Letter
“We prefer knowing to thinking, because knowing has more immediate value.” – Neal Gabler
“My father, Benjamin Shiller, told me not to believe in authorities or celebrities — that society tends to imagine them as superhuman. It’s good advice. People are snowed by celebrities all the time. In academia people have this idea of achieving stardom — publishing in the best journals, being at the best university, writing on the hot topic everyone else is writing about. But that’s what my father told me not to do. He taught me that you have to pursue things that sound right to you. In 2004, when I wrote the second edition of my book Irrational Exuberance, I said in the preface I was worried that the boom in home prices might collapse, bring on bankruptcy in both households and businesses, and lead to a world recession. I remember thinking that this sounds kind of flaky — nobody else is saying this, I can’t prove it, this could be embarrassing. But I had learned from my father not to care what other people think. This was my book, and I believed this, so I just said it.” – Robert Shiller
“A person who has not made peace with his losses is likely to accept gambles that would be unacceptable to him otherwise.” – Daniel Kahneman
A central theme [behavioral psychology] is “that people who face a difficult question often answer an easier one instead, without realizing it.” – Daniel Kahneman
“We were required to predict a soldier’s performance in officer training and in combat, but we did so by evaluating his behavior over one hour in an artificial situation. This was a perfect instance of a general rule that I call WYSIATI, “What you see is all there is.” We had made up a story from the little we knew but had no way to allow for what we did not know about the individual’s future, which was almost everything that would actually matter. When you know as little as we did, you should not make extreme predictions like “He will be a star.” – Daniel Kahneman
“The illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the [investment management] industry.” – Daniel Kahneman
“The exaggerated expectation of consistency is a common error. We are prone to think that the world is more regular and predictable than it really is, because our memory automatically and continuously maintains a story about what is going on, and because the rules of memory tend to make that story as coherent as possible and to suppress alternatives. Fast thinking is not prone to doubt. The confidence we experience as we make a judgment is not a reasoned evaluation of the probability that it is right. Confidence is a feeling, one determined mostly by the coherence of the story and by the ease with which it comes to mind, even when the evidence for the story is sparse and unreliable. The bias toward coherence favors overconfidence. An individual who expresses high confidence probably has a good story, which may or may not be true.” – Daniel Kahneman
“To know whether you can trust a particular intuitive judgment, there are two questions you should ask: Is the environment in which the judgment is made sufficiently regular to enable predictions from the available evidence? The answer is yes for diagnosticians, no for stock pickers. Do the professionals have an adequate opportunity to learn the cues and the regularities? The answer here depends on the professionals’ experience and on the quality and speed with which they discover their mistakes.” – Daniel Kahneman
“The more successful a company becomes, the more difficult it is to continue the record: Competition, governmental controls, and increasing market saturation all play a role in slowing growth. Too, a management team skilled a t running a rapidly growing $50 or $100 million corporation may be lost at the $300 to $500 million sales level. Product and markets seemingly invulnerable to competition are suddenly inundated by it. Untouchable patents are circumvented by new discoveries. Costs cannot be controlled and prices cannot be raised, so profit margins are squeezed. Markets that appeared open for years of brisk growth become saturated. Political or economic events occur, such as an oil embargo or a sharp recession, totally beyond the control of even the most astute management, wreaking havoc in the marketplace. History constantly reminds us that in an uncertain world there is no visibility of prospects. Future earnings cannot be predicted with accuracy.” – David Dreman, Contrarian Investment Strategies: The Next Generation
“The [availability, recency, anchoring, and hindsight] heuristic biases, which are all interactive, seem to flourish particularly well in the stock market and to result in a high rate of investor error. We are too apt to look at insufficient information in order to confirm a course of action, we are too inclined to put great emphasis on recent or emotionally compelling events, and we expect our decisions to be met with quick market confirmation. The more we discuss a course of action and identify with it, the less we believe prior standards are valid. So each trend and fashion looks unique, is identified as such, and inevitably takes it toll. Knowledge that no fashion prevails for long is dismissed.” – David Dreman, Contrarian Investment Strategies: The Next Generation
“Experience teaches us that when “everyone” comes to the same conclusion, that conclusion is just about always wrong.” – David Dreman, Contrarian Investment Strategies: The Next Generation
“A good starting point [in the measurement of investment risk] is the preservation and enhancement of your purchasing power in real terms.” – David Dreman, Contrarian Investment Strategies: The Next Generation
“A realistic definition of risk recognizes the potential loss of capital through inflation and taxes, and would include at least the following two factors:
- The probability that the investment you chose will preserve your capital over the time you intend to invest your funds.
- The probability the investments you select will outperform alternative investments for this period.”
– David Dreman, Contrarian Investment Strategies: The Next Generation
“The qualitative factors upon which most stress is laid are the nature of the business and the character of the management. These elements are exceedingly important, but they are also exceedingly difficult to deal with intelligently.” – Graham and Dodd
“Investing should be dull, like watching paint dry or grass grow.” – Paul Samuelson
“As value investors, our business is to buy bargains that financial market theory says do not exist. We’ve delivered great returns to our clients for a quarter century—a dollar invested at inception in our largest fund is now worth over 94 dollars, a 20% net compound return. We have achieved this not by incurring high risk as financial theory would suggest, but by deliberately avoiding or hedging the risks that we identified.” – Seth Klarman
“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” – Seth Klarman
“Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred. Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.” – Seth Klarman
“Credit is money of the mind.” – Jim Grant
“Value investing is literally a treasure hunt for value. Regardless of the economic, investment and political environment, we must be unshaken in our conviction. We must abide by our fundamental value disciplines to sniff out undiscovered opportunities. We must possess deep patience and have considerable stamina to withstand share price volatility and client criticism. We must be prepared to be temporarily wrong in the short-run and to withstand the “heat”. We must stick to our value philosophy and remain committed no matter how tough the investment climate may become. From our clients’ point of view, we want them to fully understand our value philosophy, investment style and deep commitment. We ask them to be patient in both good and difficult times. In return we will endeavour to give 100% of our abilities toward our common goal of investment excellence.” – Irwin A. Michael
“The model I like to sort of simplify the notion of what goes on in a market for common stocks is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-mutuel system is a market. Everybody goes there and bets and the odds change based on what’s bet. That’s what happens in the stock market.
—Charlie Munger, “Art of Stock Picking”
“With a profession such as investing, people see the ‘doing’ as the buying and selling. It is difficult to come home from work, and answer your spouse’s question, ‘what did you do today?’ with ‘well, I read a lot, and I talked a little.’ If you’re not buying or selling, you may feel you aren’t doing anything.” – David Abrams
Lou Simpson manages his portfolio according to five basic principles. He outlined these timeless principles in GEICO’s 1986 annual report:
- Think independently.
- Invest in high-return
