Andy Kessler
- Invest “in the fog” (“where nobody else knows nothin’—if everybody knows something, you ain’t gonna make money on it”), and look for signposts that others haven’t seen.
- Invest in big trends, ones that you are 99% confident in.
Dennis Gartmann
- True momentum strategy; buy high, sell higher. “Do more of what is working and less of what is not.” Sell weakest markets and buy strongest markets.
- Rule #1 and Rule #2: Never, under and circumstance, add to a losing position…not EVER!
- “Trade not on the bullish side or the bearish side, but on the winning side.”
- Only be long, aggressively long, or neutral in a bull market; only be short or neutral in a bear market.
- Think like a fundamentalist but trade with technicals, and understand mass psychology. Keep the technical system simple—complexity breeds confusion, simplicity breeds ability to make decisions quickly.
Mark Finn
- High signal to noise in markets: what we “know” about the future is small compared to what we do not or cannot know. This is further complicated by what we know compared to what other investors also already know.
- Problems with using past performance: excessive noise to signal, manager turnover, using average fund returns instead of average investor (asset-weighted) returns, time period (unique economic environments), common factor exposure (ex. trading momentum), asset bloat.
- A diversified portfolio of 50 stocks reduces the portion of the portfolio’s specific stock risk from 50% to 4%.
- Studies have shown managers as a group do not outperform the market, the number that do are not greater than expected by random chance, past performance has no correlation with future performance—this is true even adjusting for style and before survivorship bias (Kahn and Rudd study).
- Using Bayesian techniques to incorporate past performance—61% weight on investment process, 35% on asset class efficiency and alpha availability, only 4% on past performance.
- Factor out beta and search for uncorrelated strategies. Dampen your enthusiasm and use common sense and experience. Use volatility throttling: weight manager allocations by the inverse of their variance.
Gary Shilling
- “Find an important, non-consensus, long-term theme—and stick with it.” Shilling’s theme was long-term disinflation.
- Bonds are unpopular and dull, but can be as powerful as stocks: 25-year Treasury bonds bought in October 1981 at a yield peak of 14.7% and rolled yearly would have returned 22% annually compounded by 2005—4x more than the S&P 500 that returned 18%.
- Keep big picture (macro trends) in perspective and have courage of your convictions, do not get distracted or discouraged by temporary pullbacks. Ignore chatter of the financial media.
Ed Easterling
- Risk is not a knob. Risk does not drive returns—valuations and fundamentals drive returns. Risk is high when valuations are high.
- Probabilities are true only when they are statistically valid. Probabilities apply to large samples, not single examples.
- Measure using real returns, not nominal—break-even nominally is still a lost against inflation.
- Of the last 95 rolling 10-year periods, only 47% of the time annual returns exceeded 7% net of fees; of these 82% of the time P/E’s increased throughout the period.
James Montier
- Emotion is important to investing, because studies show they help sense risk (emotion brain-damaged patients fail to make good decisions). However, at high intensity emotions can be susceptible to fear. People are bad at projecting or controlling their potential emotion responses while in an unemotional state (hot-cold empathy gap).
- Under emotional distress, people tend to favor high risk, high reward options, even if these are poor choices. By practicing self control, people deplete their self regulation mechanism and may subsequently make rash decisions.
- Bias blind spot: people underestimate their own susceptibility to bias.
- Self attribution bias: people associate success with their own skill and failure with bad luck. Thoroughly examine you own mistakes to learn from failure.
- Overconfidence: people tend to be overconfident in themselves (especially experts) and over-optimistic. More information is not necessarily better information—it leads to more confidence, but not necessarily to more accuracy.
- Confirmatory bias: people look for information that confirm rather than contradict their preconceived views. Look for information and people that disagree with you and understand the other point of view.
- Hindsight bias: ascribing prescience or reasons after the fact. “I knew it all along”, ex-post bubble recognition.
- Anchoring bias: people use irrelevant information to influence their valuations. Instead, use market prices to back into growth assumptions and determine if growth is achievable. Focus strictly on relevant information.
