Farnam Street Q1 letter to investors more at VWP
If we can control our own minds, we stand to gain everything.
It’s disturbing how awful we are to each other. The chase of serotonin as we climb and fall in the grand sorting game reveals humanity’s less flattery sides.
One of the best feelings is when something we own goes up in price. I knew I was a genius! Of course this was going to work! Why do they say investing is hard?
And it always hurts when something we own declines in price. This seemed like such a layup. Why is everyone selling? Should I sell too? What am I missing? Will I be left holding the bag?
One of the worst feelings is when we see other people making easy money. It doesn’t matter whether it was tulips in 1636, the South Seas in 1719, Japanese stocks in 1988, tech stocks in 1999, Florida condos in 2005, Bitcoin in 2017, and who knows what tomorrow. FOMO is inseparable from the human condition. I have to buy; I can’t stand to miss out. Everyone’s getting rich except me!
The schadenfreude in the investment industry is grotesquely palpable. We love to see others crash and burn, the bigger the better. Serves them right. I knew I was smarter. They were greedy and didn’t understand the risks they were taking.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
But what if we decided to stop playing this awful game?
Six ways to opt out of the financial sorting game
1. Spending less than you earn is the real key to wealth building. If you do your saving correctly, any investment returns are the cherry on top. The right savings plan will reduce uncertainty and your dependence on returns. Find a way to enrich, rather than rob, your future self.
2. Pick a strategy that makes sense to you and stick with it. Some people like to buy high-quality companies, some dividend-paying. Others are like us and prefer stocks on sale with a margin of safety. Like the seasons, every investment approach has its spring bounty of good returns and cold winter where it will test your patience. The investors who really lose are the ones who chase what is recently hot and never catch the rebound. Don’t be that person.
3. Create an investment plan and follow it. Without a plan, you’re subject to the ebb and flow of fear and greed. As General Patton said, “A good plan violently executed now is better than a perfect plan executed next week.” It doesn’t have to be complicated. Automated is preferable as you only have to make a smart decision once and you benefit for years. Time is your friend, so the earlier you start,the better.
4. Accept that others may get rich faster than you. And that’s OK! They may also be taking risks you can’t see and will crash and burn before the finish line. Who knows? “Run your own race” and avoid the pitfalls of envy. It’s especially important to use debt judiciously. “Over the years, a number of very smart people have learned the hard way that a long string of impressive numbers multiplied by a single zero always equals zero.” - Warren Buffett
5. Ignore the financial press. Their real objective is to sell advertising, not provide you with useful investment information. You won’t miss the noise; the signal is elsewhere. “Investing is one of the simplest fields run by people who believe in their souls that they’ll do better if they make it more complicated.” - Morgan Housel
6. Practice compassion. The odds are overwhelming that if you’re reading this, your quality of life is in the upper 90%+ of all people in the world. Recognize your good fortune-- it didn’t have to be this way. Instead of coveting others’ returns or money, point your creativity toward easing the suffering of the less fortunate. It’s all but guaranteed to provide you with a better ROI.
A Market Update in Four Charts and Four Quotes
1. Everyone knows we’re in a bubble.
“In a speculative market, it’s not the understanding of valuation, o reconomics, or a century of market cycles that gets you into trouble.It’s the assumption that anyone cares.” - John Hussman
2. Yet FOMO keeps everyone fully invested.
“As long as the music is playing, you’ve got to get up and dance. We
are still dancing.” - Chuck Prince, former CEO of Citibank in July 2007, just before
the crash that required massive bailouts for his company.
3. Everyone thinks they’ll be able to get out in time. (Seventy percent of fund managers
believe the market will peak in 2018.)
“Today’s is a cynical bubble, built not on faith in a new era, b ut onoveroptimism about the ability to get out before everyone else.”
- James Montier
4. With little difference between the most expensive and cheapest valuations, it’s
not a favorable environment for bottom-up stockpickers. (We long for the days of 2000
and 2009 when there was a deep pool of attractive investment candidates.)
“The wise ones bet heavily when the world offers them opportunity.
They bet big when they have the odds. And the rest of the time, they
don’t… Look at lots of deals and don’t do almost all of them.”
- Charlie Munger