Posts filed under “Apprenticed Investor”

Tren Griffin runs 25IQ, a blog about business models, investing, technology, and other aspects of life that he find interesting. He works for Microsoft; Previously he was a partner at Eagle River, a private equity firm established by Craig McCaw.

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A Dozen Things I have Learned from Barry Ritholtz about Investing

As part of my “A Dozen Things I’ve Learned” series of blog posts I thought I would take on a list put together by Barry Ritholtz. My self-assigned task is to add my support to what Barry wrote, while staying with my usual 999 word limit for any given blog post. The task I assigned to myself is to elaborate on what he has written (rather than just repeating what Barry wrote) since the best support for the investing maxims themselves comes from Barry himself. Given Barry’s towering intellect, this is a scary exercise.

1. “Cut your losers short and let your winners run.” Loss aversion is highly dysfunctional for investors since it causes people to hold on to “losers” for too long to avoid the pain of a loss. The first half of Barry’s first maxim pushes against that aspect of loss aversion. Cutting losses short pushed against a tendency to hold tightly to losers hoping that they recover before then need to acknowledge the loss. The second half of Barry’s first maxim helps lower transactions costs, fees and taxes, but is also about the value of opportunity cost analysis. Charlie Munger once put it this way: “There is this company in an emerging market that was presented to Warren. His response was, ‘I don’t feel more comfortable buying that than I do of adding to Wells Fargo.’ He was using that as his opportunity cost. No one can tell me why I shouldn’t buy more Wells Fargo.”

2. “Avoid predictions and forecasts.”  The less complex the system you are trying to understand, the greater the likelihood you can make a bet which is both non-consensus and correct. Making a bet which follows the consensus and it correct will only deliver beta. The most complex system of all is the macro economy since it is composed of a nest of complex adaptive systems rife with both uncertainty (probabilities unknown) and ignorance (probabilities not computable). On a relative basis, the most tractable system on which one can make an investment and try to generate alpha is an individual company. Very few people can make non- consensus bets which are also correct at a company level, but its is at least possibl;e if you are smart and work hard. 90%+ of people are better off buying a low fee index even when it comes to making bets on individual companies. The greatest for investors often comes from the fact that 70% of people think they fall withion the 10% who can generate alpha. When it comes to self-appraisals humans are too often vastly over generous.

3. “Understand crowd behavior.”  Humans often herd. People like what others like (path dependence) and especially in the presence of uncertainty or a requirement that they actually do some work, will follow other people. Most notably when diversity of opinion breaks down, crowds are often *not* wise. Buying when others are fearful and selling when others are greedy. is wise.

4. “Think like a contrarian (occasionally).” As I noted in my post about Howard Marks,  you must both adopt a view that is contrarian *and* be right to outperform the market. Being a contrarian for its own sake is a ticket to losses since the crowd is often right.

5 . “Asset allocation is crucial.” The amount you allocate to each investing category is a more important decision than the individual assets you pick within that category. My thoughts on asset allocation for muppets are here:  Giving advice to “know something investors” is something I have not yet tackled since they are know-something investors already (seems like bringing coals to Newcastle).

6. “Decide if you are an active or passive investor.” My thoughts on active vs. passive are here:  As Dirty Harry said to the cornered criminal in the movie Magnum Force: ”A man’s got to know his limitations.” “I feel lucky” is not the way a genuine investor conducts his or her affairs.

7. “Understand your own psychological make up.” As Feynman famously said, the easiest person to fool is yourself. Genuine self-knowledge is hard-won knowledge since no one has perspective on yourself by definition. On this topic it is wise to read Charlie Munger.

8. “Admit when you are wrong.” Heuristics like “public commitment consistency” bias cause us to hold on to positions long after a reasonable analysis by a neutral observer would have concluded that we were wrong. For example, once you say publicly “X is going up” it gives your brain a shot of stupid juice when it comes to concluding that you might be wrong.

9. “Understand the cycles of the financial world.” Barry seems in agreement with Howard Marks on this point. Nothing good or bad goes on forever. As Billy Preston sings in the well-known song things “go round in circles.” Mr. Market is bipolar and for that reason market swings will always happen. By focusing on the intrinsic value of individual investments And tuning out the talking heads blathering about their macroeconomic forecasts, market swings can become your friend. The irony is: the more you focus on what is micro in nature, the more you will benefit from macro trends.

