Stocks now sell at levels that should produce long-term returns far superior to bonds. Yet pensions managers, usually encouraged by corporate sponsors they must necessarily please ("whose bread I eat, his song I sing"), are pouring funds in record proportions into bonds.
Many corporate managers, in fact, exhibit a bit of schizophrenia regarding equities. They consider their own stocks to be screamingly attractive. But, concomitantly, they stamp approval on pension policies rejecting purchases of common stocks in general. And the boss, while wearing his acquisition hat, will eagerly bid 150% to 200% of book value for businesses typical of corporate America but, wearing his pension hat, will scorn investment in similar companies at book value. Can his own talents be so unique that he is justified both in paying 200 cents on the dollar for a business if he can get his hands on it, and in rejecting it as an unwise pension investment at 100 cents on the dollar if it must be left to be run by his companions at the Business Roundtable?
A second argument is made that there are just too many question marks about the near future; wouldn't it be better to wait until things clear up a bit? You know the prose: "Maintain buying reserves until current uncertainties are resolved," etc. Before reaching for that crutch, face up to two unpleasant facts: The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.
Managers currently opting for lower equity ratios either have a highly negative opinion of future American business results or expect to be nimble enough to dance back into stocks at even lower levels. There may well be some period in the near future when financial markets are demoralized and much better buys are available in equities; that possibility exists at all times. But you can be sure that at such a time the future will seem neither predictable nor pleasant. Those now awaiting a "better time" for equity investing are highly likely to maintain that posture until well into the next bull market.
Read more, click here....
Comment: Isn't it a similar scenario after 40 years now? "A person who does not learn from the history does not has his story."
Showing posts with label Warren Buffett. Show all posts
Showing posts with label Warren Buffett. Show all posts
Monday, November 10, 2008
Saturday, October 18, 2008
Chairman's Memo
Below are some exceprts from Oaktree Capital Management L.P. Chairman, Howard Marks regarding the current market. The memo dated 15th October 2008. Click here to view full memo..... You need to download pdf file read to view it. Click here to download pdf reader.
"But in dealing with the future, we must think about two things: (a) what might happen and (b) the probability it will happen. During the crisis, lots of bad things seemed possible, but that didn’t mean they were going to happen. In times of crisis, people fail to make that distinction."
"In general, following the beliefs of the herd – and swinging with the pendulum – will give you average performance in the long run and can get you killed at the extremes."
"The message of The Black Swan is how important it is to realize that the things everyone rules out can still come to pass. That might be generalized into an understanding of the importance of skepticism. I’d define skepticism as not believing what you’re told or what “everyone” considers
true. In my opinion, it’s one of the most important requirements for successful investing. If you believe the story everyone else believes, you’ll do what they do. Usually you’ll buy at high prices and sell at lows. You’ll fall for tales of the “silver bullet” capable of delivering high returns without risk. You’ll buy what’s been doing well and sell what’s been doing poorly. And you’ll suffer losses in crashes and miss out when things recover from bottoms. In other words, you’ll be a conformist, not a maverick (an overused word these days); a follower, not a contrarian."
"Skepticism is what it takes to look behind a balance sheet, the latest miracle of financial engineering or the can’t-miss story. The idea being marketed by an investment banker or
broker has been prettied up for presentation. And usually it’s been doing well, making the tale more credible. Only a skeptic can separate the things that sound good and are from the things that sound good and aren’t. The best investors I know exemplify this trait. It’s an absolute necessity."
"Skepticism and pessimism aren’t synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive. I’ll write some more on the subject, but it’s really as simple as that."
"I found very few who were optimistic; most were pessimistic to some degree. Some became genuinely depressed – even a few great investors I know. Increasingly negative tales of the coming meltdown were exchanged via email. No one applied skepticism, or said “that horror story’s unlikely to be true.” Pessimism fed on itself. People’s only concern was bullet-proofing their portfolios to get through the coming collapse, or raising enough cash to meet redemptions. The one thing they weren’t doing last week was making aggressive bids for securities. So prices fell and fell – the old expression is “gapped down” – several points at a time. The key – as usual – was to become skeptical of what “everyone” was saying and doing. One might have said, “Sure, the negative story may turn out to be true, but certainly it’s priced into the market. So there’s little to be gained from betting on it. On the other hand, if it turns out not to be true, the appreciation from today’s depressed levels will be enormous. I buy!” The negative story may have looked compelling, but it’s the positive story – which few believed – that held, and still holds, the greater potential for profit."
"Most people don’t repeat their mistakes; they make new ones."
"That’s the main reason why we shouldn’t expect there to be any limit on the resources thrown at the problem. All it will take is running the printing presses long enough to rebuild financial institutions’ capital accounts, make good guarantees and enable borrowers to roll over their outstanding debt, all of which is reckoned in nominal terms. The philosophical bridge of unlimited aid to private institutions appears to have been crossed, and printing the necessary money is unlikely to be an issue."