- Representativeness bias: people form opinions from expectations rather than from objective concrete logical thinking. Focus on facts, not the stories. Use statistical thinking, not mental shortcuts.
- Memory tricks: 1) availability and vividness effects: people tend to more likely recall recent and vivid events, which influence their thinking (shark attacks are not more likely than lightning deaths, big trigger events are less likely and less important than many small cumulative events). Don’t confuse intensity of the information with importance of the information (ex. suspension of dividends—low intensity, high importance but usually under-reacted). 2) direct experience: people place twice as much weight on their own direct experience vs. those learned vicariously through others.
- Inattentional blindness and framing: people mis-analyze when they are too focused on looking for something else or if the information is presented to them in a confusing or misleading way. Think through facts and how the facts are presented to you.
- Loss aversion: people place feel more pain over losses than happiness over gains and are willing to gamble big to avoid losses. 1) Inertia bias: people form personal attachment to holdings; 2) endowment effect: people tend to place a higher value on something merely because they own it; disposition effect: people ride losers and cut winners short. A formal sell discipline is important for investors. Be dispassionate about valuation.
Bill Bonner
- Keynesian economics only interfere with the pure economic decisions of millions of participants in a free market.
- The ends are beyond our control. Economic means (free market)—not political ones (government intervention)—may not necessarily get what we want, but at least the intent is civilized and we will deserve it.
Rob Arnott
- S&P 500 is not the market—it does not include every investable asset (including human capital) and thus is not efficient and not consistent with CAPM.
- Fundamentals-weighted indexing (weighted by book value, cash flow, revenue, sales, dividends, employment) adds 2% with lower risk than cap-weighted indexes. Cap-weighted indexes inherently overweight overvalued stocks. Fundamental index outperformance: +3.5% in recessions, +0.4% in bull markets, +6.5% in bear markets. Strategy outperforms modestly in strong markets and by a lot in weak markets. Results are highly statistically significant.
George Gilder
- By limiting information disclosure, the SEC is creating more volatility in the markets, as investors are exposed to less “entropy” (significant information).
- A market is an arena of information; the winners are the people with the best information, mostly inside information.
- Ignore outside noise and focus on acquiring real, fundamental knowledge about companies.
Michael Masterson
- “It is not business until you make the first sale.” It is ultimately about selling (think Chanel, Rolex, etc.)
- The single most effective way of entering a market is to offer a popular product at a low price. High-priced niche products require time, money, and experience to develop—three things the entrepreneur does not have.
- Choose a business that can grow without your personal involvement, one that can grow by adding more people, property, or money.
- Set a stop-loss on any investment (business, real estate, and stocks) and stick to it.
- Improve your strengths before eliminating your weaknesses. If needed, hire somebody whose strength is your weakness.
- Focus effort instead of diversifying. Learn and conquer one field/ industry (average learning curve is 5000 hours) before moving to another. Pareto Principle (80-20 Rule)—always ask yourself what activities are generating the most return for the effort.
- Cut your losers quick—the market is telling you something.
- Be good at what you do and be good (a good person) doing it. In every relationship you get into (business, social, or personal) make sure the situation is win-win.
Richard Russell
- Rule #1: compounding works. It is the royal road to riches, the safe road, the sure road—but it only works through time.
- Rule #2: Don’t lose (big) money. Be wary of big losses in the stock market, options, real estate, gambling, and even your own business.
- Rule #4: Look for values. If there is no outstanding value, wait. An outstanding value must be safe and offer attractive returns and a good chance of appreciation.
- Thinking is rehearsing. In investing and in life, there’s no substitute for acting.
John Mauldin
- Change is accelerating; rate of change is exponential. “Change is like a train. It can either run you over or you can catch it to the future.”
- Overconfidence and lack of confidence can get you killed. Cautious optimism is the right approach.
- Boom bust cycles won’t change because it is caused by human psychology, which will not change.
- Jeremy Grantham study: grouped the average P/E over a year from 1925-2001 and measured its subsequent 10-year compounded real return. The cheapest two quintiles had real returns of 11%, the most expensive quintile had real returns of 0%.
Finished: May-2008