Wit and Wisdom*
Intrinsic Value Investor Wisdom:
All companies can be divided into six categories at any given moment.
Peter Lynch always divided companies into these categories, which could change over time as a company grew, matured, or stumbled, or as its business model changed: slow growers, stalwarts, growth companies, cyclicals, asset plays, and turnarounds.
If you are a hobbyist “dumb money” investor, your ONLY POSSIBLE edge is “time arbitrage.”
[I had seen this term before, but a great explanation appeared in “2 Words That Will Crush Wall Street Over the Next 20 Years,” Jeremy Phillips, Fool.com, October 21, 2010.]
[Basically, you have to hold stocks longer than the Big Fish care to hold them. You don’t have an information advantage. You don’t have a timing advantage. You don’t have any other analytic advantage. (Really, you don’t.) This is your only possible advantage. Big Fish have quarterly numbers to report to their investors, or they use technical or quantitative trading strategies. Thus, they have a tendency to devalue the ability of any particular high-quality company to compound shareholder returns massively over long time frames. The best part is, even though they tend to know this, with some limited exceptions they can’t do anything about it! It is baked into the institutional money-management system itself.]
Morgan Housel, Motley Fool, June 18, 2013: “If you hold for five, 10, 15 years or more, the odds of earning a positive return on stocks after inflation quickly approach 100%, historically.” [This piece also contains wonderful images illustrating the point.]
Don’t be fooled by low or high P/Es on cyclical stocks.
"Really cyclical stocks always are most dangerous when they look the cheapest - because the smart money knows the earnings are peaking for the cycle (think homebuilders with PE multiples of 6 or 7 back in 2006). They always look ‘expensive’ precisely when earnings are troughing." Reformed Broker, Blog, March 28, 2012
Focus on managing risk, not on returns.
"Targeting investment returns leads investors to focus on potential upside rather that on downside risk…rather than targeting a desired rate of return, even an eminently reasonable one, investors should target risk." Seth Klarman, Margin of Safety
Look for a company no analyst follows and no (or few) institutional investors are in.
"If you find a stock with little or no institutional ownership, you’ve found a potential winner. Find a company that no analyst has ever visited, or that no analyst would admit to knowing about, and you’ve got a double winner." Peter Lynch, One Up On Wall Street
Do not ignore CAPE, it matters.
Future returns are lower when valuations are high, and future returns are higher when valuations are low. Index Universe, Summer 2012
Technical Trader Wisdom:
Charting can give clues about fundamentals you aren’t aware of.
“Charting and technicals are predictors of whats [sic] coming it shows us what the market knows and we don’t.” Sunrise Trader, Twitter, March 27, 2012
General Investing Wisdom:
Keep it all in perspective.
“‘The real risks in life are not the stock market. If you want risk, get married. And if you want more risk have children.” Jeff Benjamin, Investment News, April 29, 2013 (quoting behavioral finance expert Meir Statman)
Know what you don’t know.
"Knowing that you don’t know is among the most important aspects of investing, for both professional and non-pro investors. The most financially dangerous response to an information vacuum is to reach desperately for a framework that makes things intelligible. It is particularly dangerous to grab at one that just happens to fit your personal politically ideology.” Interloper, Blog, March 26, 2012
"[W]hen goods and services are highly complex, buyers struggle to determine fundamental value and often end up relying on price and reputation as indirect signals of quality." Zweig, “Jumbo Shrimp,” March 28, 2012 (citing and paraphrasing Scitovsky, 1950)
Adapt or die, and don’t hold tight to cherished ideas, conventions, or stocks.
The greatest stock-pickers do not hold to losing positions or ideas. They change and adapt. (Or, the story of Peter Lynch.) The Reformed Broker, May 22, 2013
Beware of people who think or assume there is a huge fundamental distinction between stocks and bonds.
"For many years, the conventional wisdom insisted that stocks were a hedge against inflation. The proposition was rooted in the fact that stocks are not claims against dollars, as bonds are, but represent ownership of companies with productive facilities. These, investors believed, would retain their value in real terms, let the politicians print money as they might. And why didn’t it turn out that way? The main reason, I believe, is that stocks, in economic substance, are really very similar to bonds.” Warren Buffet, Fortune Magazine, May 1977 (emphasis added).
Don’t look to the market for advice.
“The most common mistake of investing is the failure to distinguish something that’s become more expensive from something that’s still a good investment. Too many people [make] the mistake of looking to the price to gain confidence, without recognizing that that doesn’t make any sense.” Ray Dalio, as quoted by Jason Zweig, Wall Street Journal, on May 5, 2013.
“The market is the worst giver of advice — it’s prone to tell you what you should have done, not what you should do.” Vitaliy Katsenelson, Institutional Investor, April 5, 2012
"[R]ecessions will only hurt those [investors] that fear them." Chuck Carnevale, Seeking Alpha, May 5, 2013
Just as any company would do, always try to reduce your own commission, tax, and other costs.
