Here are the best things I read and thought about today –
- Peter Bernstein is one of my favourite authors when it comes to the idea of ‘risk’. He was a financial historian and had been in the investment world since the 1950s. He is the author of “Capital Ideas” and “Against the Gods,” the second being a super-text that everyone wanting to understand about financial risk and its history must read.
One of the best interviews I have read of him is the one with Jason Zweig that I came across recently (I first read it long time back), and read through it entirely. It contains some brilliant insights on investing, risk, and decision making. Here is the part I liked the best where Bernstein said that “the riskiest moment in investing is when you’re right.”
On being asked how investors can avoid being shocked, or at least reduce the risk of overreacting to a surprise, Bernstein replied (emphasis mine) –
Understanding that we do not know the future is such a simple statement, but it’s so important. Investors do better where risk management is a conscious part of the process. Maximizing return is a strategy that makes sense only in very specific circumstances. In general, survival is the only road to riches. Let me say that again: Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.
The riskiest moment is when you’re right. That’s when you’re in the most trouble, because you tend to overstay the good decisions. So, in many ways, it’s better not to be so right. That’s what diversification is for. It’s an explicit recognition of ignorance. And I view diversification not only as a survival strategy but as an aggressive strategy, because the next windfall might come from a surprising place. I want to make sure I’m exposed to it. Somebody once said that if you’re comfortable with everything you own, you’re not diversified.
Anyways, while searching through my collection of other resources on Bernstein, I came across this brilliant article he wrote for Bloomberg many years back, titled The 60/40 Solution, wherein he talked about the lessons from history (emphasis mine) –
The constant lesson of history is the dominant role played by surprise. Just when we are most comfortable with an environment and come to believe we finally understand it, the ground shifts under our feet. Surprise is the rule, not the exception. That’s a fancy way of saying we don’t know what the future holds. Even the most serious efforts to make predictions can end up so far from the mark as to be more dangerous than useless.
All of history and all of life is stuffed full of the unexpected and the unthinkable. Survival as an investor over that famous long course depends from the very first on recognition that we do not know what is going to happen. We can speculate or calculate or estimate, but we can never be certain. Something very simple but very penetrating stems from this observation. If we never know what the future holds, we can never be right all the time. Being wrong on occasion is inescapable. As the great English economist John Maynard Keynes expressed it some 80 years ago, “A proposition is not probable because we think it so.” The most important lesson an investor can learn is to be dispassionate when confronted by unexpected and unfavorable outcomes.
- Philip Fisher, in his book Common Stocks and Uncommon Profits wrote, “If the job has been correctly done when a common stock is purchased, the time to sell it is—almost never.”
I sincerely believe in this idea of never selling my stocks, IF I did the job of picking them well. But then, there are times when you must sell your stocks, and one of the keys to investment nirvana is the ability to know when to do that. A doyen amongst value investors in India, Sanjoy Bhattacharyya, wrote this piece on the art of selling stocks some years back, wherein he shared the four rules of selling –
While remaining disciplined in terms of the process of stock-picking, the seasoned value investor waits patiently for Mr. Market to provide opportunity. Typically, there are just four reasons to sell:
1. A clear deterioration in either earning power or ‘asset’ value.
2. Market price exceeds ‘fair’ value by a meaningful margin.
3. The primary assumptions, or expected catalysts, identified prior to making the investment are unlikely to materialise or are proven to be flawed.
4. An opportunity likely to yield superior returns (with a high degree of certainty) as compared to the least attractive current holdings is on offer.
- “Nobody knows nothing,” writes Nick Maggiulli in his latest post –
Logically this statement implies that “everybody knows something,” but that’s not the spirit of the phrase. What it really means is that no one has a monopoly on knowledge. No one is infallible.
Not the analysts at the top tier banks. Not the Nobel Laureates. Not even the great Warren Buffett. Yet, we create this mythology around them that says otherwise. We treat like Gods those who are merely men.
As Philip Tetlock stated in Superforecasters, “the average [political] expert was roughly as accurate as a dart-throwing chimpanzee.” Unfortunately, we have come to realize that even the experts are still primates after all.
And this realization that we are only human has never been more apparent than today. Because despite all of our medical knowledge and wisdom, a microscopic foe has brought us to our knees.
- Mr. Vallabh Bhanshali, Chairman and co-founder of Enam Group, spoke at a webinar recently on the topic of worldly wisdom through history. It was an insightful talk, containing his learnings from Indian scriptures to Charlie Munger. Do watch it.
That’s about it from me for today.
Stay safe. Stay focused.