WHAT STAR WARS CAN TEACH US ABOUT INVESTING

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WHAT STAR WARS CAN TEACH US ABOUT INVESTING

Star Wars and Investing

Star Wars: The Force Awakens was released on Blu-Ray and DVD today.

The Force Awakens crushed the box office this past winter and is by far the highest grossing movie of all-time in the United States. It’s also the third highest grossing movie worldwide (behindAvatar and Titanic) and the original Star Wars movie is the second highest grossing movie of all-time when adjusted for inflation (behind only Gone with the Wind).

Li Lu And Greenwald On Competitive Advantages And Value Investing

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But what would you say if I told you that Yoda and Obi-Wan Kenobi weren’t just Jedi Masters and they weren’t just masters of the box office – they were also value investing masters.

Don’t believe me? Well… I find your lack of faith disturbing.

In any case, just check out these Star Wars quotes:

BEWARE OF FEAR AND GREED

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Greed can be a powerful ally.

-Qui-Gon Jinn (Episode I: The Phantom Menace)

Fear is the path to the dark side. Fear leads to anger. Anger leads to hate. Hate leads to suffering.

-Yoda (Episode I: The Phantom Menace)

Market prices are often fairly accurate over the long run, but they can be greatly swayed by investors’ emotions in the short term. As Warren Buffett, the Yoda of investing, always says: “Be fearful when others are greedy and greedy when others are fearful.”

DON’T TRUST MARKET PROJECTIONS

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Difficult to see. Always in motion is the future.

-Yoda (Episode V: The Empire Strikes Back)

The ability to speak does not make you intelligent.

-Qui-Gon Jinn, to the rambling Jar Jar Binks. (Episode I: The Phantom Menace)

Who’s more foolish? The fool or the fool who follows him?

-Obi-Wan Kenobi (Episode IV: A New Hope)

Remember, no one knows for sure what’s going to happen in the future. Yet many people in the financial community pretend to have a crystal ball in order to give a false sense of security to those whose money they want to “manage.” This is why analysts’ project corporate earnings (and then revise them) and why market strategists project the Dow to end the year at exactly 17,616 or for oil to trade at $20 a barrel.

Keep in mind that “forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

Never tell me the odds.

-Han Solo (Episode V: The Empire Strikes Back)

“You know better than to trust a strange computer.”

-C-3PO, to R2-D2 (Episode V: The Empire Strikes Back)

Along the same lines as above, don’t blindly trust other people’s projections. And don’t forget that models are precisely inaccurate. They can be a helpful tool for valuation, but models do have limitations. The more complicated a model is, the more important it is to remember this fact.

KEEP WITHIN YOUR CIRCLE OF COMPETENCE

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Always remember: Your focus determines your reality.

-Qui-Gon Jinn (Episode I: The Phantom Menace)

Chewie, we’re home!

Han Solo (Episode VII: The Force Awakens)

You don’t have to be a genius to be a good investor. Just be very smart in some areas… and stick to those areas. Investing within your circle of competence means investing in the companies and industries that you know and can understand.

INVEST FOR THE LONG TERM

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“Adventure. Excitement. A Jedi craves not these things.”

-Yoda (Episode V: The Empire Strikes Back)

“You don’t have to do this to impress me.”

-Princess Leia, to Han Solo (Episode V: The Empire Strikes Back)

Great, kid! Don’t get cocky.

-Han Solo, to Luke Skywalker (Episode IV: A New Hope)

Things like day trading might sound exciting. But if you want an adrenaline rush, then I suggest jumping out of a plane. A good value investor knows that slow and steady wins the race. There is no need to take crazy risks in order to chase big returns. It’s hard to get rich quickly in the stock market – but it’s incredibly easy to get very wealthy over time if you’re focused on the long term.

 FIND UNDERVALUED ASSETS

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You will find that many of the truths we cling to depend greatly on our own point of view.

-Obi-Wan Kenobi (Episode VI: Return of the Jedi)

Your eyes can deceive you, don’t trust them.

-Obi-Wan Kenobi (Episode IV: A New Hope)

Do or do not… there is no try.

-Yoda (Episode V: The Empire Strikes Back)

Value investors look for assets that are – obviously – undervalued. But to be undervalued, a stock has to be perceived to be worth less by other investors than you perceive it to be. To find these opportunities, you are going to have to do some digging beneath the surface. It will be hard, but don’t just try – do.

LIMIT YOUR RISK

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It’s a trap!

-Admiral Ackbar (Episode VI: Return of the Jedi)

You are unwise to lower your defenses.

-Darth Vader (Episode VI: Return of the Jedi)

Traps can come in many forms. Maybe it’s an actual value trap. Or maybe it’s the trap of a cognitive bias, such as using past performance to predict the future; seeking out only the data that confirms your original hypothesis; or being unwilling to sell your worst stocks. Watch out for these.

Also, when the stock market is rising, when euphoria is in the air, and when the rising tide is lifting all ships, it’s very easy to abandon your principles in search of higher returns. Don’t lower your defenses. Keep your guard up and be wary of traps.

STAY THE COURSE

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“Patience you must have, my young Padawan.”

-Yoda (Episode V: The Empire Strikes Back)

I find your lack of faith disturbing.

-Darth Vader (Episode IV: A New Hope)

“Now, be brave and don’t look back. Don’t look back.”

-Shmi Skywalker, to her son Anakin Skywalker (Episode I: The Phantom Menace)

Stay on target.

-Gold Five (Episode IV: A New Hope)

Finally, if you’re sure of your analysis and you’re sure of yourself, then you must stick by your decision. Value investors almost naturally are contrarians. This sometimes makes it hard to have faith. But ignore all the noise and be willing to sit patiently while you quietly work your way toward your goal.

SUMMARY

So there you have it. Listen to the heroes of Star Wars and beware of fear and greed, don’t trust market projections, keep within your circle of competence, invest for the long term, find undervalued investments, limit your risk, and stay the course.

Now go. You have a galaxy of investments waiting.

And may the Force be with you!


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Star Wars: The Force Awakens (Plus Bonus Features)

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Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…
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