I thought I'd say a few things that have caught my attention over the past few months. I have a new academic study to share, a few books to mention and some news on my own upcoming new edition of The Focus Investor. I just received the annotated copy of it back from the editor the other day. Though we are one step closer to getting in everyone's hands it still needs to be revised, again. On to the rest of the blog!
Thinking, Fast and Slow: A Fascinating Book
Thinking, Fast and Slow
Amazon Kindle Link:
Thinking, Fast and Slow
This probably won't surprise many regular readers of this blog (yes I know that I should be posting more regularly in order to actually have regular readers!) but I have a new book to recommend:Thinking, Fast and Slow by Daniel Kahneman, a recipient of the Noble Prize in Economic Sciences.
The marketing blurb from the book:
"In the highly anticipated Thinking, Fast and Slow, Kahneman takes us on a groundbreaking tour of the mind and explains the two systems that drive the way we think. System 1 is fast, intuitive, and emotional; System 2 is slower, more deliberative, and more logical. Kahneman exposes the extraordinary capabilities—and also the faults and biases—of fast thinking, and reveals the pervasive influence of intuitive impressions on our thoughts and behavior. The impact of loss aversion and overconfidence on corporate strategies, the difficulties of predicting what will make us happy in the future, the challenges of properly framing risks at work and at home, the profound effect of cognitive biases on everything from playing the stock market to planning the next vacation—each of these can be understood only by knowing how the two systems work together to shape our judgments and decisions.
Engaging the reader in a lively conversation about how we think, Kahneman reveals where we can and cannot trust our intuitions and how we can tap into the benefits of slow thinking. He offers practical and enlightening insights into how choices are made in both our business and our personal lives—and how we can use different techniques to guard against the mental glitches that often get us into trouble. Thinking, Fast and Slow will transform the way you think about thinking."
Dr. Kahneman covers all the bases that an investor should think about when studying how their our actions and though processes can influence their decision making in life and investing. Here is one quote that I found very informative for focus investors:
"Closely following daily fluctuations is a losing proposition, because the pain of the frequent small losses exceeds the pleasure of the equally frequent small gains. ...the deliberate avoidance of exposure to short-term outcomes improves the quality of both decisions and outcomes. The typical short-term reaction to bad news is increased loss aversion. Investors who get aggregated feedback receive such news much less often and are likely to be less risk averse and to end up richer. You are less prone to useless churning of your portfolio if you don't know how every stock in it is doing every day..."
We all understand one of the enemies of the focus investor is the inability to sit on our rumps for long periods of time while we wait for opportunity to come to us and this is just further confirmation.
This is just a tiny portion of the wisdom in the book and I heartily recommend it to all of my readers even if you have read many books about investment psychology.
In case you didn't know I'm not the only person who has issues with Jim Cramer and his television show. C<span">ramer and Jason Zweig, a writer for the WSJ, also have quite a history of bantering back and forth. One episode between them dates back to 2008 and here is how the Mad Money site frames the dispute:
"Cramer criticized Wall Street Journal columnist Jason Zweig after he wrote an article this weekend that said buy and hold is solid investment strategy and took a shot at TV pundits who recommend trading in and out of stocks. Cramer explained that his strategy is to buy and do homework, not buy and hold. He reminded investors that buy and holders got slaughtered during the dot-com bust. Cramer took even more issue with Zweig's statement that buying stocks down 50% is a good investment. He pointed out that investors who bought into National City (NCC), Washington Mutual (WM), General Motors (GM) Fannie Mae (FNM) and Freddie Mac (FRE) after they dropped 50% are now down even more. Cramer said that savvy investor should do one hour per week of homework on any stock they invest in - if they don't have time than they should hand it off to a professional, and do their homework on the guy in running the fund. He told investors to remain involved in their portfolios. "The results are completely worth the effort," he said."
(Link to full article:
The idea that Buy and Hold is dead as an investment stratedgy seems to be a theme for this blog post as it is discussed here and in a later part of this blog. Trust me Buy and Hold is alive and well if its properly conducted. Jason Zweig seems to have the last laugh in this argument with Cramer though as this new research article points out in his January 28, 2012 tweet:
says new study: to make money, short jim cramer's "buys," ignore his "sells"
I think its worth a read.