"In the longer term, we have to wonder about the effect on the world of a glut of newly printed dollars, sterling and euros. The reason owning printing presses makes repayment easy is that it lets a nation cheapen its currency. But one would think that more units of currency per unit of GDP means a debasement of the currency, and thus reduced purchasing power (read: higher inflation).
Walking along Hyde Park on Sunday, I saw a street vendor selling old stock certificates.
Do you have any banknotes, I asked? Anything from the Weimar Republic? For the last
few weeks, I’ve wanted to get some of those.
In Weimar Germany, the government enabled itself to pay World War I reparations by
cheapening its currency . . . literally. So the 1,000 mark note I bought was simply overstamped
One Million Marks in red. Voila! Now we’re all rich.
The mark fell from 60 to the U.S. dollar in early 1921 to 320 to the dollar in early 1922
and 8,000 to the dollar by the end of 1922. It’s hard to believe, but according to
Wikipedia (user-maintained and perhaps not always the most authoritative):
In December 1923 the exchange rate was 4,200,000,000,000 Marks to 1
U.S. dollar. In 1923, the rate of inflation hit 3.25 x 106 percent per month
(prices double every two days).
One of the firms printing these [new 100 trillion Mark] notes submitted an
invoice for 32,776,899,763,734,490,417.05 (3.28 x 1019, or 33 quintillion)
Marks. [That’s not a misprint.]
Lord Keynes judged the situation this way:
The inflationism of the currency systems of Europe has proceeded to
extraordinary lengths. The various belligerent governments, unable, or too
timid or too short-sighted to secure from loans or taxes the resources they
required, have printed notes for the balance.
But it’s not that easy. People with things to sell aren’t that stupid. So instead of 1,000
marks, a goat now costs one million marks. That piece of paper used to be a thousand
mark note – and now it’s a million mark note – but it still buys the same goat.
The benefit to the government is that it’s able to pay off its old nominal debts in currency
of which it suddenly has a lot more . . . but which no longer has much purchasing power.
So when repaid in the cheapened currency in 1923, the person to whom the government
owed 1,000 marks can only buy one-thousandth of a goat – not a whole goat as in 1920.
My late friend Henry Reichmann was a boy then, working as a busboy in a restaurant in
Berlin. He told me he used to be paid at lunchtime and immediately ran out to spend his
salary, since it would buy less if he waited until after work to shop.
That’s hyperinflation. Just as the Great Depression became a model during the credit
crisis, Weimar Germany gives us something to think about regarding our new future.
I’m not smart enough to know what’s coming, but I’m also not dumb enough to
think a few government actions on Monday were enough to solve all our problems.
At best, we usually substitute one problem for another – usually one later on in lieu of
today’s.
I don’t know what to do about this risk, whether it’ll come home to roost, or to what
extent. And I certainly don’t think hyperinflation can be assigned a high enough
probability to make it worth doing much about. But it may cause one to rethink holdings
of low-yielding, flight-to-quality-elevated, long-term Treasurys."
"I’ve believed for many years that just as success carries within itself the seeds of failure (see 2003-08), so does failure carry the seeds of success."
"a forest fire: a year after, bright green shoots grow from the ashes; in fact, I think they’re fertilized by the ashes."
"a quote from Warren Buffett, and often it’s the same one:
The less prudence with which others conduct their affairs, the greater the
prudence with which we should conduct our own affairs."
"When others conduct their affairs with excessive negativism, it’s worth being positive."
"That doesn’t mean it can’t decline further, or that a bull market’s about to start. But it does mean the negatives are on the table, optimism is thoroughly lacking, and the greater long-term risk probably lies in not investing."
Note: Oaktree Capital Management L.P. is a fund manager that HQ based in US and manages USD 54.5 Billion assets.
"But in dealing with the future, we must think about two things: (a) what might happen and (b) the probability it will happen. During the crisis, lots of bad things seemed possible, but that didn’t mean they were going to happen. In times of crisis, people fail to make that distinction."
"In general, following the beliefs of the herd – and swinging with the pendulum – will give you average performance in the long run and can get you killed at the extremes."
"The message of The Black Swan is how important it is to realize that the things everyone rules out can still come to pass. That might be generalized into an understanding of the importance of skepticism. I’d define skepticism as not believing what you’re told or what “everyone” considers
true. In my opinion, it’s one of the most important requirements for successful investing. If you believe the story everyone else believes, you’ll do what they do. Usually you’ll buy at high prices and sell at lows. You’ll fall for tales of the “silver bullet” capable of delivering high returns without risk. You’ll buy what’s been doing well and sell what’s been doing poorly. And you’ll suffer losses in crashes and miss out when things recover from bottoms. In other words, you’ll be a conformist, not a maverick (an overused word these days); a follower, not a contrarian."
"Skepticism is what it takes to look behind a balance sheet, the latest miracle of financial engineering or the can’t-miss story. The idea being marketed by an investment banker or
broker has been prettied up for presentation. And usually it’s been doing well, making the tale more credible. Only a skeptic can separate the things that sound good and are from the things that sound good and aren’t. The best investors I know exemplify this trait. It’s an absolute necessity."
