In 1995, Pixar was on a rocket ship growth trajectory.
Toy Story came out in November of that year to rave reviews and made more money than almost anyone thought was imaginable. It was the first full-length animated film done entirely using CGI and ended up grossing over $360 million worldwide.
The team at Pixar was feeling pretty good about themselves, but Steve Jobs was already planning on the company’s first failure. He convinced the company’s co-founder Ed Catmull that eventually they would make a film that flopped at the box office. To prepare themselves for this eventuality, Jobs pushed the private company to go public to secure funding that could prepare Pixar for a dud at the box office.
Jobs made the case that increasing the capital base would allow the firm to fund their own projects to give them more of a say in how they moved forward creatively. But it would also prepare them financially for a future failure. He argued it made no sense to depend solely on the performance of each new release to keep the ship afloat.
Catmull described his feelings about this idea in his excellent book, Creativity Inc.:
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“The easy money has been made” is one of my least favourite sayings about investing.
Making money in the markets is never easy. In fact, I would argue that it’s always hard.
Convincing yourself to buy during a bear market is hard. Convincing yourself to hold during a bull market is hard. Figuring out what to do during a sideways market is hard. Watching others make more money in the markets than you is hard. Following a plan when things aren’t going your way is hard. There’s always going to be a reason to do something that goes against your best interests.
Howard Marks wrote about this idea in a memo for Oaktree Capital a couple years ago:
Two of the main reasons people sell stocks is because they go up and because they go down. When they go up, people who hold them become afraid that if they don’t sell, they’ll give back their profit, kick themselves, and be second-guessed by their bosses and clients. And when they go down, they worry that they’ll fall further.
Where we are in each cycle usually determines what the hard part is at that moment. The hardest part for the past few years has been holding on during a rising market. Investors witnessed two epic market crashes in the span of eight years to kick off the start of the century. Those types of losses leave scars on an investor’s psyche.
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Michael Batnick’s new book, Big Mistakes: The Best Investors and Their Worst Investments came out this week.
There are far too many investing books that dissect the past successes of history’s greatest investors. These books make it easy for investors to assume emulating these greats should be effortless. I know that’s what I thought when I read about Buffett and Graham when I first started investing.
Most investors would be far better off trying to avoid mistakes than replicate their favorite billionaire’s track record. This book chronicles every mistake imaginable in the markets and it does so in a refreshing way by showing even the most intelligent among us screw up.
Here are six things I learned from the book:
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Daniel Kahneman once said, “Hindsight makes surprises vanish.” The hindsight bias can lead investors to constantly fight the last war. Since the financial crisis the last war has made top calling in the markets a cottage industry. Looking back now the peak before the prior crash looks easy. It was not. Predicting when the music will stop is not easy. This piece I wrote for Bloomberg shows why.
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There’s a simple reason the future always feels uncertain but the past seems relatively orderly: No one has any idea what the future holds, while hindsight allows us to assume that the past was more predictable that it actually was.
Take the Great Financial Crisis. The majority of investors, economists, policy makers and regulators were completely blindsided by the worst economic and stock-market downturn since the Great Depression. Yet when these same people look back at that fateful 2007-2009 period, it seems many of them now believe that they knew it was coming and called it in advance.
It can be very lucrative to be right about major market events. Many who actually did see the crisis coming became household names in the finance industry and parlayed that success into book deals, keynote speeches, television appearances and “thought leader” status. Since so many people were cheerleading right up until the market crash, no one wants to get caught flat-footed again, leading to a steady increase in the number of people now calling for a market top.
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Before I really knew anything about human behaviour, incentives, and how the markets really work, I was always blown away by the sheer amount of intelligence I would come across in the investment world.
Most of the people I’ve interacted with throughout my career are highly educated at some of the best colleges and universities in the world. Many continued their education by getting advanced degrees or prestigious industry designations. They can speak eloquently, hit you with reams of data, can sell a ketchup popsicle to a person wearing white gloves, and have the utmost confidence in their own abilities.
