Here are some deceptively simple fortune cookies on investing and the market.
- You can’t be a part of the crowd and beat the crowd. To earn better returns than the crowd one must behave differently and be willing to look different.
- Being right doesn’t lead to superior performance if the consensus is also right.
- The desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd, and the dream of the sure thing pushes people into consensus behaviour.
- First level thinking says that stock’s going up, so it’s a buy. Second level thinking says that’s stocks going up, everyone else has already bought it, so it’s a sell.
- But… contrarianism for its own sake also misses the point. Real contrarians build a case on firm evidence, not firmly held ideals.
- Money is a medium of exchange. Wealth is a philosophy and purpose to use money wisely. Your portfolio value is not a reflection of your wealth.
- In 1949 Benjamin Graham wrote “The Intelligent Investor”. He made one mistake – investing is not about being more or less intelligent. It should have been called “The Rational Investor”.
- “Underpriced” is not the same thing as “going up soon”.
- It is impossible to know with certainty where the market will go next. But it is possible to understand the present and how it compares to a spectrum of historic conditions.
- Many more investors assume they have knowledge of the future direction of the economy and markets than actually do.
- Most investors are preoccupied with return. Few are preoccupied with risk.
- Risk comes from not knowing what you’re doing. Volatility is the normal fluctuations of price. Uncertainty is the range of possible outcomes. These are all different things. If you don’t understand the first one you will get confused about the other two.
- There is nothing riskier than believing in the absence of risk.
- Humans evolved “fear” as a survival mechanism for ancient dangers. Most of what we fear today is an over-reaction to things that have little impact on our daily lives. Conversely, many of the things that do not scare us are potentially the most dangerous. *This is not meant to scare you.
- A 15% chance of making $1,000,000 is better than a 100% of making $100,000. Probability is important.
- News media is a public echo-chamber. Social media is a private echo-chamber. Search out the points of view that challenge yours, not support them. The more deeply held, the more important to challenge.
- The chance of Trump being elected and cancelling NAFTA: 50% chance of being elected, 50% chance of motion reaching the floor, 50% chance of passing, 50% chance of winning in appeals, 50% chance of Canada and Mexico agreeing to terms = 3.125% chance of actually happening. Probability is important.
- This last year has been record setting in terms of low investor sentiment. Only twice since 1987 have investors been this pessimistic for this long. After both occasions the market rallied +20% over the following year.
- Low expectations are easier to beat than high expectations.
What I’ve been reading this week
The US does not have a debt problem: http://fat-pitch.blogspot.ca/2016/10/has-us-debt-reached-tipping-point.html
Could the rise of index investing lower future returns?: http://finance.yahoo.com/news/20-years-ago-bill-ackman-asked-warren-buffett-and-charlie-munger-about-a-risk-the-market-faces-today-130457305.html
Step one, ignore the news: http://www.nytimes.com/2016/11/03/technology/how-the-internet-is-loosening-our-grip-on-the-truth.html
New highs are a good thing: http://awealthofcommonsense.com/2016/11/dont-be-afraid-of-all-time-highs-in-the-stock-market/
Being smart isn’t everything: http://www.collaborativefund.com/blog/why-smart-people-make-bad-decisions
Don’t play hot potato with your portfolio: http://acquirersmultiple.com/2016/10/investors-underperform-because-they-continue-to-chase-returns-joel-greenblatt/