10. “Be intellectually curious.” It is in “the micro and the obscure” where one can learn things which others do not know. To make a bet that is contrary to the consensus of the crowd you must possess knowledge that the consensus has not adopted. You will mostly likely find that non-consensus knowledge on the frontiers of your own knowledge. Really great investors read constantly and actively seek out alternative viewpoints. Shutting out views you disagree with is a step toward an echo chamber.

11. “Reduce investing friction.” John Bogle formed Vanguard on the basis of the “cost matters hypothesis” not the efficient market hypothesis. On that you might want to read. Paying high fees, costs and commissions is one of the simplest investing errors to correct.

12. “There is no free lunch.” There is no substitute for hard work and rational decision making.

 

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Originally published at September 2013

 

Category: Apprenticed Investor, Investing, Markets

Paul Tudor Jones: 13 Insights

I love this collection of Paul Tudor Jones insights and rules by way of Ivanhoff Capital:   13 Insights From Paul Tudor Jones 1. Markets have consistently experienced “100-year events” every five years. While I spend a significant amount of my time on analytics and collecting fundamental information, at the end of the day, I am…Read More

Category: Apprenticed Investor, Investing, Rules

The Remarkable Life and Investing Lessons of Ronald Read

The remarkable life and lessons of Ronald Read, the $8 million janitor Barry Ritholtz Washington Post, April 26 2015       You may have read about the remarkable life and times of Ronald Read. He was the gas station attendant and lifelong resident of Windham County, Vt., who had quietly accumulated a portfolio worth…Read More

Category: Apprenticed Investor, Investing

The Remarkable Life & Lessons of Ronald Read

    My Sunday Washington Post Business Section column is out. This morning, we look at the remarkable life and lessons of Ronald Read. It is a fascinating tale. Here’s an excerpt from the column: “You may have read about the remarkable life and times of Ronald Read. He was the gas station attendant and…Read More

Category: Apprenticed Investor, Investing, Psychology

Protect Your Assets: Common-sense Cybersecurity for Investors

Let’s get the scary stuff out of the way upfront: Cybercrime costs the global economy $575 billion annually, according to reports. The United States takes a $100 billion hit, the largest of any country, according to Politico. A report from former U.S. intelligence officials counted 40 million people whose personal information was stolen within the past year.Online theft…Read More

Category: Apprenticed Investor, Investing, Web/Tech

Probability, Mean Reversion and Forecasting

We’re down to the Final Four in this year’s iteration of March Madness, also known as the national collegiate basketball tournament. Our earlier discussion of “The March Madness Theory of Investing“ didn’t sit well with some readers. The lessons we sussed out from the bracket-destroying results included home-country bias, how expert forecasts are about as good as those…Read More

Category: Apprenticed Investor, Bad Math, Psychology, Sports

Mesa Culpa: My 2014 Mistakes

Ritholtz: Admitting my 2014 mistakes Barry Ritholtz Washington Post, March 22, 2015   .   “Pain + Reflection  = Progress.” — Ray Dalio, founder of Bridgewater Associates 2014 is behind us, and before the first quarter sneaks by, I am obligated to offer my annual admissions of error. One of my biggest peeves about finance is…Read More

Category: Apprenticed Investor, Investing

What March Madness Can Teach US About Investing & Trading

We are down to the Sweet 16 in the NCAA’s men’s college basketball tournament, otherwise known as March Madness, which depending upon your perspective is either the most exciting month in sports or the American collegiate plantation system writ large. As is my wont, I seek out lessons in what I see, hunting for parallels in sports, politics, et…Read More

Category: Apprenticed Investor, Cognitive Foibles, Investing

My Mea Culpas from 2014

    > My Sunday Washington Post Business Section column is out. Its time for my annual mea culpas from last year. I like what the editors did with the print version headline: As neither of us is infallible, here are my mea culpas from 2014. Here’s an excerpt from the column:  I have been performing…Read More

Category: Apprenticed Investor, Investing

Three Commandments of Stock Valuation

Many metrics can be used to value markets. Which should you trust? Barry Ritholtz Washington Post, March 7 2015       “Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.” — John Kenneth Galbraith Let’s take a look…Read More

Category: Apprenticed Investor, Investing, Valuation