After a few years of being impressed by the sophistication and above average IQ of the various portfolio managers, strategists, analysts, and marketing people I came into contact with, I finally had a realization – intelligence can only take you so far in this world. I didn’t exactly have an epiphany on the topic, but over time the shine began to wear off.
It became apparent that the smartest person in the room isn’t always right. In fact, most of the time their intelligence works against them because they’ve become so sure of themselves and their investing abilities that they’re unable to change their mind or accept the fact that the markets don’t care what your IQ is.
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Bull markets seem like they should be easier than the alternative but even dealing with gains can be challenging as an investor. Research shows that investors trade more often during bull markets because we don’t know what to do with gains, it’s difficult to hold winners, and there are constant temptations with even bigger winners elsewhere. This piece I wrote for Bloomberg looks at how to deal with big gainers in your portfolio.
*******Major stock indexes are hitting new highs almost daily, adding to the huge gains many securities have posted in recent years. For example, Nvidia Corp. has gained almost 1,800 percent since the start of 2013. Over the past five years or so, Netflix is up 1,375 percent; Tesla is up 835 percent; Facebook is up 590 percent, and Amazon has risen 380 percent. Bitcoin is up more than 900 percent in 2017 alone.If you’ve been fortunate enough to be involved in any of these equities or other market stars, you made the right choice. But investors would be wise to work through their options on how to handle these stocks. Large gains in your portfolio are a good problem to have, but the good news also comes with psychological baggage. Continue Reading →
The stock market got interesting again this week. Volatility is back after having gone missing for the past 18 months or so.I saw the following words spewed across the financial media this week: turbulence, fear, pain, panic, distress, agony. It’s still a little early for all of that. As of the close on Thursday, the S&P 500 is a little over 10% from its all-time highs.But try telling that to your emotions when you’re witnessing a decent percentage of your savings evaporate over the course of a little more than a week. The pain we feel from losses dwarfs the pleasure we feel from gains.
Because of the havoc they can wreak on our portfolios, investment professionals and advisors often instruct their clients to ignore their emotions during times like this.
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During three separate interviews this week I was asked if I was seeing any signs of complacency among investors, markets, or clients.
If anything, the people I talk to are more concerned with the high probability of lower market returns in the future but my view is surely clouded by the clientele and readers I deal with on a regular basis.Whether my sample size is representative or not, measuring market sentiment is getting harder and harder these days. Everyone now has a megaphone to voice their opinions — social media, blogs, 24-hour financial television, podcasts, conferences, magazines, financial news websites, etc.I don’t see how you can reliably track sentiment when it comes at you every day like a wave that changes form and shape depending on people’s mood that day. There’s just not much signal in all of the noise anymore.Of course, investors have been given plenty of excuses to be complacent. It feels as though volatility and bear markets have been outlawed in 2017 and stocks in the U.S. haven’t seen a down year since 2008.Since I don’t see any reliable way to track the potential complacency of investors as a whole, I tend to look at different ways investors can be complacent depending on which type of market environment we’re in.For example, last month I read the Schroders Global Investors Study which surveyed over twenty thousand investors from around the globe to get their expected portfolio returns over the coming 5 years. The results show this group was a tad ambitious: Investors expect an annual return of 10.2% on their investments over the next five years, according to a major new study.The Schroders Global Investor Study (GIS) 2017, which surveyed 22,100 people from around the globe who invest, found millennials even more optimistic. Those born between 1982 and 1999 expected their money to make average returns of 11.7% a year between now and 2022.Older generations were more realistic. The Baby Boomer generation – born in the two decades after the Second World War – anticipated 8.6% a year.Millennials (born 1982-1999, aged 18-35): 11.7% Generation X (born 1965-1981, aged 36-52): 9.8% Baby Boomers (born 1945-1964, aged 53-72): 8.6% Silent Generation (born 1923-1944, aged 73+): 8.1%Double-digit annual returns over the next 5 years from current valuation and interest rate levels seems like a stretch to me. I could be wrong but investors with such lofty expectations after we just went through a period of above-average returns (at least in the U.S.) seems to be somewhat complacent to me.Here’s another example (although this is more delusional than complacent):
