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an effective investment philosophy, developed and honed over more than four decades and implemented conscientiously by highly skilled individuals who share culture and values. |
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A philosophy has to be the sum of many ideas accumulated over a long period of time from a variety of sources. |
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Psychology plays a major role in markets, and because it’s highly variable, cause-and-effect relationships aren’t reliable. |
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15 |
investment approach be intuitive and adaptive rather than be fixed and mechanistic. |
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Remember, your goal in investing isn’t to earn average returns; you want to do better than average. Thus, your thinking has to be better than that of others—both |
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23 |
The market will set prices so that appears to be the case, but it won’t provide a “free lunch.” That is, there will be no incremental return that is not related to (and compensatory for) incremental risk. |
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31 |
For every person who gets a good buy in an inefficient market, someone else sells too cheap. |
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32 |
A corollary that follows from Marks’s observation is that investors should look for markets or assets that are not fully efficiently priced rather than chase after the false god of completely inefficient markets. |
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Something else to keep in mind: just because efficiencies exist today doesn’t mean they’ll remain forever. |
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In other words, an investor has two basic choices: gauge the security’s underlying intrinsic value and buy or sell when the price diverges from it, or base decisions purely on expectations regarding future price movements. |
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The emphasis in value investing is on tangible factors like hard assets and cash flows. Intangibles like talent, popular fashions and long-term growth potential are given less weight. |
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42 |
If value investing has the potential to consistently produce favorable results, does that mean it’s easy? No. For one thing, it depends on an accurate estimate of value. Without that, any hope for consistent success as an investor is just that: hope. |
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being proved correct right away. It’s hard to consistently do the right thing as an investor. But it’s impossible to consistently do the right thing at the right time. The most we value investors can hope for is to be right about an asset’s value and buy when it’s available for less. |
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Joel Greenblatt: Unless you buy at the exact bottom tick (which is next to impossible), you will be down at some point after you make every investment. |
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There, many people tend to fall further in love with the thing they’ve bought as its price rises, since they feel validated, and they like it less as the price falls, when they begin to doubt their decision to buy. |
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This makes it very difficult to hold, and to buy more at lower prices (which investors call “averaging down”), especially if the decline proves to be extensive. If you liked it at 60, you should like it more at 50 . . . and much more at 40 and 30. |
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Value investors score their biggest gains when they buy an underpriced asset, average down unfailingly and have their analysis proved out. Thus, there are two essential ingredients for profit in a declining market: you have to have a view on intrinsic value, and you have to hold that view strongly enough to be able to hang in and buy even as price declines suggest that you’re wrong. Oh yes, there’s a third: you have to be right. |
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Christopher Davis: However, investors should be wary of the risk of obsolescence, which can turn a cheap stock into a value trap. |
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No asset class or investment has the birthright of a high return. It’s only attractive if it’s priced right. |
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decision. No matter how good an investment sounds, if price has not yet been considered, you can’t know if it is a good investment. |
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Joel Greenblatt: Many value investors are not good at knowing when to sell (and many sell way too early). However, knowing when to buy cures many of the mistakes resulting from selling too early. |
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You can’t make a career out of buying from forced sellers and selling to forced buyers; they’re not around all the time, just on rare occasions at the extremes of crises and bubbles. |
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The key is who likes the investment now and who doesn’t. Future price changes will be determined by whether it comes to be liked by more people or fewer people in the future. |
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The safest and most potentially profitable thing is to buy something when no one likes it. Given time, its popularity, and thus its price, can only go one way: up. |
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But as the price rises further and investors become more inflamed by the possibility of easy money, they think less and less about whether the price is fair. It’s an extreme rendition of the phenomenon I described earlier: people should like something less when its price rises, but in investing they often like it more. |
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The positives behind stocks can be genuine and still produce losses if you overpay for them. |
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54 |
Those positives—and the massive profits that seemingly everyone else is enjoying—can eventually cause those who have resisted participating to capitulate and buy. |
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54 |
Things can be overpriced and stay that way for a long time . . . or become far more so. Eventually, |
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55 |
In bubbles, infatuation with market momentum takes over from any notion of value and fair price, and greed (plus the pain of standing by as others make seemingly easy money) neutralizes any prudence that might otherwise hold sway. |
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56 |
Over the years leverage has been associated with high returns, but also with the most spectacular meltdowns and crashes. |
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can strive to create increases in value through active management of the asset. This is worth doing, but it’s time-consuming and uncertain and requires considerable expeartise. |
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57 |
Fear of looking wrong: It comes as quite a shock to many new investors how long it can take for even correct judgments to work out. |
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62 |
It’s meant to suggest both the positive relationship between risk and expected return and the fact that uncertainty about the return and the possibility of loss increase as risk increases. |
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62 |
And yet, finance theory (the same theory that contributed the risk-return graph shown in figure 5.1 and the concept of risk-adjustment) defines risk very precisely as volatility (or variability or deviation). None of these conveys the necessary sense of “peril.” |
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There are many kinds of risk…. But volatility may be the least relevant of them all. |
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Thus, it’s hard for me to believe volatility is the risk investors factor in when setting prices and prospective returns. |
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Rather than volatility, I think people decline to make investments primarily because they’re worried about a loss of capital or an unacceptably low return. |
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64 |
The possibility of permanent loss is the risk I worry about, Oaktree worries about and every practical investor I know worries about. |
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64 |
Johnson: I would go so far as to say that the risk of permanent capital loss is the only risk to worry about. |
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Falling short of one’s goal—Investors have differing needs, and for each investor the failure to meet those needs poses a risk. |
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64 |
That’s “benchmark risk,” |
