Today marks 30 years since a confident young man walked into the back office of Schroder Investment Management in London, to start his first day on the job, the first in his career. Ask me a question back then and I would have answered assuredly and quickly. Today I’d be more likely to say ‘I don’t know’ with just as much confidence.
Now older, wiser, but with just as much hair, I have over the years seen many people come and go. Clients, colleagues, bosses, company mergers, bankruptcies (thankfully not my own), through bull and bear markets, booms, crashes, and have seen my own fortunes fluctuate too before setting out on my own a few years ago.
Thirty years is a long time. The good news is it was all worth it.
The first thing to point out is I don’t have all the answers. That’s not what this post is about. I’m always learning. But I have benefited enormously from people sharing their time and expertise, so if I can help others in the same way, I’m happy to share what I’ve learnt also.
These are 30 observations, guiding principles, or simply things that work for me. Some of you who have followed me for a while will recognise many of them. These aren’t universal truths, they’re my truths, my beliefs, shaped by my experience.
And that’s probably a good place to start.
“The more you believe something to be true, the more you will have accumulated evidence to support it.”
That’s a quote from trading coach Van Tharp, and I’ve applied it to so many areas as a simple way of explaining people’s expression of their beliefs, my own, and the realisation of how powerful confirmation bias is. Van believes we don’t trade the markets, we trade our beliefs in the market. A trading system therefore is simply a set of beliefs, and I think he’s right.
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Over the course of 15 years working as a performance coach with traders and investors, from day trading shops to hedge funds and investment banks, I’ve enjoyed an unusual front row on the factors that contribute to success and failure in financial markets. During that time, I’ve conducted numerous interviews, directly observed hundreds of traders and administered countless personality tests. That experience has convinced me that much of what we think we know about trading success is just plain wrong. In this article, I tackle three myths of trading success and offer alternate perspectives.
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Fibonacci Trendline Strategy: 5 Steps To Trade
I am going to share with you a simple Fibonacci Retracement Trading Strategy that uses this trading tool along with trend lines to find accurate trading entries for great profits.
There are multiple ways to trade using the Fibonacci Retracement Tool, but I have found that one of the best ways to trade the Fibonacci is by using it with trend lines.
The Fibonacci Retracement tool was developed by Leonardo Pisano who was born around 1175 AD in Italy was known to be “one of the greatest European mathematicians of the middle ages.”
He developed a simple series of numbers that created ratios describing the natural proportions of things in the universe.
And these numbers have been used by traders now for many years!
With this strategy, you will learn everything you need to know to start trading with the Fibonacci Retracement tool. You’re going to find out the Fibonacci meaning, Fibonacci algorithm, Fibonacci biography, the Fibonacci formula for market trading, Fibonacci series algorithm, the Fibonacci sequence in nature, along with many other useful facts about this great tool!
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Several years ago Jason Zweig did a great interview with Seth Klarman titled – Opportunities for Patient Investors, which was published by the CFA Institute. While the entire interview provides a number of value investing insights, one answer, in particular, provides a unique insight into Klarman’s psychology towards investing saying:
“In investing, whenever you act, you are effectively saying, I know more than the market. I am going to buy when everybody else is selling. I am going to sell when everybody else is buying. That is arrogant, and we always need to temper it with the humility of knowing we could be wrong—that things can change—and acknowledging that we have a lot of smart competitors.”
Here is an excerpt from that interview:
Zweig: In a Forbes article in the summer of 1932, Benjamin Graham wrote, “Those with enterprise haven’t the money, and those with money haven’t the enterprise, to buy stocks when they are cheap.” Could you talk a little bit about courage? You make it sound easy. You have great clients and great partners. Was it easy to step up and buy in the fourth quarter of 2008 and the first quarter of 2009?
Klarman: You may be sceptical of my answer, but, yes, it was easy. It is critical for an investor to understand that securities aren’t what most people think they are. They aren’t pieces of paper that trade, blips on a screen up and down, ticker tapes that you follow on CNBC.
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In 1993 Walter Schloss gave a great presentation called – Upper Level Seminar In Value Investing, at the Columbia Business School. Schloss’ notes for the presentation included a number of timeless investing lessons including the kinds of stocks he looks at for investment, how to scale into an investment, and how to manage a stock portfolio.
