The Sketchbook of Wisdom: Now at a Special New Year Discount (Till 5th January 2022)
Here is the latest issue of The Journal of Investing Wisdom, where I share insightful stuff on investing I am reading and thinking about. Let’s get started.
The one year period between Feb. 2015 and Feb. 2016 was a particularly bad one for the markets. The broader markets fell around 20% during this period, and there were multitude of stocks that cracked 30-40%. Howard Marks, the legendary investor and Chairman of Oaktree Capital Management, described the situation in the stock market in his Feb. 2016 memo to clients thus –
My buddy Sandy was an airline pilot. When asked to describe his job, he always answers, “hours of boredom punctuated by moments of terror.” The same can be true for investment managers, for whom the last few weeks have been an example of the latter. We’ve seen bad news and prices cascading downward. Investors who thought stocks were priced right 20% ago and oil $70 ago now wonder if they aren’t risky at their new reduced prices.
In the rest of the memo, he went on to explain why Mr. Market – representative of the stock prices – has nothing valuable to offer to investors through his daily mood swings –
Especially during downdrafts, many investors impute intelligence to the market and look to it to tell them what’s going on and what to do about it. This is one of the biggest mistakes you can make. As Ben Graham pointed out, the day-to-day market isn’t a fundamental analyst; it’s a barometer of investor sentiment. You just can’t take it too seriously. Market participants have limited insight into what’s really happening in terms of fundamentals, and any intelligence that could be behind their buys and sells is obscured by their emotional swings. It would be wrong to interpret the recent worldwide drop as meaning the market “knows” tough times lay ahead.
Predicting the subsequent movement of stock prices, like I have mentioned umpteen times in my posts, or the next mood swing of Mr. Market, whether he will be in the best of his spirits or worst – is a loser’s game.
Focusing on where the earnings and cash flows of the underlying businesses you own, or want to own, are going to go long term is what you must focus on.
Your behaviour and expectations are under your control, and so is the amount of risk you wish to take and the time you have in hand. Stock prices and future returns aren’t under your control and thus you must leave them at what they do best, that is, fluctuate.
“If owning stocks is a long-term project for you,” warns psychologist Daniel Kahneman, “following their changes constantly is a very, very bad idea. It’s the worst possible thing you can do, because people are so sensitive to short-term losses. If you count your money every day, you’ll be miserable.”
A Super Text
Reality is far more vicious than Russian roulette. First, it delivers the fatal bullet rather infrequently, like a revolver that would have hundreds, even thousands of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security. Second, unlike a well-defined precise game like Russian roulette, where the risks are visible to anyone capable of multiplying and dividing by six, one does not observe the barrel of reality. One is capable of unwittingly playing Russian roulette – and calling it by some alternative “low risk” game.
I’m in the 15th year of my gig and we’ve have had a decent run so far. But does that mean we’re good investors? I really don’t know because there has been a massive tailwind to my kind of investing. In sticking to decent businesses and not selling, we have benefited from a sizable valuation re-rating. While not unicorn-crazy, current valuations in my corner of the world are near the upper decile of any historical range. Odds are that valuation will be a headwind over next 15 years. As a corollary, future returns will be worse than past. Only question is by how much.
To make money in stocks you must have the vision to see them, the courage to buy them, and the patience to hold them.
~ George Baker
That’s about it from me for today.
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