Jason Zweig: “The Devil’s Financial Dictionary and The Intelligent Investor” | Talks @Google

Jason Zweig: “The Devil’s Financial Dictionary and The Intelligent Investor” | Talks @Google

0:01hello and welcome everyone our speaker for today is Jason’s white Jason writes
0:08a weekly column the intelligent investor for the wall street journal it’s a very
0:13very popular column is also going to be speaking about this book The Devil’s
0:20financial dictionary so I’m not gonna give a more on the subject of that book
0:25but it’s very interesting about you know if you look at the array of subjects
0:30that Jason has written about for the last thirty years he’s written a little
0:37book of safe money and investing guide is also assisted the Nobel prize-winning
0:42psychologist Daniel Kahneman in writing his book Thinking Fast and Slow Daniel
0:49Kahneman for those of you that know give a fantastic talk at Google some time ago
0:52and Jason frequently speaks to see FAA’s investors students journalists so in
1:02talking to him before the talk I was asking him he you know when did you get
1:06your CFA and said I don’t have said you know you have a CFP now at least tell me
1:14you have an MBA said no and I found a pretty interesting and I guess you know
1:22he might talk more about you know why or why not
1:25that is a good or bad thing jason is guided light largely by a saying of his
1:31father’s it’s remarkable how much you have to learn in order to realize how
1:36little you need to know it also brings to mind what einstein said which is when
1:43he mentioned education is what remains after one has forgotten what one learned
1:49in school so without further ado ladies and gentlemen please join me in
1:54welcoming Jason strike
1:57and it’s my pleasure to be here like everyone writes and research is for a
2:08living
2:10has been an enormous help to me or the year turnabout is fair play all try to
2:15give you some useful ideas today and of course for the folks who might be tuning
2:20in later on you to welcome to all of you and thanks to everybody for coming today
2:26so I’m going to talk about my new book The Devil’s financial dictionary but
2:32also talk a little bit at the end of my role in that inning Benjamin Graham book
2:38the intelligent investor and as many of you know gramm was probably the greatest
2:44investment advisor of the 20th century the founder of the modern discipline
2:51security now is Warren Buffett’s keep her and it was certainly one of the
2:57great honors I’ve had in my career
2:59involved in editing his book intelligent investor’s so this is the devil’s
3:07financial dictionary and it was inspired very directly by the devil’s dictionary
3:15by Ambrose beers and thank you Google Books if we have anybody from Google
3:21Books in this this is the title page
3:25the book first appeared in its final form over a century ago and many people
3:35would regard it as one of the funniest books ever written in the
3:39English language I’m among them and this is yours was born in 1842 you believed
3:48to have died in 1914 although no one really knows for sure is believed to
3:55have died when we re of human folly he walked across the border into the
4:03Mexican Revolution hoping that he would be shot and no one really knows what
4:09happened to her after that but he did not suffer fools gladly and here are a
4:16few examples of definitions from the original devil’s dictionary this is
4:20probably his best-known definition those of you who are married perhaps you
4:26sympathize with this love now temporary insanity curable by marriage another
4:33favorite of mine once you are in love you should remember this callous
4:38attitude to unduly concerned about the preservation of with of that which can
4:43be lost only if it is not worth keeping
4:47here’s one of his few financial definitions it’s quite good
4:51finance now the art or science of managing revenues and resources for the
4:57best advantage of the manager
4:59and I’ve including this one it gives you a sense of how dark beers’s view of the
5:08world was I don’t really endorse his pessimism you can buy your own
5:13conclusions about his personality but I put it up because those of you who by
5:20the Devils financial dictionary will encounter some definitions that I’ve
5:27written that also feature these little icon on flights of fancy in which an
5:34imaginary character explains helps us understand the definition and in this
5:41case yours is giving us two lines of poetry from a non-existent medieval
5:51English poet named Ibori the bald but in any case so why did I want to write this
5:59book will be familiar with the 19th century British SAS and historian Thomas
6:09Carlyle who is today perhaps best known for saying that economics is the dismal
6:18science which is a little quip that he made in an article he wrote actually in
6:251840 and what I would argue after almost thirty years of writing about investing
6:33is that if economics is the dismal science and investment is the abysmal
6:40art it is rendered boring and overly complicated a few words I heard over the
6:51years about various investing books are some of these I’m sure anyone in this
6:57room who was read a book on investing my
7:00adjectives of your own you would tend to apply but it’s never really been clear
7:06to me why there’s no sense of fun involved when we talk about investing
7:14and also why so few people point out the ridiculousness of certainty that often
7:24use involved when people manage other people’s money so that’s some of the
7:30spirit I wanted to get out in the book and the other thing is it occurred to me
7:36as I was thinking about recapturing some of this area
7:44Ambrose Bierce that maybe if you can make people laugh
7:50help them learn and I think one of the real pitfalls of traditional financial
7:56advice is its OS ombre deadly serious and sort of self referential and
8:05Selfridges and one of the things I’ve learned over the years is that yes it’s
8:12true in a very long run
