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

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

Published on Apr 5, 2016

Jason Zweig will discuss his latest book, The Devil’s Financial Dictionary, and how he went about distilling everything he had learned in almost three decades as an investing journalist into definitions of Wall Street terms that are, in many cases, only a few words long. Markets are driven much more by psychology and history than by economics. In writing The Devil’s Financial Dictionary, Zweig was guided largely by a saying of his father’s: “It’s remarkable how much you have to learn in order to realize how little you need to know.”

“This is the most amusing presentation of the principles of finance that I have ever seen.” —Robert J. Shiller, professor of finance, Yale University; Nobel laureate in economics; author of Irrational Exuberance

“Part social commentary, part instruction manual, Zweig’s book is must-reading for anyone who presumes or desires to understand the investment world…. Like the book in which they’re contained, each of Zweig’s entries is pointed, witty, and revealing of important and useful truths. The Devil himself, a.k.a., [Ambrose] Bierce, would be proud.” —TIME

About the Author
Jason Zweig writes a weekly column, “The Intelligent Investor,” for The Wall Street Journal. He is the author of The Devil’s Financial Dictionary, a satirical glossary of financial terms; Your Money and Your Brain, on the neuroscience and psychology of financial decision-making; and The Little Book of Safe Money, an investing guide. The editor of the revised edition of Benjamin Graham’s The Intelligent Investor and co-editor of Benjamin Graham: Building a Profession, Zweig also assisted the Nobel Prize-winning psychologist Daniel Kahneman in writing his book, Thinking, Fast and Slow. Before joining The Wall Street Journal, Zweig worked at Money, Forbes and TIME.

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
2:10has 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
14:28employees 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
19:01believe 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
26:46now 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
38:53another 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
48:35right 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

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