"Skepticism and pessimism aren’t synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive. I’ll write some more on the subject, but it’s really as simple as that."
"I found very few who were optimistic; most were pessimistic to some degree. Some became genuinely depressed – even a few great investors I know. Increasingly negative tales of the coming meltdown were exchanged via email. No one applied skepticism, or said “that horror story’s unlikely to be true.” Pessimism fed on itself. People’s only concern was bullet-proofing their portfolios to get through the coming collapse, or raising enough cash to meet redemptions. The one thing they weren’t doing last week was making aggressive bids for securities. So prices fell and fell – the old expression is “gapped down” – several points at a time. The key – as usual – was to become skeptical of what “everyone” was saying and doing. One might have said, “Sure, the negative story may turn out to be true, but certainly it’s priced into the market. So there’s little to be gained from betting on it. On the other hand, if it turns out not to be true, the appreciation from today’s depressed levels will be enormous. I buy!” The negative story may have looked compelling, but it’s the positive story – which few believed – that held, and still holds, the greater potential for profit."
"Most people don’t repeat their mistakes; they make new ones."
"That’s the main reason why we shouldn’t expect there to be any limit on the resources thrown at the problem. All it will take is running the printing presses long enough to rebuild financial institutions’ capital accounts, make good guarantees and enable borrowers to roll over their outstanding debt, all of which is reckoned in nominal terms. The philosophical bridge of unlimited aid to private institutions appears to have been crossed, and printing the necessary money is unlikely to be an issue."
"In the longer term, we have to wonder about the effect on the world of a glut of newly printed dollars, sterling and euros. The reason owning printing presses makes repayment easy is that it lets a nation cheapen its currency. But one would think that more units of currency per unit of GDP means a debasement of the currency, and thus reduced purchasing power (read: higher inflation).
Walking along Hyde Park on Sunday, I saw a street vendor selling old stock certificates.
Do you have any banknotes, I asked? Anything from the Weimar Republic? For the last
few weeks, I’ve wanted to get some of those.
In Weimar Germany, the government enabled itself to pay World War I reparations by
cheapening its currency . . . literally. So the 1,000 mark note I bought was simply overstamped
One Million Marks in red. Voila! Now we’re all rich.
The mark fell from 60 to the U.S. dollar in early 1921 to 320 to the dollar in early 1922
and 8,000 to the dollar by the end of 1922. It’s hard to believe, but according to
Wikipedia (user-maintained and perhaps not always the most authoritative):
In December 1923 the exchange rate was 4,200,000,000,000 Marks to 1
U.S. dollar. In 1923, the rate of inflation hit 3.25 x 106 percent per month
(prices double every two days).
One of the firms printing these [new 100 trillion Mark] notes submitted an
invoice for 32,776,899,763,734,490,417.05 (3.28 x 1019, or 33 quintillion)
Marks. [That’s not a misprint.]
Lord Keynes judged the situation this way:
The inflationism of the currency systems of Europe has proceeded to
extraordinary lengths. The various belligerent governments, unable, or too
timid or too short-sighted to secure from loans or taxes the resources they
required, have printed notes for the balance.
But it’s not that easy. People with things to sell aren’t that stupid. So instead of 1,000
marks, a goat now costs one million marks. That piece of paper used to be a thousand
mark note – and now it’s a million mark note – but it still buys the same goat.
The benefit to the government is that it’s able to pay off its old nominal debts in currency
of which it suddenly has a lot more . . . but which no longer has much purchasing power.
So when repaid in the cheapened currency in 1923, the person to whom the government
owed 1,000 marks can only buy one-thousandth of a goat – not a whole goat as in 1920.
My late friend Henry Reichmann was a boy then, working as a busboy in a restaurant in
Berlin. He told me he used to be paid at lunchtime and immediately ran out to spend his
salary, since it would buy less if he waited until after work to shop.
That’s hyperinflation. Just as the Great Depression became a model during the credit
crisis, Weimar Germany gives us something to think about regarding our new future.
I’m not smart enough to know what’s coming, but I’m also not dumb enough to
think a few government actions on Monday were enough to solve all our problems.
At best, we usually substitute one problem for another – usually one later on in lieu of
today’s.
I don’t know what to do about this risk, whether it’ll come home to roost, or to what
extent. And I certainly don’t think hyperinflation can be assigned a high enough
probability to make it worth doing much about. But it may cause one to rethink holdings
of low-yielding, flight-to-quality-elevated, long-term Treasurys."
"I’ve believed for many years that just as success carries within itself the seeds of failure (see 2003-08), so does failure carry the seeds of success."
"a forest fire: a year after, bright green shoots grow from the ashes; in fact, I think they’re fertilized by the ashes."
"a quote from Warren Buffett, and often it’s the same one:
The less prudence with which others conduct their affairs, the greater the
prudence with which we should conduct our own affairs."
"When others conduct their affairs with excessive negativism, it’s worth being positive."
"That doesn’t mean it can’t decline further, or that a bull market’s about to start. But it does mean the negatives are on the table, optimism is thoroughly lacking, and the greater long-term risk probably lies in not investing."