Here is an excerpt from the presentation:
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Investing is full of sports metaphors, most of which are drawn from blood sports such as boxing, strategic team sports including football, and individual sports where brains are as important as brawn, such as golf. Those sports are all full of common metaphors drawn from warfare. In fact, all sports are, in essence, proxies for warfare, which makes a 2,000-year-old text particularly relevant to sports, but also to investing as well.
Translated into many languages and still referred to as one of the great works on military strategy and tactics, the lessons of Sun Tzu’s The Art of War are particularly relevant to investors as they navigate increasingly complex asset classes and investment strategies.
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Here’s a great article at the WSJ by Burton Malkiel, author of A Random Walk Down Wall Street and Chief Investment Officer of Wealthfront. Malkiel provides two strategies that might be worth considering in an overpriced world saying:
“What, then, can an investor do to control risk? The two strategies that work are broad diversification and rebalancing.”
Here’s an excerpt from that article:
What should an investor do when all asset classes appear overpriced? The 10-year U.S. Treasury bond currently yields about 2.6%, much lower than the 5% historical average and only slightly higher than the Federal Reserve’s 2% inflation target. Yields of lower-quality bonds are unusually meager compared with those of traditionally safe Treasurys.
For equities, the cycle-adjusted price/earnings ratio, or CAPE—the valuation metric that does the best job in predicting future 10-year rates of return—is about 34. That’s one of the highest valuations ever, exceeded only by the readings in 1929 and early 2000, prior to crashes. Today’s CAPE suggests that the 10-year equity rate of return will be barely positive.
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News that the Dow Jones Industrial Average is down several hundred points sends shivers down the spine of even the most weathered investor. Such drops, while infrequent, can be scary because it’s impossible to predict how severe or long-lasting losses will be. And even if you trust the market will eventually rebound (as it always has), it’s hard to watch the value of your investments shrink before your eyes.
In the immediate term, people will argue about what to call it — a crash? A correction? Leave the vernacular to others, and instead understand what’s causing the market to fall. This knowledge may not bring your money back right away, but it could help you prepare for the market’s next move up or take advantage of lower stock prices in the meantime.
Defining a drop in the stock market
One of our favorite investors here at The Acquirer’s Multiple is Bruce Berkowitz. He is the Founder and Chief Investment Officer of Fairholme Capital Management, and President and a Director of Fairholme Funds. In 2010 Berkowitz was named as the 2009 Domestic-Stock Fund Manager of the Year by Morningstar as well as the Domestic-Stock Fund Manager of the Decade (2000-2009), also by Morningstar. Most recently, he was named 2013’s Money Manager of the Year by Institutional Investor Magazine.
Here’s an excerpt from an interview with Berkowitz in which he succinctly lays out his three-step approach to value investing, including the example of Bank of America:
At Fairholme, we’re very focused on price. Price matters most to us. And we think that price determines much of the success you’re gonna have in the future. So rather than predict what’s going to happen with the company we try to price it correctly with a large margin of safety. So pricing with a significant margin of safety is very important in our rule number one of not losing.
Once we determine what a cheap price is, our next step is to look at the investment and the underlying company and stress test it to determine all the ways that business can go wrong, the environment can go wrong, the balance sheet can go wrong. Try to kill the company.
If we can’t kill the company and we’re buying it at a price that reflects near death we may be onto something very good.
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One of the best papers ever written on investing is The Wisdom of Great Investors, provided by Davis Advisors.
Davis Advisors was founded by legendary investor Shelby Cullom Davis, a leading financial advisor to governors and presidents, who parlayed an initial investment of $100,000 in the late 1940s into more than $800 million by the end of his career in the early 1990s. In 1969, Shelby Cullom Davis’s son, Shelby M.C. Davis, founded Davis Advisors after serving as the head of equity research at The Bank of New York.
Shelby Cullom Davis famously said:
“You make most of your money in a bear market, you just don’t realize it at the time.”
This timeless paper is a great reminder that wherever we are in the history of investing it is crucial that we don’t forget the painful lessons from investors of the past. Here are the most important takeaways from the paper:
Overview
It is important to understand that periods of market uncertainty can create wealth-building opportunities for the patient, diligent, long-term investor. Taking advantage of these opportunities, however, requires the willingness to embrace and incorporate the wisdom and insight offered in these pages. History has taught us that investors who have adopted this mindset have met with great success.
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