8:16markets and the returns on investments they’re driven by economics fundamental
8:22forces of supply and demand but in the short-term medium-term even the fairly
8:30long term for many years on in 325 sometimes ten years
8:35markets are driven by Psychology often crowd psychology sometimes abnormal
8:41psychology and another wonderful thing that Sakura chol dictionary format
8:51enables a writer to do is to look at a time I G the derivation of words is
9:00often one of the things we pick up when we learn where words come from is the
9:07hidden meanings that work within the heart of terminology we use every day
9:14without really being aware of it
9:18one simple classic example is and I’ll ask does anybody in the room you know
9:26what do the words happy happen and perhaps all have in common did anyone
9:35know what the root word happen means in early English remember the next time
9:48you’re happy I hope will be in a couple minutes from now remember that you’re
9:53you’re happy because you’re lucky and some extent to be lucky he is to be
9:59happy so I wanted to have some fun with ideas like that but it’s also I wanted
10:07to bring in financial history because one of the critical things investors
10:13need to do is learn from mistakes now we can learn from our own mistakes but a
10:21lot cheaper and learn from other people’s mistakes right and i really
10:28simple useful definition of history is a record of other people’s mistakes and
10:36and also their regrets so we can learn from that and then the final thing that
10:43I think satire is useful for use to fight confirmation bias to prevent us
10:50from digging ourselves into ever deeper hole in our own decisions and just
10:58constantly drilling down to prove that we’re not ready done is right and
11:04to sink in this sinkhole our own sunk costs until we can get out and if you
11:11can bring a little sense of play and make a little bit of fun of people’s
11:18ideas maybe you can join them out of that complacency that at least was my
11:23hope so I’m just putting up one illustration from the book just to give
11:30you a sense of the VO
11:31the publisher and I wanted to get across may recognize this is a 16th century
11:37Dutch engraving taken from a painting by the great Dutch Master Pieter Bruegel
11:44the elder and this was engraved around 1558 and the the queenly characters
11:51sitting in the middle is buried here or green and you can see all of these
11:57people and creatures are worshiping her serving her in one form or another
12:04telling her chest with gold lab is full of goal
12:08there’s a frog in the foreground might be towed frogs and toads were symbols of
12:15greed in medieval Europe and there are all kinds of other things going on and
12:19at the risk of bothering people who are eating their lunch point out that on the
12:25far right of the store is eating from the bottom of that
12:33that figure immediately to the left and so I wanted to give you a few of the
12:41definitions in the book
12:43give you a feel for what I’m trying to do and those of you who are in the
12:52market for financial advice should probably keep these first two in in mind
12:56so big producer now on a stockbroker or insurance agent who produces big
13:03commissions the term is erroneous however the broker or agent doesn’t
13:09produce the Commission’s it is his clients who produced them he just
13:14collect some more than an actual adviser often someone who cares deeply about
13:23being prudent diligent competent and honest in which case his or her services
13:29will be priceless sometimes someone who cares about being a big producer in
13:36which case you were in big trouble
13:40this is one of my favorite definitions very short potential conflict of
13:47interest now an actual conflict of interest
13:53every respect as you read every document your financial advisor my hand you will
14:01mention this term potential conflict of interest and you should remember that
14:07the real meaning is actual conflict of interest or casting now attempt to
14:20predict the unknowable by measuring the irrelevant a task that in one way or
14:27another
14:28employees most people on wall street because the human mind he’s admitting
14:34the truth that the world is largely random and unpredictable forecasters
14:39will always be in demand regardless of their futility Wall Street follows what
14:44marketing professor Jay Scott Armstrong has called the seersucker theory for
14:49everything here there is a soccer in the real world as with weather forecasts or
14:56predictions about who will win a sporting event those making the
14:59projections typically estimate the likelihood that they are correct
15:04Wall Street forecasts on the other hand almost never have probabilities attached
15:09as decision scientists brutish offer only 1994 when both forecaster and
15:16client exaggerate the quality of forecasts the client will often win the
15:22race to the poor house long term is another favorite of mine and I think
15:29it’s one that’s very useful for people to bear in mind long-term adjectives
15:35on wall street a phrase used to describe a period that begins approximately 30
15:40seconds from now and ends at most a few weeks from now
15:46your I’ve put up one of my favorite images this is clay model of the liver
15:58of a sheep from ancient Babylonia it was made sometime between 1900 and 1600 BC
16:08so it’s well over 3,500 years old almost 4,000 years old and here’s the
16:15definition baru now in ancient Mesopotamia a priest who specialized in
16:22predicting the future by studying the contours of a liver or long taken from
16:27the sacrificed sheep baru worked from an intricate template often rendered as it
16:34claimed at that charted dozens of variations on the surface in the sheep
16:39soared as in this example from the British Museum we may safely presume
16:44that when the borrowers predictions didn’t come true he blamed it on the
16:49Jeep the modern version of a Mesopotamian baru is known as a
16:54Technical Analyst