Note: Oaktree Capital Management L.P. is a fund manager that HQ based in US and manages USD 54.5 Billion assets.
Monday, October 13, 2008
Face Off Again?
9月29日,沃伦?巴菲特宣布以每股港币8元的价格认购2.25亿股比亚迪公司的股份,约占比亚迪总股本的10%。受此影响,比亚迪股价大涨,港股及国内A股相关概念炒作不断。
显然,关注比亚迪的并非只有巴菲特一人。理财周报独家获悉,就在此前两天,国内曾有多家基金公司前往比亚迪进行了考察。当然,他们并不晓得巴菲特认购之事。
有趣的是,这些很多事后追捧巴菲特价值投资的国内投资人士,在当时恰恰做出了与巴菲特完全相反的判断。他们认为比亚迪估值偏高,需谨慎买入。
考察完比亚迪,十几位基金公司人士的总体感觉是,比亚迪虽然基本面尚好,但人员流失严重,原材料成本上升。上半年虽然收入增加,但因成本上升缘故, 利润也在下降。因此,感觉比亚迪与其他同类企业一样,基本上没有摆脱本年度整体经济下行的大环境。而且估值也不低。因此,基金公司的判断是“买入有风险, 需谨慎。”
在基金公司作出判断几个小时后,就有消息传出巴菲特将要出手。很多分析师的态度一下子又有了180度大转弯。
2007年9月以来,受与富士康诉讼案的影响,比亚迪的股价步入下滑通道,从77港元的最高点一路下跌到8.4港元。
股价的下跌强化了市场上的质疑,2008年9月初,BNP百富勤发布的研报称,比亚迪的汽车业务扩张速度令该行担忧其盈利能力;另一方面,其子公司比亚迪电子(0285.HK)的手机业务贡献,虽然正进一步扩张,但不及预期强劲,该行给予比亚迪“减持”的评级。
“华尔街多少年?中国资本市场才几年?”上述投资总监说道,“国内证券从业人员毕竟经历的太少,在大牛大熊的转换间还是缺少经验。很多公司的分析师年纪都很小,甚至是80后。没有经历过经济周期的人,你让他们如何能够作出正确的判断?”
“另外,国内的很多投资者会受到制度上的制约。特别是基金经理要受到短期排名和基准业绩比较的羁绊。公司不会给你很多的时间,让你去做长期投资。”该投资总监称。“从这个角度上看,中国和外国的基金公司都差不多。共同基金受到赎回的压力,对冲基金受到投资人的压力。"read more, click here.....
Thursday, July 26, 2007
Turtles in Omaha
Excerpts from Turtles in Omaha by Michael J. Mauboussin, Chief Investment Strategist, Legg Mason Capital Management. Click here to view more.
The Mindset of Great Investors
The difference in [investment] return had nothing to do with knowledge and everything
to do with emotional and psychological factors. We had all been taught the same thing,
but my return . . . was three times that of the others. Over the years, I kept finding
evidence that emotional and psychological strength are the most important ingredients
in successful trading.
-- Curtis M. Faith, "Way of the Turtle"
Nassim Taleb’s latest book, The Black Swan, is a treatise on the improbable events Buffett has in mind. 5 The term black swan comes from philosopher Karl Popper’s criticism of induction: We get closer to truth if we focus on falsification instead of verification. Seeing lots of white swans
(verification) does not allow for the statement “all swans are white,” but seeing one black swan
(falsification) does disprove the statement. This is relevant in investing because investment
strategies based on the reoccurrence of white swans can be toppled by one black swan event.
Taleb suggests all black swans have three attributes: they are outliers, they have an extreme
impact, and people seek to explain them after the fact.
Three High Hurdles
Here are three psychologically-difficult barriers great traders and investors must overcome: loss aversion, frequency versus magnitude, and the role of randomness. How individuals cope with these barriers provides good insight into their investing temperament.
Loss aversion. In what is now a well-documented and well-known phenomenon, humans suffer roughly twice as much from losses as they receive pleasure from comparable gains. An important consequence is investors will turn down positive expected-value financial propositions, especially when their recent results have been poor.
Faith provides a powerful example of this point. Following the expiration of the confidentiality
agreement he signed, Faith explained the turtle system to a friend. Noting that cocoa presented a great trading opportunity in 1998 through early 1999, he inquired how his friend was doing in
cocoa. The friend replied he stopped trading cocoa because he had lost money and thought the
trade was “too risky.”
Then Faith explains the circumstances. Following the system would have generated 28 total
trades (average size $10,000 – $15,000) from April 1998 through February 1999, producing a
total profit of nearly $56,000. But of the 28 trades, 24 were unprofitable (average loss of about
$930) while 4 were profitable (average gain of roughly $20,000). Even more difficult, the first 17 trades in a row lost money.
Given this profit pattern, it is not difficult to see why a trader would abandon the commodity and perceive it as overly risky. But Faith’s point is crucial: Recency bias and loss aversion often cause you to give up right before the trade becomes profitable. Sticking with positive expectation financial propositions is essential to maximizing profits over time.
