If an asset has cash flow or the likelihood of cash flow in the near term and is not purely dependent on what a future buyer might pay, then it’s an investment. If an asset’s value is totally dependent on the amount a future buyer might pay, then its purchase is speculation.
Investors need to pick their poison: Either make more money when times are good and have a really ugly year every so often, or protect on the downside and don’t be at the party so long when things are good.
My experience is that short sellers do far better analysis than long buyers because they have to. The market is biased upward over time—as the saying goes, stocks are for the long run.
Typically, we make money when we buy things. We count the profits later, but we know we have captured them when we buy the bargain.
Never stop reading. History doesn’t repeat, but it does rhyme.
Jim Grant has a wonderful expression: In science, progress is cumulative, and in finance, progress is cyclical. Fads will come and go, and people will think we are on to a new thing in finance or investing; but the reality is that it is probably not really new, and if we have seen the movie or read the book, maybe we know how it turns out.
“The speculative urge that lies within us is strong; the prospect of a free lunch can be compelling, especially when others have already seemingly partaken. It can be hard to concentrate on potential losses while others are greedily reaching for gains and your broker is on the phone offering shares in the latest “hot” initial public offering. Yet the avoidance of loss is the surest way to ensure a profitable outcome. A loss-avoidance strategy is at odds with recent conventional market wisdom. Today many people believe that the risk comes, not from owning stocks, but from not owning them.” – Seth Klarman, Margin of Safey
“All investors must come to terms with the relentless continuity of the investment process.” – Seth Klarman, Margin of Safety
“Sometimes being early is indistinguishable from being wrong.” – Seth Klarman[115]
“Value investing is at its core the marriage of a contrarian streak and a calculator.” – Seth Klarman[116]
“The strategy of buying what’s in favor is a fool’s errand, ensuring long-term underperformance. Only by standing against the prevailing winds – selectively, but resolutely – can an investor prosper over time. But for a while, a value investor typically underperforms.” – Seth Klarman[117]
“The way to maximize outcome is to focus on the process.” – Seth Klarman[118]
“It is important to remember that value investing is not a perfect science. It is an, with an ongoing need for judgment, refinement, patience, and reflection. It requires endless curiosity, the relentless pursuit of additional information, the raising of questions, and the search for answers. It necessitates dealing with imperfect information – knowing you will never know everything and that that must not prevent you from acting. It requires a precarious balance between conviction, steadfastness in the face of adversity, and doubt – keeping in mind the possibility that you could be wrong.” – Seth Klarman[119]
“It’s incredibly important to note that when you don’t allow failure, you get more failure.” – Seth Klarman[120]
Charlie Munger
“Another thing I think should be avoided is extremely intense ideology because it cabbages up one’s mind. You see it a lot with T.V. preachers (many have minds made of cabbage) but it can also happen with political ideology. When you’re young it’s easy to drift into loyalties and when you announce that you’re a loyal member and you start shouting the orthodox ideology out, what you’re doing is pounding it in, pounding it in, and you’re gradually ruining your mind. So you want to be very, very careful of this ideology. It’s a big danger.
“I have what I call an iron prescription that helps me keep sane when I naturally drift toward preferring one ideology over another and that is: I say that I’m not entitled to have an opinion on this subject unless I can state the arguments against my position better than the people who support it. I think only when I’ve reached that state am I qualified to speak. This business of not drifting into extreme ideology is a very, very important thing in life
“Of course the self-serving bias is something you want to get out of yourself. Thinking that what’s good for you is good for the wider civilization and rationalizing all these ridiculous conclusions based on this subconscious tendency to serve one’s self is a terribly inaccurate way to think.
“Of course you want to drive that out of yourself because you want to be wise, not foolish. You also have to allow for the self-serving bias of everybody else because most people are not going to remove it all that successfully, the human condition being what it is. If you don’t allow for self-serving bias in your conduct, again you’re a fool.
“Darwinpaid particular attention to disconfirming evidence. Objectivity maintenance routines are totally required in life if you’re going to be a great thinker.” — Charlie Munger, USC Law Commencement 2007
Munger on Financial Innovation:
It all started with an asinine bubble. The cause was a combination of megalomania, stupidity, insanity, and I would say evil on the part of bankers and mortgage brokers.
And it was widespread. Alan Greenspan was a smart guy, but he totally overdosed on Ayn Rand when he was young. You can’t give bankers the freedom to create gambling games.
Clever derivatives broke dozens of companies. It killed them. Bankrupt. We don’t need these kinds of innovation in finance. It’s OK to be boring in finance. What we want is innovation in widgets.
I bet Richard Fuld doesn’t have an ounce of contrition. It’s just megalomania. When it’s like that, you need rules to prevent catastrophe. When banks are borrowing the government’s credit rating, you need rules to prevent stupid things.
I don’t want to sell credit to people who are going to hurt themselves with it. You should only sell products that are good for the people who use them. Some disagree with this, but I know I’m right. That is to say, you’re talking to a Republican who admires Elizabeth Warren.
Fancy computers are engaging in legalized front-running. The profits are clearly coming from the rest of us — our college endowments and our pensions. Why is this legal? What the hell is the government thinking? It’s like letting rats into a restaurant.
None of us should fall for the idea that this was constructive capitalism. In the 1920s they called it bucket shops – just the name tells you it’s bad – and they eventually made it illegal, and rightly so. They should do the same this time.
30 of Charlie Munger’s best quotes[121]
Spend each day trying to be a little wiser than you were when you woke up.
In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero.
Choose clients as you would friends.
The best armor of old age is a well-spent life preceding it.
When you borrow a man’s car, always return it with a tank of gas.
If only I had the influence with my wife and children that I have in some other quarters!
Take a simple idea and take it seriously.
In business we often find that the winning system goes almost ridiculously far in maximizing and or minimizing one or a few variables — like the discount warehouses of Costco.
Don’t do cocaine. Don’t race trains. And avoid AIDS situations.
We look for a horse with one chance in two of winning and which pays you three to one.
You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.
It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.
A great business at a fair price is superior to a fair business at a great price.
All intelligent