16:56this is another illustration that I love this is from a 15th century British
17:07manuscript and it might look a little mysterious to you but I think you’re you
17:12understand when I read the definition promises now on a mythical creature
17:19described by the ancient Romans and often included in mediaeval last year
17:23the bonuses closely resemble the ball but with its horns curled back toward
17:29its tail because the horns are only four sho as the Roman naturalist when he
17:35wrote the bonuses has no way to deter predators and will run away was
17:40threatened when it becomes panic-stricken the bonuses spews immense
17:45quantities of flaming hot manure in its wake as the next stock market crash will
17:51show the typical investor who believes himself to be a bowl will turn out to be
17:57a bonuses do not stand too close behind him
18:01irrational adjective aware if you use to describe any investor other than
18:12yourself so here I have a little set of some of the behavioral finance
18:20definitions in the book they form a little bit of a theme as you might
18:24imagine overconfidence I believe I’m justified by the evidence that one knows
18:31more or is better than others
18:33the predominant personality trait most investors and nearly every amateur
18:39trader to be overconfident used to be ignorant of your own ignorance in the
18:45financial markets overcoming overconfidence is essential and
18:50extremely expensive but a person who believes that an asset will go up in
19:00price
19:01believe often based exclusively on the fact that the person happens to own it 0
19:07Boolean false bomb is almost incapable of absorbing any evidence suggesting
19:13that the asset might go down market now a period of rising prices that many
19:23investors to believe that their IQ has risen at least as much as the market
19:29value as their portfolios after the inevitable falling prices they will
19:34learn that both increases were temporary
19:38and this one is very important and we all come to the will circle back to this
19:45when I talk about Benjamin Graham toward the end
19:48career risk yeah the risk that by thinking independently a money manager
19:54might lose clients in danger of big salary and harm his or her career for
20:00money managers the only risk that matters when professional investors are
20:05right no one will ask why their clients will be too busy counting their profits
20:10to seek an explanation but when money managers are wrong
20:15their clients will immediately want to know why they made the mistake
20:19portfolio managers can either be wrong in a crowd in which case no one will
20:24blame them for making the same mistake everybody else made or wrong and alone
20:30in which case they will look like idiots action now one second
20:46like everything in life this is a little harder than it looks
20:51option now on the right to buy or sell a financial asset at a fixed price on or
20:57before specific time from the Latin up to you I choose a boon for stock brokers
21:04whose clients don’t understand how options work and generator fortune in
21:08commission as they attempt to learn and here I have a little flight of fancy
21:14explained he was asking me a client of the brokerage firm born rich and how I
21:22put two children through Harvard by training options unfortunately they were
21:27my brokers jokin perhaps the earliest recorded options trade according to
21:33aristotle was made by families of Milan as circa 6 24 25 47 BC one of the seven
21:41sages of Greece who put down deposits on all near my olive oil presses one winter
21:47when his knowledge of astronomy purportedly told him that the next year
21:52would bring a good olive grove bailey’s paid almost nothing and profited hugely
21:57when the abundant harvest created high demand for prices thus making him one of
22:03the first individual investors to make more money training options and his
22:07brokers did he was also one of the last
22:12now obviously I have to remind the viewers this refers to exchange traded
22:20options rather than incentive options broker the comparative form of broke
22:29also used as a noun a person who buys and sells stocks bonds mutual funds and
22:35other assets for people who are under the delusion that the broker is doing
22:39something other than guesswork one early definition of a broker sometimes
22:45attributed to the British lexicographer Samuel Johnson is a negotiator between
22:50two parties who contrived both and here I’d like to show you this wonderful
22:59although maybe not so a small engraving from 1720 which illustrates the South
23:08Sea Bubble and various other speculations that swept through Europe
23:14at that time and these are two brokers who are distributing securities and you
23:25can see that hostility to the financial industry is not exactly a contemporary
23:32phenomenon is almost 400 years ago now and fear that sweeps across a crowded
23:49market or a planet frightening multitude of people into selling and leaving the
23:54rest wondering whether they should like swarms of cicadas long ago there were
24:00panics roughly every seventeen years in 1819 1837 1857 1873 1893 and 1907 the
24:11word derives from the god man who hunted the pastors and wild places of ancient
24:17Greece in the form of a greening but ugly man with the horns years and hairy
24:22legs legs of a goat
24:24man was the god of herds and flocks serenading them with his pipes fittingly
24:30pan was the son of Hermes the God of shepherds messengers diplomacy travel
24:35trade every suggesting that the relationship between panic and trade is
24:41as old as commerce itself and this illustration comes from September 1873
24:48immediately after the panic of 1873 that swept through wall street and the
24:54caption is panic as a Health Officer we bring the garbage out of Wall Street New
25:02York only a few years earlier had been subject to several cholera epidemics
25:08were believed to have been caused very likely correctly by the abundance of
