A roadmap to wealth
Buy a good asset.
Pay a sensible price.
Survive the ups and downs.
Repeat.
Warren Buffett has said "Be greedy when others are fearful and fearful when others are greedy" . Is there all there is to it?
Sometimes you should be greedy when others are fearful and fearful when others are greedy.
There are also times when you should be greedy when others are greedy and fearful when others are fearful.
These two conditions occur rarely. Most of the time what other's think is not relevant. They should be shut out and you must think for yourself.
Sometimes you should be greedy when others are fearful and fearful when others are greedy.
There are also times when you should be greedy when others are greedy and fearful when others are fearful.
These two conditions occur rarely. Most of the time what other's think is not relevant. They should be shut out and you must think for yourself.
Is there a place for active management?
There is a place for active fund management but it's not what you think it is and it is not the way you think it works:
A passive investor does only certain things. Straying from it invites considerable risk.
An active investor must do everything a passive investor does and when he does something different it is only after bringing a great deal of intelligent effort.
Intelligent effort is characterised by having the right mental framework for decision making, skill, considerable experience, tested judgement and more then a trace of wisdom.
In most years he will do no better then the passive investor but every now an again the active effort will pay off. Over large amounts of time the additional gains add up.
"The determining trait of the enterprising investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades, an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort in the form of a better average return than that realized by the passive investor." Ben Graham in "
The Intelligent Investor", 1949.
Background:
The failure of mutual funds to beat the Indexes. Ponzy schemes that emerged during the credit crisis. The outlandish fees that were charged by Hedge funds while producing little benefit over index returns. All these issues have sewn the thread of doubt in active investment management.
There is a place for active fund management but it's not what you think it is and it is not the way you think it works:
A passive investor does only certain things. Straying from it invites considerable risk.
An active investor must do everything a passive investor does and when he does something different it is only after bringing a great deal of intelligent effort.
Intelligent effort is characterised by having the right mental framework for decision making, skill, considerable experience, tested judgement and more then a trace of wisdom.
In most years he will do no better then the passive investor but every now an again the active effort will pay off. Over large amounts of time the additional gains add up.
"The determining trait of the enterprising investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades, an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort in the form of a better average return than that realized by the passive investor." Ben Graham in "
The Intelligent Investor", 1949.
Background:
The failure of mutual funds to beat the Indexes. Ponzy schemes that emerged during the credit crisis. The outlandish fees that were charged by Hedge funds while producing little benefit over index returns. All these issues have sewn the thread of doubt in active investment management.
If the intellectual framework is correct will I avoid disaster.
Not necessarily.
To avoid disaster requires that you be prepared all the time and that you can see around the corner all the time.
Both of which are almost impossible even for those in the know and are prepared to do it.
The analogy would be of a house with strong foundations built in an earthquake zone hit by an earthquake that is off the Richter scale. Cracks will show probably and disaster might even follow.
Not necessarily.
To avoid disaster requires that you be prepared all the time and that you can see around the corner all the time.
Both of which are almost impossible even for those in the know and are prepared to do it.
The analogy would be of a house with strong foundations built in an earthquake zone hit by an earthquake that is off the Richter scale. Cracks will show probably and disaster might even follow.
Belief, Understanding and Courage
In most things but particularly Investing, understanding is not enough. To be successful the leap must be made from understanding to belief. That leap is anything but easy.
But without it the vital ingredient of courage will not follow.
In most things but particularly Investing, understanding is not enough. To be successful the leap must be made from understanding to belief. That leap is anything but easy.
But without it the vital ingredient of courage will not follow.
Courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand
Benjamin Graham from the Intelligent Investor
Value and Growth are connected at the hip.
The job of the investor, unfortunately, is much harder, he or she has to find a stock that has it's economics and growth intact at a price that is reasonable.
Background:
There is an ongoing discussion about those who look for stocks with high growth and those who look for stocks that are deeply discounted. A growth stock without sound economics will eventually burn out and as luck would have it just after you buy it. Similarly, a deeply discounted stock is usually discounted for a reason.
There is no value without growth and no growth without value.Warren Buffett
The job of the investor, unfortunately, is much harder, he or she has to find a stock that has it's economics and growth intact at a price that is reasonable.
Background:
There is an ongoing discussion about those who look for stocks with high growth and those who look for stocks that are deeply discounted. A growth stock without sound economics will eventually burn out and as luck would have it just after you buy it. Similarly, a deeply discounted stock is usually discounted for a reason.
The Casino
For every game there are two sides: the player and the owner. Both sides are attempting to make money from the same game. For the player, it is entertainment but for the owner it is a business. What separates the two are the odds or the margin of safety. For the player it is against him. For the owner it is with him. If the player forgets this fact, he courts disaster. If the owner forgets this fact he may behave foolishly and, therefore, not do as well as he could.
The analogy describes the difference between the speculator(player) and the investor(owner).
For every game there are two sides: the player and the owner. Both sides are attempting to make money from the same game. For the player, it is entertainment but for the owner it is a business. What separates the two are the odds or the margin of safety. For the player it is against him. For the owner it is with him. If the player forgets this fact, he courts disaster. If the owner forgets this fact he may behave foolishly and, therefore, not do as well as he could.
The analogy describes the difference between the speculator(player) and the investor(owner).
If you do all the right things, will you get outstanding results?
Not necessarily.
Warren Buffet, preface to the fourth edition of the Intelligent Investor
I might add to Buffet's quote the fact that you have to be able to take advantage of a market folly.
Not necessarily.
You will probably, however, not get a bad result.Although competence and hard work are necessary, luck is essential
Whether you achieve outstanding results will depend on the effort and intellect you apply to your investments, as well as on the amplitudes of stock market folly that prevail during your investing career
Warren Buffet, preface to the fourth edition of the Intelligent Investor
I might add to Buffet's quote the fact that you have to be able to take advantage of a market folly.
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