Paraphrase: “The most consistent form of alpha comes from reducing fees.” [And taxes, I would add.] Rob Copelan, Absolute Return + Alpha, April 18, 2012 (quoting a wealth manager).
Don’t expect the stock market to confirm your political views.
"Most investors would be much better off if they ignored all the news about the Fed or politics….Don’t look for confirmation of your political views in the stock market (this is known as the ‘Larry Kudlow Effect’)." Eddy Elfenbein, Crossing Wall Street Blog, April 19, 2012.
Failure happens, overall results are what matter.
"Even great trading systems fail sometimes, Your job is to make sure your system has a net positive return." SunriseTrader, Tweeted, April 20, 2012.
"It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong." George Soros (date unknown)
On dumb money.
"Dumb money is only dumb when it listens to the smart money." Peter Lynch, One Up On Wall Street
Never EVER short a stock based only on its valuation.
Tweet from Doug Kass to Rocco Pendola, November 29, 2012
Never EVER mess around with penny stocks.
Tweet by Jim Cramer, April 11, 2013
Insider selling is not a really big deal in broad market terms.
[I]nsider sales are not really as good as an indicator as most people are led to believe. Also, (importantly,) there is [generally] absolutely nothing wrong with them. [There are exceptions] Microfundy, March 13, 2013
Understand the psychological life cycle of a bull market.
"Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria." — Templeton, quoted by Vader Capital, March 14, 2013
Chances are good that a company that publicly derides its regulators (rather than working cordially with them) is taking on risks that are unhealthy to long-term investors.
[See the example of JPMorgan from 2010-2013.]
[Contra: “[I]it is in our self-interest to conduct our operations in a manner that earns the approval of our regulators and the people they represent.” Warren Buffett, Berkshire Hathaway 2012 Shareholder Letter, at page 10.
[Here’s my post on this.]
Don’t assume everyone or even a majority of people in your country actually want GDP growth.
"But with respect to national polities, macroeconomists presume the existence of an overwhelming preference for GDP growth and full employment that simply does not exist." Interfluidity (Steve Randy Waldman), “Depression is a choice,” Blog, April 17, 2012.
The investing and even economic opinions of people who aren’t putting their money where their mouth is aren’t worth spit.
[Many have said this, including me, repeatedly on Twitter, about financial pundits and newsletter writers who don’t have no skin in the game. But this is a great example:] ”In the market, opinions are useless words if you don’t back them up with cash.” ChicagoSean, March 13, 2013 (with a great example from a trader’s perspective).
Here’s Doug Kass, March 21, 2013 Tweet.
Here’s Barry Ritholtz, in a great piece partially focusing on this issue, on May 15, 2013.
The issue is that reputational harm is insufficient to deter stupid. That is because such harm is almost nonexistent for investing and economics pundits. The same “Wrongstradamuses” (who don’t manage money) appear on CNBC and in op-ed pages year-after-year-after-year, to the great detriment of many.
Monetary Policy Wisdom:
Don’t make the common mistake of thinking that monetary policy is the only determinant of inflation/deflation.
Here is Morningstar’s Bob Johnson talking about the things that impact inflation, in the context of a discussion about using inflation as a recession predictor. Bob Johnson, Morningstar, 4/10/2010
And speaking of, here is Steve Randy Waldman tying 1970’s malaise to demographics, and arguing that monetary policy has been given too much blame for the 1970’s and too much credit for the 1980’s. Interfluidity, 9/5/2013
The Fed, not some mega bond manager, controls long-term imterest rates in a depressed/deflationary economy.
"This are not times of an overheated economy where the market decides the long-term interest rate. This is a struggling economy where the FED pins the long-term interest rate at whatever level it wants." Michael Harris, Price Action Lab Blog, April 20, 2012
Steels stocks are a commodity.
Steels are “a commodity that rallies only on severe price increases over contained periods of time.” Jim Cramer, “Don’t Pine for a Mirage,” March 15, 2013
CHINA: ”[I]n the Western tradition, the most important political value is democracy. For the Chinese, it’s meritocracy.” Martin Jacques, "We see Chinese Governance in Western Terms," March 18, 2013
*I update this page as I see great quotes. This is not a page for basic information like how to do a discounted cash-flow analysis, etc. I think that mere knowledge of what makes a company basically good or bad, or how to estimate the value of a company, are really only the bare minimum lowest bars one needs to clear in this game — sort of the equivalent of being a high school graduate in the game of life. In my opinion, these quotes and notes represent higher-order thinking about the broader world of finance, markets, and the economy. I have learned a lot from them (or I believe I have, anyway).