25:18garbage in the streets including horse manure and other things and sanitation
25:25workers were organized and hired by the city and they would these crews would go
25:32through but here with the artist has done very cleverly is he’s transformed
25:36one of them into the Greek god Pan to symbolize the financial panic that had
25:42just run a risk the chance that you don’t know what you were doing when you
25:53think you do the prerequisite for losing more money in a shorter period of time
25:59than you could ever have imagined possible risk and formally defined as
26:05the odds of an adverse or undesirable outcome when the forecast is for any
26:10eighty percent chance of sunshine for example than the risk of rain is 20% or
26:15as the extent to which extreme outcomes differ from the average it has been
26:20philosophically defined by finance professor ellroy simpson of london
26:25Business School this way
26:27risk means more things can happen then we’ll have
26:30in the end risk is the gap between what investors think they know and what they
26:37are not learning about their investments about the financial markets and about
26:42themselves
26:46now the right to own a fraction of a business regarded by most investors as
26:54the right to play a video game gives you a taste I think of some of the
27:03definitions I have in the book and how I hope and using a little bit of a forked
27:10tongue might help shock people out of accepting things at face value when
27:17they’re dealing with the financial markets and here just getting back to
27:20the idea of this confirmation her couple of quotes from Warren Buffett and his
27:25business partner Charlie Munger down Charles Darwin and I think the need to
27:34know I learned in working on this book is how hard it is to mark and to poke
27:45fun at it barely if you don’t know what you’re talking about
27:52in order to hit the target and to find the humor or the absurdity that’s
27:59lurking at the heart of video marketing pitch or any other investors might be
28:09confronted with
28:11understand it pretty well because if if you poke fun at it without fully
28:17understanding it it just comes across as mean and
28:22so far three months this book has been out I haven’t had anybody on wall street
28:30complained to me that I was on fact a lot of investment bankers and fund
28:36managers have said to me oh you you you were way too so I think there is a
28:43there’s an important lesson in this which is it can be quite useful for you
28:52as individuals and maybe as members of an organization before you commit to an
29:00idea an investment project or a significant new initiative might be
29:11worth it if you can
29:15ridiculous first what’s funny about what makes no sense and I think that can be
29:22useful mental exercise I would obviously I would run that past my supervisor
29:29before I tried it if I were you but I think there’s a lot that can come from
29:36trying to find the absurdity humor that’s lurking inside an idea it’s
29:42believed me is much better to do it in advance before hand then to find out
29:49after the fact that what we just spent all our time and money on was ridiculous
29:55so let me talk for a few minutes about the investor in 2003 I had the great
30:03honor of anything the book and I learned a great deal from doing that
30:09Benjamin Graham was born in 1894 he died in 1976 was one of the most successful
30:17investors in the twentieth century and interestingly he’s been a great deal of
30:25time in the first edition of the book on this question you know what makes
30:31Intelligent Investor and he was he took great pains to emphasize that it’s not
30:38find televisions we might normally associate with intelligent measures it
30:48has nothing to do with IQ or as he scores or GRE ease or any others
30:55standardized tests and also doesn’t have anything to do with credentials and he
31:02was very specific what you meant as he put it it’s a function more of character
31:09and intelligence as most people define and he also in throughout his writings
31:17enables us to see what he meant character what what makes that kind of
31:24intelligence and these are critical virtues for anybody who wants to succeed
31:32as an investor regardless of what you messing approach you take so you have to
31:38be patient you have to be prudent it’s very important to be independent and
31:44skeptical that’s at the heart of everything you have to be curious and
31:49eager to learn that one at least has stood me in good stead you have to be
31:55disciplined and that really mean self-control so right and roots he
32:02distinction between investment and speculation this paragraph I think every
32:09investor should memorize and investment operation is one which upon thorough
32:14analysis promises safety of principal on an adequate return operations not
32:20meeting these requirements are speculative and then he defines each of
32:25these terms are on dialysis the study of the facts in the light of established
32:31standards of safety and value you have to work at it
32:35safety of principal protection against loss under all normal or reasonably
32:40likely conditions or variation
32:42and here I want to emphasize he he’s not thinking that the asset you’re analyzing
32:49can’t lose money what he’s saying is you should be very confident based on
32:57evidence that the business risk is minimal but you’re not buying into a
33:03company or or or a market for an asset class that will simply go away you’re
33:10not going to lose 90 percent of your money or more because you didn’t foresee
33:16an obvious flaw in business model or an evaluation and a really simple example
33:24from the headlines of the past few months with me now in pharmaceuticals
33:29which really built its business on the idea of acquiring one drug company after
33:35another and then drastically raising prices immediately after the acquisition
33:40which any number of people said probably isn’t sustainable business model and at
33:48least he’s done what we’ve seen in recent weeks that seems to have been
