Reblog: Diversification Overrated? Not a Chance!


In February 2000, a financial advisor named Bob Markman wrote an article that got a huge amount of attention online. Called “A Whole Lot of Bull*#%!” (that’s how the original was spelt) and published by Worth magazine, the article attacked the idea of diversification, arguing that any money put into currently underperforming investments was money wasted. Internet and other technology stocks had been so hot for so long that nothing else was worth owning, Markman argued. He was far from alone in saying that.

Markman and I exchanged long emails and even longer letters (that’s how people communicated in those Neolithic days), but the “debate” boiled down to one point: Can the typical investor predict the future with precision, or not? Markman insisted the answer was yes. I felt then, as I still do, that the answer was no.

In Markman’s defence, there is a case to be made that if you have inside knowledge or superior analytical ability, then you should bet most or all of your money to capitalize on it. Warren Buffett and Charlie Munger have long argued exactly that. If you are as analytically brilliant as Buffett or Munger, diversification will lower your returns. The rest of us, however, should have much less courage about our convictions. And inside knowledge or superior analytical ability are best applied to individual securities, not to broad market views.

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Reblog: To Be a Great Investor, Worry More About Being Wrong Than Right


If you were a Hillary Clinton supporter, every statement by Donald Trump fortified your faith that he would lose the election, and you took the consensus of polls as proof she would win. Mr. Trump gave supporters reason to think he’d chasten Wall Street, and as the election approached, pundits predicted a market meltdown if Mr. Trump won. Yet the S&P 500 has returned more than 5% since his election.

Ever since Nov. 8, voters have been scrambling from all sides to avoid admitting that we were wrong. If that requires fibbing to ourselves, so be it.

Likewise, instead of opening their minds to the possibility of being wrong, investors often wall themselves off from new information that could threaten their views.

When the U.S. stock market produced its worst start to a year in modern history, losing 10.5% in January and early February, terms like “contagion,” “panic” and “fear and loathing” filled the air. Stocks promptly shot up.

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Reblog: Seth Klarman: Investing Requires A Degree Of Arrogance Tempered With The Humility Of Knowing We Could Be Wrong


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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Reblog: When a 10% gain makes you feel like a loser


Big gains can be hard to find in the financial markets. Nowadays, though, they seem to be everywhere — and that could change how you feel about taking risks.

As of Nov. 16, the S&P 500 is up 359% since the bull market began March 9, 2009, counting dividends, according to S&P Dow Jones Indices. This year alone through Nov. 16, Alphabet (the parent company of Google) has returned 32%, Amazon.com 52%, Apple 50% and Facebook 56%, including dividends. Bitcoin, the digital currency, has gained more than 700% so far this year.

Against that backdrop, even what investors used to regard as a generous annual gain — say, 10% — starts to feel paltry. New research into a mental process called “contrast effects” shows how that works and how it can alter your behavior.

Finance professors Samuel Hartzmark of the University of Chicago Booth School of Business and Kelly Shue of Yale University’s School of Management analyzed nearly 76,000 earnings announcements from 1984 through 2013 in which companies earned either more or less than investors were expecting.

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Reblog: YES, MUTUAL FUNDS CAN STAND OUT FROM THE HERD


Forbes Magazine, Dec. 19, 1994

At the typical stock-fund office, phalanxes of computer screens glow like the control room of a nuclear reactor. The portfolio manager is an intense young MBA. He can recite earnings estimates by rote for each of the 100 stocks in his billion-dollar fund. He’s a high-pressure guy, the atmosphere is electric with excitement, and the phones are always ringing. All this costs money, but the managers have to justify themselves. What are they for if not to trade in and out of stocks?

Yet all this striving does nothing for most fund investors. Although the industry has its good years, over long periods of time the average U.S. stock fund does worse than a market index. No wonder: Typical annual expenses run to 1.3% of assets.

George Mairs, 66, does things differently. Mairs & Power, Inc., founded by Mairs’ father in 1931, has nine employees and runs a total of $300 millon out of the old First National Bank Building in St. Paul, Minn. Nearly all that money is in separate accounts. Mairs & Power Growth Fund has $41 million in assets; a balanced mutual fund, Mairs & Power Income Fund, runs $13 million.

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