Frequency versus magnitude. This concept is really an extension of loss aversion. Most of us frame the success or failure of a financial proposition in terms of the price. For instance, if you buy a stock at $30, any price above that level is mentally successful; any price below it is
mentally unsuccessful.
What investors often fail to consider is that change in wealth is not a function of how often you’re right, it’s a function of how much money you make when you’re right versus how much you lose when you’re wrong. You need to consider both frequency and magnitude to understand investment results.
Faith illustrates this point by sharing 20 years of results for a trading system. Over that time span, the system generated about 5,600 trades, or around 250 a year. Of those trades, a shade over two-thirds lost money, making the success ratio less than one-third. But the winning trades
earned 2.2 times the losing trades on average, netting a substantial overall profit.
As with loss aversion, operating according to the frequency-and-magnitude maxim is easier said
than done. Faith notes, “Some of the Turtles had a hard time with this concept; they felt the need to be right and to predict markets.”
The expected-value mindset has served many well-known investors well. One example is George Soros. Former colleague Scott Bessent said in a recent interview, “George has a terrible batting
average—it’s below 50 percent and possibly even below 30 percent—but when he wins it’s a
grand slam. He’s like Babe Ruth in that respect.”
Role of randomness. Most people agree stock prices move more dramatically than business
values move. In the stock market, like most probabilistic systems, there is a great deal of noise in the system. However, most investors fail to recognize the degree to which randomness affects
short-term results. And, as bad, many investors have emotional reactions to short-term
randomness that undermine the quality of their decision making.
This is Faith’s comment; the idea applies to nearly everyone involved with markets: 16
Most traders do not understand the degree to which completely random chance can
affect their trading results. The typical investor understands this even less than the typical
trader does. Even very experienced investors such as those who operate and make
decisions for pension funds and hedge funds generally do not understand the extent of
this effect.
Here’s the point: A trader, or investor, can put on a positive expectation bet (correct process) and still have poor results (outcome) for some period of time due solely to randomness. But many investors attribute bad outcomes to bad processes, which leads to substantial error. As insidious is attributing good outcomes to a good process. A thoughtful investor must carefully consider process and recognize long-term outcomes will follow.
Here are some data to substantiate the point. The first is a study by The Brandes Institute called “Death, Taxes, and Short-Term Underperformance.” 18 The researchers screened for largecapitalization, actively-managed funds that had a 10-year track record through 2006. This yielded 591 funds. They then ranked the funds by decile based on annualized gains.
The top-decile group had returns in excess of 10.9 percent, and all of them delivered better
returns than the S&P 500 index. The researchers posed two questions: Did these funds have
periods of relative underperformance? If so, by how much?
The answer to the first question is a resounding yes. In fact, all 59 of the funds in the top decile
underperformed for at least one year. In its worst one-year period, the average top-decile fund
underperformed the index by 1,950 basis points, with a range of negative 650 to 4,410 basis
points.
Over a three-year period, the average underperformance was still 810 basis points, with a range
of positive 250 to negative 2,240 basis points. The one- and three-year numbers of these good long-term funds clearly show the limitations of relying on short-term results to decipher the
ultimate outcomes.
Unfortunately, the randomness in short-term results exerts a cost. Most institutional investors,
including pension funds, endowments, and foundations, rely on short-term investment results to
judge the managers they hire. Despite this, they would be better off with a robust way to assess
process. The focus on outcomes, combined with the limited appreciation for randomness, leads
to bad decisions.
In a recent academic paper, researchers tracked the decisions of 3,500 plan sponsors over a
decade. 19 What they found is not surprising. Plan sponsors hire managers after they have
enjoyed three years of excess returns. After they are hired, the managers generate excess
returns “indistinguishable from zero.”
Further, plan sponsors often fire managers after a period of underperformance, but the managers often go on to generate excess returns after they’ve been fired. Said differently, plan sponsors would have been better off on average keeping the manager they fired. And this analysis leaves aside costs.
While very understandable, this performance chasing shows many plan sponsors are fooled by
randomness. Evidence is voluminous that individual investors, too, chase performance to the
detriment of their long-term results.
Faith adamantly argues for a focus on process:
Good investors invest in people, not historical performance. They know how to identify
traits that will lead to excellent performance in the future, and they know the traits that are
indicative of average trading ability. This is the best way to overcome random effects.
This mindset fits comfortably with Buffett’s point about assessing chief investment officer
candidates based on “how they swing at the ball.”
The Mindset of Great Investors
The difference in [investment] return had nothing to do with knowledge and everything
to do with emotional and psychological factors. We had all been taught the same thing,
but my return . . . was three times that of the others. Over the years, I kept finding
evidence that emotional and psychological strength are the most important ingredients
in successful trading.
-- Curtis M. Faith, "Way of the Turtle"
Nassim Taleb’s latest book, The Black Swan, is a treatise on the improbable events Buffett has in mind. 5 The term black swan comes from philosopher Karl Popper’s criticism of induction: We get closer to truth if we focus on falsification instead of verification. Seeing lots of white swans
(verification) does not allow for the statement “all swans are white,” but seeing one black swan
(falsification) does disprove the statement. This is relevant in investing because investment
strategies based on the reoccurrence of white swans can be toppled by one black swan event.