33:51borne out and this is the most fascinating heard of gramm’s definition
33:58of all I think what did he mean by adequate he sometimes use the terms
34:04satisfactory return any rate or amount of return however low which the investor
34:10is willing to accept provided he acts with reasonable intelligence and what
34:15he’s really saying is when you when you are investing you should ask yourself
34:21what do you mean minimal rate of return I’m willing to accept to enter into this
34:27investment and that’s a very helpful way of steering people away from having
34:32unrealistic expectations which is so often the problem so Graham do another
34:41really helpful distinction that i think is often overlooked he talked about two
34:46kinds of investors defensive and enterprise
34:50and the conventional definition of I think we’ve all heard it many of you
34:58have probably taken questionnaires the financial advisors give you asking you
35:04how much risk you want take or you can take and often it breaks down into these
35:10three categories then I regard as and it’s silly actually conservative
35:16moderate and an aggressive the notion that there you know hundred-million
35:21investors in the united states and only three types seems a little silly and
35:28there’s a much more basic problem which is that it’s extraordinarily difficult
35:33to measure individual risk tolerance before the risk groups many of you may
35:44have taken a risk tolerance questionnaire that asks you if the stock
35:49market went down 20% would you do you put which you buy more would you sell I
35:58see people nodding no problem is until it goes down 20% everyone says oh yeah
36:04by more than 20% and people sit on their hands or goes down 50% and they sell or
36:12goes down he percent and they don’t buy another stock for twenty years even
36:18though this risk tolerance questionnaire said they had plenty of tolerance so
36:24instead draws a completely different distinction and it has nothing to do
36:30with appetite for risk or capacity Chris and it is how hard you’re willing to
36:37work how interested are you presumably everyone in this room
36:42and most of the people watching online are interested enough in investing too
36:46and a few minutes walk so you are probably enterprising or at least
36:54talking in that direction and program says if you were defensive what you’re
37:02trying to do is avoid big mistakes and very important work very hard at it you
37:09don’t want to spend your Saturday afternoon reading 10 K’s or downloading
37:15financial documents from the SEC website and that’s fine if you are enterprising
37:22then you’re probably willing to commit a lot of effort into investing as in the
37:27enterprise that’s why he chose that word because he is interred projects in
37:31operation Grange operation work and for people who enjoy it it’s it’s a lot of
37:40fun it’s enormously challenging the critical observations here is it doesn’t
37:46matter whether your defensive or enterprising what matters is that you
37:52know which one you are if you are defensive think you’re enterprising
38:00going to be very sorry if you’re enterprising and you think your
38:07defensive you’ll be disappointed because you won’t have done as well as you could
38:12all markets and you probably will be disappointed in bear markets as well so
38:20you know for people who are defensive simple portfolio of index funds that you
38:27never touch and never trade is market totally defensible decision if you’re
38:35enterprising that was not going to be very satisfying and the virtue of all of
38:40this is unlike the conventional way of separating investors very easy
38:47measure everyone intuitively knows how interested in mind investing is a
38:52process
38:53another very powerful idea for gramm is the margin of safety and I’ll summarize
38:59it in a very simple way which is just this that most people most individual
39:06investors ask themselves how much money will I make when I’m right and this is
39:12particularly among men
39:15this is a very standard question now I’m grams terms Intelligent Investor instead
39:23will ask for in addition will also ask how much money will I lose that forces
39:30you to focus on your margin of safety then just a couple of quick distinctions
39:38here so all of us in this room are individual investors most people
39:43watching online or also and we’ve been told for our entire lives that we can’t
39:49compete with big institutions like mutual funds and hedge funds and pension
39:54plans insurance companies banks on the other professional investors with
39:59millions of dollars worth of research and resources high-frequency trading
40:05platform available and there is a counter etiology that you often hear
40:11which is an individual investors can beat the pros at their own game you just
40:17faster and smarter and you heard this a lot in the nineteen nineties propping up
40:27the line again lately but I would ask it terribly different question which is why
40:34would you wanna play that game the problems can’t even win that game
40:42every year typically seventy eighty percent overall professional investors
40:47underperformed the market so why would I want to play the game that they don’t
40:51even know how to win wouldn’t it make more sense for me to play my game and
40:58one of the reasons it’s so hard for professional investors to win because of
41:05the way victory is defined so they must they have to measure success by how they
41:12do relative to the market benchmark S&P 500 and short-term how are they doing
41:21year-to-date over the past 12 months six months three months 1 month week often
41:28many younger measure the results
41:30daley and that leads to an obsession with the short term and complete myopia
41:37or long-term
41:40how an individual investors how can you how should you measure success it’s
41:48pretty obvious to me instead of measuring your success relative to the
