… at least not until you read this article.Read More
I have compiled the top 5 mistakes investors make in the stock market to teach you what not to do when investing. Charlie Munger, the Vice Chairman of Berkshire Hathaway and Warren Buffett’s partner, has a favorite piece of advice, which is to always invert. What he means by that is that we should figure out what we don’t want to do and avoid it in order to get the result that we want. Let’s apply his advice by answering the following question: What is the most certain way to lose the most money investing in stocks?Read More
Listening to Warren Buffett, Charlie Munger and other smart investors over the course of the weekend surrounding the Berkshire Hathaway meeting in Omaha is always informative. Below I examine my 10 insights from this year’s trip, which are a combination of new ideas and helpful reminders about those from the past that are still important today.Read More
For a taxable investor, the pre-tax rate of return is not the whole story. The tax efficiency of how that pre-tax return was generated will have a large impact on the after-tax rate of return and the ultimate wealth of the investor. Long-term investing naturally results in very tax-efficient returns. The same pre-tax rate of return over 30 years achieved in the most tax efficient way could result in you having more than 2.5 times more than you would have had if your returns had been completely tax-inefficient.Read More
Having a long-term time horizon can help you avoid making poor short-term investment decisions. A multi-year time horizon can also give you an advantage toward achieving superior returns by allowing you to make high-potential investments that others with a shorter timeframe would avoid. This article will elaborate on why being a long-term investor can help you achieve better returns, and illustrate how you can go about doing so.Read More
Passive investing – replicating the market’s returns through low-cost index funds or exchange-traded funds (ETFs) – has finally gained a meaningful share of the market. However there are still many investors who attempt to beat the market by investing with higher-fee active investment managers or directly in individual securities. These investors should fully consider the difficulty of achieving a superior result through active investing, and be aware of the behavioral biases that might be driving them down that path even when their circumstances might make passive investing a better alternative.Read More
Behavioral biases affect decisions more often than one might think. Behavioral defense involves making sure you are aware of any such biases affecting your thinking and correcting for them whenever possible. This article will focus on helping you make better decisions through the use of behavioral defense.Read More