Taleb suggests all black swans have three attributes: they are outliers, they have an extreme
impact, and people seek to explain them after the fact.
Three High Hurdles
Here are three psychologically-difficult barriers great traders and investors must overcome: loss aversion, frequency versus magnitude, and the role of randomness. How individuals cope with these barriers provides good insight into their investing temperament.
Loss aversion. In what is now a well-documented and well-known phenomenon, humans suffer roughly twice as much from losses as they receive pleasure from comparable gains. An important consequence is investors will turn down positive expected-value financial propositions, especially when their recent results have been poor.
Faith provides a powerful example of this point. Following the expiration of the confidentiality
agreement he signed, Faith explained the turtle system to a friend. Noting that cocoa presented a great trading opportunity in 1998 through early 1999, he inquired how his friend was doing in
cocoa. The friend replied he stopped trading cocoa because he had lost money and thought the
trade was “too risky.”
Then Faith explains the circumstances. Following the system would have generated 28 total
trades (average size $10,000 – $15,000) from April 1998 through February 1999, producing a
total profit of nearly $56,000. But of the 28 trades, 24 were unprofitable (average loss of about
$930) while 4 were profitable (average gain of roughly $20,000). Even more difficult, the first 17 trades in a row lost money.
Given this profit pattern, it is not difficult to see why a trader would abandon the commodity and perceive it as overly risky. But Faith’s point is crucial: Recency bias and loss aversion often cause you to give up right before the trade becomes profitable. Sticking with positive expectation financial propositions is essential to maximizing profits over time.
Frequency versus magnitude. This concept is really an extension of loss aversion. Most of us frame the success or failure of a financial proposition in terms of the price. For instance, if you buy a stock at $30, any price above that level is mentally successful; any price below it is
mentally unsuccessful.
What investors often fail to consider is that change in wealth is not a function of how often you’re right, it’s a function of how much money you make when you’re right versus how much you lose when you’re wrong. You need to consider both frequency and magnitude to understand investment results.
Faith illustrates this point by sharing 20 years of results for a trading system. Over that time span, the system generated about 5,600 trades, or around 250 a year. Of those trades, a shade over two-thirds lost money, making the success ratio less than one-third. But the winning trades
earned 2.2 times the losing trades on average, netting a substantial overall profit.
As with loss aversion, operating according to the frequency-and-magnitude maxim is easier said
than done. Faith notes, “Some of the Turtles had a hard time with this concept; they felt the need to be right and to predict markets.”
The expected-value mindset has served many well-known investors well. One example is George Soros. Former colleague Scott Bessent said in a recent interview, “George has a terrible batting
average—it’s below 50 percent and possibly even below 30 percent—but when he wins it’s a
grand slam. He’s like Babe Ruth in that respect.”
Role of randomness. Most people agree stock prices move more dramatically than business
values move. In the stock market, like most probabilistic systems, there is a great deal of noise in the system. However, most investors fail to recognize the degree to which randomness affects
short-term results. And, as bad, many investors have emotional reactions to short-term
randomness that undermine the quality of their decision making.
This is Faith’s comment; the idea applies to nearly everyone involved with markets: 16
Most traders do not understand the degree to which completely random chance can
affect their trading results. The typical investor understands this even less than the typical
trader does. Even very experienced investors such as those who operate and make
decisions for pension funds and hedge funds generally do not understand the extent of
this effect.
Here’s the point: A trader, or investor, can put on a positive expectation bet (correct process) and still have poor results (outcome) for some period of time due solely to randomness. But many investors attribute bad outcomes to bad processes, which leads to substantial error. As insidious is attributing good outcomes to a good process. A thoughtful investor must carefully consider process and recognize long-term outcomes will follow.
Here are some data to substantiate the point. The first is a study by The Brandes Institute called “Death, Taxes, and Short-Term Underperformance.” 18 The researchers screened for largecapitalization, actively-managed funds that had a 10-year track record through 2006. This yielded 591 funds. They then ranked the funds by decile based on annualized gains.
The top-decile group had returns in excess of 10.9 percent, and all of them delivered better
returns than the S&P 500 index. The researchers posed two questions: Did these funds have
periods of relative underperformance? If so, by how much?
The answer to the first question is a resounding yes. In fact, all 59 of the funds in the top decile
underperformed for at least one year. In its worst one-year period, the average top-decile fund
underperformed the index by 1,950 basis points, with a range of negative 650 to 4,410 basis
points.
Over a three-year period, the average underperformance was still 810 basis points, with a range
of positive 250 to negative 2,240 basis points. The one- and three-year numbers of these good long-term funds clearly show the limitations of relying on short-term results to decipher the
ultimate outcomes.