41:53S&P 500 who cares right and instead of measuring it short-term measure it
42:00against what you’re trying to achieve which probably isn’t beating the S&P 500
42:06and certainly isn’t being it over the past 60 days or sixty minutes
42:13many of you have probably read the wonderful richard fineman book what do
42:19you care what other people think I love the title of book such a helpful
42:24reminder why would I care whether I’m market that doesn’t make me richer or
42:31poorer if I want to match the market I can do it for almost free with an index
42:37fund maybe I have other goals but certainly measuring my success by what
42:46other people are doing is not something
42:48I’m interested in and I don’t think anybody should be and one of the
42:52critical advantages for individual is how long your time horizon can and
42:59should be many of you are young you’re in your twenties or thirties those
43:06decades are well behind me but I measure my time are rising in century I often
43:17say I’m I’m investing for the next hundred years because I have children
43:22causes I care about and I’m not going to be able to build a long-term legacy with
43:31my family’s well if I focus on what’s happening today is Howard so you are too
43:40wonderful things that Graham said this is from the intelligent investor and
43:45it’s so important I will read out loud but note this important that the true
43:52investors scarcely ever is forced to sell his shares and all other times he’s
43:59free to disregard the current price quotation need pay attention to it and
44:04act upon it only to the extent that it suits his book and no more by suits and
44:09book grain is using the old fashioned wall street term for your interim
44:15profits and losses and I highlighted the same Red Cross investor who commits
44:22himself to be stampeded or unduly worried by unjustified market declines
44:28in his holdings is perversely transforming his basic advantage into a
44:34basic disadvantage that man and of course grammer’s writing in the
44:38seventies we could say that investor would be better off if his or her stocks
44:44had no market quotation at all for the investor would then be spared the mental
44:50anguish caused him by other persons mistakes of judgment and Graham off and
44:56use the term vocational
44:58to describe what happens when there is any interim decline in the market so
45:04think about what he is saying and what he’s saying is that as an individual
45:08rather an institution you have this massive added of not needing to care
45:17about what the market is doing in the short term if you do care you have taken
45:25your biggest advantage over institutions and turned it into a crippling
45:31disadvantage because what you’ve done is you’ve shifted yourself from playing
45:37your own game and you’re only playing field or pitch complain their game which
45:44they can’t win and you surely can’t win because you don’t have the resources
45:49they do not that it would help them win either so that Graham said later in 1974
46:00we have heard many complaints institutional dominance of the stock
46:04market has put the small investor at a disadvantage because he can’t compete
46:08the facts are quite the opposite I am convinced that an individual investor
46:14with sound principles and soundly advised can do
46:19distinctly better over the long pole and a large institution where their trust
46:26company which of course today we would think governors mutual fund company or
46:30maybe a broker or investment bank may have to combine its operations to 300
46:37concerns or less
46:38biggest companies in the country or the world individual has up to 3,000 issues
46:45for his investigations and choice most true bargains are not available in large
46:50box by this very fact institutions are well nigh eliminated as competitors in
46:58the bargain
46:58other than what he’s really saying is not only can individuals institutions
47:06but there’s some reason to believe if your head is in the right place you
47:12could do even better take away from all of this the first is just to emphasize
47:21the point Graham was just making which is you need to position yourself if you
47:26are an enterprising investor you need to ask where can I go weird the big
47:33institutions and one obvious choice would be stocks that are smaller than
47:38average another would be just for lack of a complex term thinker stocks
47:44companies that have done terribly lately that professional investors are throwing
47:51out of their portfolios they’re throwing them overboard as fast as they can
47:55creating value for the future
47:59docstater hard to understand as engineers were quantitatively inclined
48:05people be able to fight your way through perspectives better than a lot of
48:10professional investors another way to be intelligent is to be patient
48:16extend their time horizon years and decades as I mentioned be independent
48:24and there’s a wonderful passage from Grandview and neither right nor wrong
48:28because the crowd disagrees with you you were right because your data and your
48:34reasoning
48:35right one of Warren Buffett’s favorite passages for good reason and then there
48:41is a wonderful thing from Ralph Waldo Emerson and philosopher that I love is
48:48easy in the world after the world opinion it is easy and solitude to live
48:56after our own but the great man a great investor is the one who in the midst of
49:02the crowd keeps with perfect sweetness and dependence of solitude and I
49:10wouldn’t recommend this in the workplace were at home as a way to get along with
49:16your family but as an investing philosophy it’s absolutely brilliant and
49:22if you look at the careers of the world’s greatest investors people like
49:26gramm or Warren Buffett or Charlie Munger you very much see this kind of
49:32mentality at work people who separate themselves from the prevailing tides of
49:39emotion in the marketplace when other people are euphoric they find that
49:45troubling when other people are miserable they find that exciting and