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But every investor who’s unwilling to throw in the towel on outperformance, and who chooses to deviate from the index in its pursuit, will have periods of significant underperformance. |
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Specifically, in crazy times, disciplined investors willingly accept the risk of not taking enough risk to keep up. |
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risk: the risk that arises when the people who manage money and the people whose money it is are different people. |
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risk that could jeopardize return to an agent’s firing point is rarely worth taking. |
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65 |
Unconventionality—Along similar lines, there’s the risk of being different. |
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66 |
Illiquidity—If an investor needs money with which to pay for surgery in three months or buy a home in a year, he or she may be unable to make an investment that can’t be counted on for liquidity that meets the schedule. |
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71 |
It’s impossible to assess the accuracy of probability estimates other than 0 and 100 except over a very large number of trials. |
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“Risk means more things can happen than will happen.” |
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Understanding uncertainty: The possibility of a variety of outcomes means we mustn’t think of the future in terms of a single result but rather as a range of possibilities. The best we can do is fashion a probability distribution that summarizes the possibilities and describes their relative likelihood. |
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“There’s a big difference between probability and outcome. Probable things fail to happen—and improbable things happen—all the time.” |
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The most common bell-shaped distribution is called the “normal” distribution. However, people often use the terms bell-shaped and normal interchangeably, and they’re not the same. |
| 5 |
74 |
In many cases they made the assumption that future events would be normally distributed. |
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74 |
Thus, when widespread mortgage defaults began to occur, events thought to be unlikely befell mortgage-related vehicles on a regular basis. Investors in vehicles that had been constructed on the basis of normal distributions, without much allowance for “tail events” |
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Quantification often lends excessive authority to statements that should be taken with a grain of salt. That creates significant potential for trouble. |
| 5 |
75 |
Many futures are possible, to paraphrase Dimson, but only one future occurs. The future you get may be beneficial to your portfolio or harmful, and that may be attributable to your foresight, prudence or luck. |
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Risk can be judged only by sophisticated, experienced second-level thinkers. |
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Many things could have happened in each case in the past, and the fact that only one did happen understates the variability that existed. |
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76 |
The point is, people usually expect the future to be like the past and underestimate the potential for change. |
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76 |
We hear a lot about “worst-case” projections, but they often turn out not to be negative enough. |
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77 |
most people view risk taking primarily as a way to make money. |
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78 |
risk as increasing during upswings, as financial imbalances build up, and materializing in recessions. |
| 6 |
78 |
Risk means uncertainty about which outcome will occur and about the possibility of loss when the unfavorable ones do. |
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79 |
The greatest risk doesn’t come from low quality or high volatility. It comes from paying prices that are too high. This isn’t a theoretical risk; it’s very real. |
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Even if we realize that unusual, unlikely things can happen, in order to act we make reasoned decisions and knowingly accept that risk when well paid to do so. Once in a while, a “black swan” will materialize. But if in the future we always said, “We can’t do such-and-such, because the outcome could be worse than we’ve ever seen before,” we’d be frozen in inaction. |
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When things are going well, extrapolation introduces great risk. |
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Risk aversion is the essential ingredient in a rational market, as I said before, and the position of the pendulum with regard to it is particularly important. |
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The pendulum swing regarding attitudes toward risk is one of the most powerful of all. In fact, I’ve recently boiled down the main risks in investing to two: the risk of losing money and the risk of missing opportunity. |
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The first, when a few forward-looking people begin to believe things will get better The second, when most investors realize improvement is actually taking place The third, when everyone concludes things will get better forever |
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117 |
The ultimate danger zone is reached when investors are in agreement that things can only get better forever. That makes no sense, but most people fall for it. It’s what creates bubbles—just as the opposite produces crashes. |
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The first, when just a few thoughtful investors recognize that, despite the prevailing bullishness, things won’t always be rosy The second, when most investors recognize things are deteriorating The third, when everyone’s convinced things can only get worse |
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119 |
Joel Greenblatt: This means markets will always create opportunities, whether now or later. In markets with few opportunities, it’s important to be patient. Value opportunities will eventually present themselves, usually after no more than a year or two. |
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The swing back from the extreme is usually more rapid—and thus takes much less time—than the swing to the extreme. (Or as my partner Sheldon Stone likes to say, “The air goes out of the balloon much faster than it went in.”) |
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Joel Greenblatt: Many of the mistakes I have made are the same ones that I had made before; they just look a little different each time—the same mistake slightly disguised. |
| 10 |
125 |
The fourth psychological contributor to investor error is the tendency to conform to the view of the herd rather than resist—even when the herd’s view is clearly cockeyed. |
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126 |
“many people who don’t share the consensus view of the market start to feel left out. Eventually it reaches a stage where it appears the really crazy people are those not in the market.” |
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Time and time again, the combination of pressure to conform and the desire to get rich causes people to drop their independence and skepticism, overcome their innate risk aversion and believe things that don’t make sense. |
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The fifth psychological influence is envy. However negative the force of greed might be, always spurring people to strive for more and more, the impact is even stronger when they compare themselves to others. |
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People who might be perfectly happy with their lot in isolation become miserable when they see others do better. |
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Greed, excitement, illogicality, suspension of disbelief and ignoring value cost people a lot of money in the tech bubble. And, by the way, a lot of brilliant, disciplined value investors looked dumb in the months and years before the bubble burst—which of course it eventually did. |
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135 |
Investors who believe they’re immune to the forces described in this chapter do so at their own peril. |
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a bull case is so powerful that it can make adults overlook elevated valuations and deny the impossibility of the perpetual-motion machine, why shouldn’t it have the same influence on you? |
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Believe me, it’s hard to resist buying at the top (and harder still to sell) when everyone else is buying, the pundits are positive, the rationale is widely accepted, prices are soaring and the biggest risk takers are reporting huge returns. |
y su incapacidad de crear riqueza