Unfortunately, the randomness in short-term results exerts a cost. Most institutional investors,
including pension funds, endowments, and foundations, rely on short-term investment results to
judge the managers they hire. Despite this, they would be better off with a robust way to assess
process. The focus on outcomes, combined with the limited appreciation for randomness, leads
to bad decisions.
In a recent academic paper, researchers tracked the decisions of 3,500 plan sponsors over a
decade. 19 What they found is not surprising. Plan sponsors hire managers after they have
enjoyed three years of excess returns. After they are hired, the managers generate excess
returns “indistinguishable from zero.”
Further, plan sponsors often fire managers after a period of underperformance, but the managers often go on to generate excess returns after they’ve been fired. Said differently, plan sponsors would have been better off on average keeping the manager they fired. And this analysis leaves aside costs.
While very understandable, this performance chasing shows many plan sponsors are fooled by
randomness. Evidence is voluminous that individual investors, too, chase performance to the
detriment of their long-term results.
Faith adamantly argues for a focus on process:
Good investors invest in people, not historical performance. They know how to identify
traits that will lead to excellent performance in the future, and they know the traits that are
indicative of average trading ability. This is the best way to overcome random effects.
This mindset fits comfortably with Buffett’s point about assessing chief investment officer
candidates based on “how they swing at the ball.”
Sunday, June 24, 2007
段永平：照巴菲特说的做
"因为投资有一个最大的特点就是你不能够给自己定目标，说我今年一定要赚百分之多少。因为价格是市场给的，但是价值是它内在的东西，所以你最重要的是了解它的价值，然后等待市场最后给它一个公平的价格。一般来讲，这个时间也不会很长，以我个人的经验看，大概最多也就3年。你只要有个两三年的耐心，找到好公司，拿在手里怎么着都是能挣钱的。但倒过来讲，你拿错了股票，拿的时间越久可能就越糟。"
"比方说像网易，我大概是0.8-1美元买的，留到八、九十美元都没有卖。这个过程中，其实每天都是可以卖的，但如果你了解这个企业，认为它有这个价值，可能就不着急卖，否则你每天都会受价格的影响。"
"最重要的是首先要做对的事情，然后把事情做对。"
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Saturday, April 28, 2007
Thursday, March 08, 2007
Chairman's Letter 2006 6
"We’ve found that if you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels."
Wednesday, March 07, 2007
Chairman's Letter 2006 5
"Let me end this section by telling you about one of the good guys of Wall Street, my long-time friend Walter Schloss, who last year turned 90. From 1956 to 2002, Walter managed a remarkably successful investment partnership, from which he took not a dime unless his investors made money. My admiration for Walter, it should be noted, is not based on hindsight. A full fifty years ago, Walter was my sole recommendation to a
“How would you summarize your approach?” Edwin replied, “We try to buy stocks cheap.” So much for
Modern Portfolio Theory, technical analysis, macroeconomic thoughts and complex algorithms.
Following a strategy that involved no real risk – defined as permanent loss of capital – Walter produced results over his 47 partnership years that dramatically surpassed those of the S&P 500. It’s particularly noteworthy that he built this record by investing in about 1,000 securities, mostly of a lackluster type. A few big winners did not account for his success. It’s safe to say that had millions of investment managers made trades by a) drawing stock names from a hat; b) purchasing these stocks in comparable amounts when Walter made a purchase; and then c) selling when Walter sold his pick, the luckiest of them would not have come close to equaling his record. There is simply no possibility that what Walter achieved over 47 years was due to chance.
Tuesday, March 06, 2007
Chairman's Letter 2006 4
"When someone with experience proposes a deal to someone with money, too often the fellow with money ends up with the experience, and the fellow with experience ends up with the money."
Monday, March 05, 2007
Chairman's Letter 2006 3
"Corporate bigwigs often complain about government spending, criticizing bureaucrats who they say spend taxpayers’ money differently from how they would if it were their own. But sometimes the financial behavior of executives will also vary based on whose wallet is getting depleted. Here’s an illustrative tale from my days at Salomon. In the 1980s the company had a barber, Jimmy by name, who came in weekly to give free haircuts to the top brass. A manicurist was also on tap. Then, because of a cost-cutting drive, patrons were told to pay their own way. One top executive (not the CEO) who had previously visited Jimmy weekly went immediately to a once-every-three-weeks schedule."
Sunday, March 04, 2007
Chairman's Letter 2006 2
"Be fearful when others are greedy, and be greedy when others are fearful."
Saturday, March 03, 2007
Chairman's Letter 2006 1
"Size seems to make many organizations slow-thinking, resistant to change and smug. In Churchill’s words: “We shape our buildings, and afterwards our buildings shape us.” Here’s a telling fact: Of the ten non-oil companies having the largest market capitalization in 1965 – titans such as General Motors, Sears, DuPont and Eastman Kodak – only one made the 2006 list." -- Warren Buffet, Chairman's Letter 2006
Thursday, March 01, 2007
Black Tuesday -- 27th February 2007
Is "Black Tuesday" is a stand alone stock market crisis?
What's the implication to the overall market?
Will people will shy away from investing in stock market? .... etc....