49:51the only way you can do that is with this kind of emotional you can thank you
50:03question just raise your hands and I’ll thank you very great entertaining
50:19presentation but you know one issue we we have fighting even other people here
50:25within the picking stocks is that we don’t really believe that we can
50:30actually pick stocks that not gonna go out of business
50:33likes it very great I cursing so where is this talk that I know for sure if it
50:38goes down I’m gonna buy more IBM is not doing that anymore there’s no boo chips
50:44are not go to small stocks like we we don’t be arrogant to believe that we can
50:50investigate their annual reports their management they could be lying in their
50:56reported 22 thats why I guess maybe we should just declare ourselves defensive
51:01investors and go within because you know index not gonna go to see right now we
51:07have you can say maybe if you know where which were the stocks that may be the
51:13logic of that we know that Beijing grafton
51:17used to invest his core portfolio was it like the standard or whatever said that
51:24time and kind of what do you think would be equivalent is time well thank you for
51:31that and and I think you you largely answered your own question I think the
51:39critical factor for everyone is to be well calibrated you need to know about
51:46yourself how defensive or how enterprising and my prepared to be and
51:53how qualified do I feel to become enterprising if you’re not comfortable
51:59with it
52:00work you’ve done a reasonable analysis and and you can’t get comfortable that
52:07you could ever assessed the probabilities then you should stay
52:10defensive now being defensive in Gresham stern’s doesn’t
52:15your portfolio should all be cashed it just means you’re not going to analyze
52:20individual securities you could put all your money in stocks if you want to do
52:24and putting it in index funds are perfectly defensible toys and end the
52:29classic offensive choice I am I i would add one thing I think which is both
52:37Warren Buffett and Charlie Munger his partner have often talked about the
52:42importance of combining patients Charlie Munger leads to call gumption you know
52:51extreme determination at the right moment and if you have this sort of
52:58temperament share in the fourth quarter of 2008 for the first quarter of 2009
53:06you can say I don’t think the world is coming to an end I think financial
53:13assets are cheap I’m going to add more so one way you can be enterprising is
53:20you can be enterprising with a defensive portfolio you could say the next time
53:25there’s a financial crisis or a crash and there will be one probably sooner
53:30rather than later
53:32although I have no idea when but then next time there’s a market panic you
53:37could say I’m going to add a substantial amount of money to my portfolio now you
53:44don’t have to do that and the next crash might be the final crash and it might
53:50turn out to be a good idea but if history is any guide people who take
53:56that step in times of extreme disruption can do very well
54:02long run I think we had another question here
54:04thank you for coming today jason said a question who do you think benjamin
54:12graham’s and Warren Buffett’s the 21st century are your top three candidates in
54:16your opinion I’m not sure I want to go on record with that you know I don’t
54:37know that that would make a difference I think it’s very it’s really important to
54:42eat humble about anybody’s ability to identify skilled managers in advance and
54:56you’re certainly are plenty of people out there who are building great track
55:02records right now by the amount of statistical analysis you have to do on
55:08their performance have any confidence that it isn’t just lock is really
55:13significant and in most cases what we have in his reputation that has gone
55:26largely on analyzed and there are not that many managers whose records I
55:34really statistically and wise because typically by the time I get to do that
55:41their performance has
55:47now I think I maybe talk to me afterwards but for now I’m gonna pass
55:53it’s a really interesting question but I I’m gonna pass on that for now thank you
55:58Jason for a very insightful presentation I have two part question if one is a
56:03follow-up question that was just asked if you were asked the same question the
56:07seventies and eighties would you have named Buffett at that time would you not
56:11have the exact same reason and if you would have I would yeah I think in the
56:19seventies very few people really interesting useful you know in many
56:29cases just given the standard margins of outperformance we tend to observe in the
56:36stock market we’re someone who performs benchmark S&P 500 by one percentage
56:45point your compounded is regarded as an extraordinary achievement so you know
56:52over a period when stocks are up seven or eight percent someone who earns eight
56:56or nine gets an enormous amount of favorable attention
57:01pretty narrow margin and then given the standard deviation that is usually
57:08embedded in a track record like that often you need fifty to eighty years to
57:13have 95% confidence that the person is your phone not lucky and at that point
57:20you pretty much dealt with a human lifespan your own and money manager so
57:28there’s kind of a paradox that by the time you can be confident that the
57:33person who’s really good at what he or she is doing your both about to die so I
57:41don’t think most people would have identified by a third in the seventies
57:45while if you did in the nineteen eighties Carol Loomis the great
57:50financial journalist good fortune identified him
57:54almost immediately sixties I’m carol is a good friend of mine and some other
58:03people did as well but most people who investors in berkshire hathaway arrived
58:09later the ones who made the most money from Berkshire are the ones who
58:14identified him as the second question during a presentation you referred to
58:20one specific example where investors had a principal loss of principal valiant
58:28when I look at the 13 s quite a few renounce value investor some mutual
58:34funds that were back all the way to the seventies suffered in the seventies talk
58:40idea about some hedge funds some that actually worked with Buffett in cycle so
58:48lot of past successes what do you think in your opinion or errors of judgment
58:56here are obviously looking in hand side and then were the lessons that one could
59:02have learned from something like investigative journalism that maybe the
59:06investors didn’t apply to dig deeper yeah I think you know they’re the recent
59:16collapse in the stop I said valiant arms poses is for years to come
59:23in investing classes and I don’t think we have the focus what cognitive error
59:33were critical errors that professional money managers made but I think
59:42that often happens in situations and I’m rapt research on valiant and I have
59:53spoken directly about it
59:55many investors you’re referring I’m so I’m just speculating but I think in many
60:01cases people rely on you assurance management and let qualitative factors
60:10you otherwise would be quantitatively based and when as an investor you always
60:24have to be very sensitive who retroactive revisions of reading your
60:32own security originally invested based on quantitative measures and you now
60:43find that you’re using qualitative justifications for continuing to hold it
60:49and that is a red flag and certainly one of the things I’ve learned over the past
60:56decade the importance of having a structured decision process and working
61:04off a check list or another camp lead that compels you to organize your
61:12thinking and your rationale and it also makes it harder for you to migrate away
61:17from that and I i think we learned with hindsight is that many of these
61:25investors bought the stock for one set of reasons and then held it for a
61:31different set and that is always a red flag and investing as it is you know a
61:37lot of other things in life I mean someone who married a spouse for one set
61:44of reasons and another set probably not likely to have a very happy marriage the
61:51same thing applies in the financial world I think yes a lot of comments
61:56about marriage and I’m wondering if you know watching this one last question
62:07think you in managing other people’s money do you see any model that is not
62:24has the potential of conflict of interest
62:28what do you think about and in full upon it is what do you think about this year
62:33model where change management twenty percent of the profit right where they
62:41are there are many groups in management business
62:48who will tell you they have no conflict of interest in fact I had a long email
62:56dialogue about a year ago with a financial adviser who said to me my
63:02friend my financial planning practice is conflict free I have no conflict of
63:09interest at all just ask my clients and I tried to point out to him then in fact
63:17no matter how he charges he can’t help but have conflict of interest in fact
63:23appeared in charge at all he would still have
63:26there’s a there’s an irreducible conflict in the fact that someone who is
63:32managing your money is managing your money not his or her own and there I
63:39don’t think there’s any way to eliminate that the key is for the manager and the
63:47client to be on the same page and to understand where the conflict are and
63:53what the conflicts are so someone who is charging for example 2 and 20 as a hedge
63:58fund my tour or some VC funds my has a clear incentive to raise money
64:06hang on to the money often take very substantial risks and one of the things
64:13you want to look for and again this is just a bit of general advise is as
64:19engineers you’re very familiar with this sort of approach you want to look at the
64:23dispersion right you want to say well who out there is doing this more cheaply
64:30and what does it look like over at this end of the distribution and then who’s
64:35doing it much more expensively and what does that apply and then we are in that
64:40continuum does this person or fund fall into my comfortable with that is there a
64:47better cheaper way to do it
64:49where are the results to the results seem to be improved by higher fees I
64:56guess it’s theoretically possible but certainly what you want to do is you
65:03want to look at alternative ways you could be charged and ask yourself
65:09whether you’re more comfortable with one of those other models of paying fees
65:15rather than this one
65:16you don’t have to pay to in 20 if you don’t want to you might get stuck doing
65:24it if you like the people or the process but I don’t think you should accept any
65:29fee structure
65:31has given or set in stone they’re increasingly there are there’s a
65:37diversity of ways people charged to manage your money and I think also
65:44individual investors tend to underestimate their own negotiating
65:48power you should always get the four me ATP which is the standard as he see
65:55disclosure or any registered investment advisor has to provide and often when
66:02you read the ATV you will see something very interesting that the person you met
66:08with never mentioned these are very few asset managers will volunteer that fact
66:19but by law if they may negotiate they must negotiate in your form they don’t
66:30tell you directly but they do have to tell you in the disclosure form if you
66:36see it there you should bring it with you when you meet with the person so I
66:41would just encourage you to be as aggressive on that front as you’re
66:46comfortable being because these are the primary determinant of the difference
66:53between good performance in great performance and it’s one thing that you
66:59can control probably much more so than you’ve been led to believe so I would
67:04just encourage that interesting this was great really do you know when your book
67:11thank you