These questions arise after Black Tuesday which happened on 27th February 2007. It started from Shanghai and Shenzhen stock markets because of the rumour that Chinese regulator would impose a capital gain tax to cold down the soon to be bubble market.
Similar crisis happened in May 2006. While the market lost quite significant wealth in the short period, the market rebound after few months and passing through several new history high, especially in Shanghai, Shenzhen, Ho Chi Minn and Singapore.
While the incidence on Tuesday hurt many investors especially retail investors who bet on margin/loan and those deal with Day Trade and they may shy away from the market for a short period, they tend to forget and return to the market in the shortest period. My friends who gain 2 weeks ago and bet more in the hope that they will gain more but the incidence on Tuesday made their hope disappear. The overconfidence turns to sad mood after losing monies in the market. When you compare the "prediction" of those fund managers, chartists, technical analysts, media and so forth, you will puzzle that their "prediction" could change to reverse side in 2 weeks time. 2 weeks ago, they were overconfidence that the market will surpass new high but now all change direction.
Will people stop speculate/gamble on stocks? Very unlikely.... because
"What I learn from history is people never learn from history." -- Warren Buffett
What's the implication to the overall market?
Will people will shy away from investing in stock market? .... etc....
These questions arise after Black Tuesday which happened on 27th February 2007. It started from Shanghai and Shenzhen stock markets because of the rumour that Chinese regulator would impose a capital gain tax to cold down the soon to be bubble market.
Similar crisis happened in May 2006. While the market lost quite significant wealth in the short period, the market rebound after few months and passing through several new history high, especially in Shanghai, Shenzhen, Ho Chi Minn and Singapore.
While the incidence on Tuesday hurt many investors especially retail investors who bet on margin/loan and those deal with Day Trade and they may shy away from the market for a short period, they tend to forget and return to the market in the shortest period. My friends who gain 2 weeks ago and bet more in the hope that they will gain more but the incidence on Tuesday made their hope disappear. The overconfidence turns to sad mood after losing monies in the market. When you compare the "prediction" of those fund managers, chartists, technical analysts, media and so forth, you will puzzle that their "prediction" could change to reverse side in 2 weeks time. 2 weeks ago, they were overconfidence that the market will surpass new high but now all change direction.
Will people stop speculate/gamble on stocks? Very unlikely.... because
"What I learn from history is people never learn from history." -- Warren Buffett
Sunday, February 25, 2007
Q&A between Warren Buffett & University Georgia MBA students , Jan 2007
"The chains of habit are too light to feel until they are too heavy to break."
"Human behavior allows for success if you are able to detach yourself emotionally."
"This is OK because i don't need to win every game, just the ones I play."
"If you don't bring anything to the game, you shouldn't expect to win."
"Human behavior allows for success if you are able to detach yourself emotionally."
"This is OK because i don't need to win every game, just the ones I play."
"If you don't bring anything to the game, you shouldn't expect to win."
Thursday, December 21, 2006
The Warren Buffett CEO 27: Harrold Melton
“Honesty and integrity should govern all your business decisions.”
Wednesday, December 20, 2006
The Warren Buffett CEO 26: Jeff Comment
“Be a role model for your employees and your customers.” “Be passionate about your business.”
“Stick to your core strengths and your business will flourish.”
Thursday, October 19, 2006
Wednesday, October 18, 2006
The Warren Buffett CEO 24: Ralph Schey III
“The way you communicate with your employees is crucial. You should talk with them and hear their concerns rather than simply being a manager who tells them what to do. You want to inspire them so they want to accomplish something.”“Entrepreneurial spirit is powerful. Even in large companies, you should let managers have some degree of ownership so, like entrepreneurs, they can develop and grow their parts of business.”
Tuesday, October 17, 2006
The Warren Buffett CEO 23: Ralph Schey II
Ralph Schey says that he measures his success by “the people who I’ve inspired to do something that makes them successful. And when somebody recognizes what I did to mentor them, to get them to do something that they may not have done, and they come back and say, ‘I appreciate it,’ I feel very good about that.”
“What drives an entrepreneur is to be in control of his destiny, and to do something better than anyone else can do it….The entrepreneurial opportunity is more than just making money and creating user satisfaction with a superior product of superior value. Opportunity is manifested in changing people’s lives and envisioned.”
Monday, October 16, 2006
The Warren Buffett CEO 22: Ralph Schey I
“When we were a public company, of the roughly 200 working days a year, we probably spent at least 50 of them outside of the company, talking to public relations people, investor relations people, investment people, and others like that. We don’t do that anymore, so we have more time to concentrate on growing the business.” Warren Buffett when talk about Ralph Schey says, “The reasons for Ralph’s success are not complicated. Ben Graham taught me 45 years ago that in investing it is not necessary to do extraordinary things to get extraordinary results. In later life, I have been surprised to find that this statement holds true in business management as well. What a manager must do is handle the basics well and not get diverted. That’s precisely Ralph’s formula. He establishes the right goals and never forgets what he set out to do. On the personal side, Ralph is a joy to work with. He’s forthright about problems and is self-confident without being self-important.”
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