A New Templeton Book
This book looks quite interesting as it is written by two investment professionals with one, Sandy Nairn, having worked with Mr. Templeton for ten years. They believe that their prospective will offer fresh insights into his investment approach. The authors also advise that they have the benefit of having new material to draw from which includes letters to clients and investment holding data that has not been previously published.
James Montier, an author and investment manager that I respect, wrote this blurb:
"Anyone calling themselves an investor should read this book. It is a treasure trove packed with a wonderful combination of Sir John's collected wisdom on the enduring power of the value-based contrarian approach and the authors' fresh insights into both Sir John's methods and their application in today's investment opportunity set."
I think the book looks quite interesting and have preordered it. I also intend to follow up with a full review when the book is released.
Book to Avoid: Buy High, Sell Higher?
Buy High Sell Higher by Joe Terranova
I was recently in my local library ordering articles for background research on a new chapter of The Focus Investor book when I stopped by the investment section and one title jumped out at me: "Buy High and Sell Higher" with a further blurb on its cover that stated "Why buy-and-hold is dead..." Which are both sentiments that I disagree with but thinking that its worthwhile on occasion to see the counter arguments to ideas that you believe in I checked out the book.
In the prologue he gives one good piece of advice when he states that one principle of investing is that you should never put yourself in a position that you have to sell at an inappropriate time. He follows up with a piece of horrible investment advice. On page 12: "The new normal is characterized by fear and uncertainty, and not just for retail investors. New times demand new tactics: welcome to buying high and seller higher."
He goes on to talk about how this strategy would have failed if they would have invested in the S&P 500 in 2000 and held onto those shares until 2010. He also uses Microsoft as an example by saying if you had purchased the stock in 2000 and held onto it until 2010 would have been a "losing proposition in the New Normal". The problem is that he never takes into consideration the valuation of Microsoft in 2000 and how the high price paid versus earnings would be a large of the reason why the company stock (versus its actual business performance) had under performed over this period. The company in this case performed well but the stock didn't in large part because of the unrealistic expectations of those who initially overpaid.
He goes on to discourage day trading but then goes onto to say that you should be "trading around positions and shifting allocations six to eight times a year". His advice is to invest with confidence, on other words investing in "...stocks that the market likes: stocks with momentum, stocks that are outperforming the average benchmark indexes like the S&P 500, and more specifically, stocks that are outperforming other stocks in the same sector". (page 15) Notice how he never once mentions valuations, never once talks about them as businesses.
He further advises investors not to buy when the stock price is low (he calls this the falling knife method of investing) because "when you buy a stock that is consistently making new lows or has just made a 52-week low, you have no point of reference to tell you what to do with that stock". He goes on to state his belief that no investor has any idea of how far the security could fall so they can have no idea when they should sell. Once again his mistake is not taking into account the value of the business and trying to determine the reason for the drop versus the long-term picture of the business. If there is a disconnect, i.e. the company is facing short-term headwinds but with a favorable long-term horizon, this can present a compelling investment opportunity.
He reserves his thoughts on buy on hold on page 48... "...gold became a classic buy-and-hold asset from 2000 to 2010... Just because buy-and-hold has been revealed to be a flawed investment strategy in general during the last decade does not mean that there were not a few assets that could be bought and kept without experiencing significant pullbacks, and gold was one of them." So he appears to be saying that buy-and-hold can work but I doubt he was recommending gold to his client between 2000-2006. So it seems he is telling us buy-and-hold is dead except for those assets/investments that held their value over the last decade and which are now quite obvious to spot with the aid of hindsight.
In the conclusion of his book (page 233-234) he advises investors not to invest like Buffett mainly because he thinks holding stocks forever is something that many investors "can't afford to invest the way he does... no one should invest like Buffett." He continues this discussion by mentioning that in 2008 Buffett purchased a big slug of GoldmanSachs preferred stocks and used it as an example of how investors simple can't invest like Buffett. What he neglects is what Buffett has spent years teaching about investing via his annual report, interviews, and his annual meeting. You must look for companies that you can understand , companies that possess competitive advantages, and that are selling for below you estimate of intrinsic value. Individual investors are certainly able to make these kinds of investments if they spend time learning the investment process, a process that has been followed successfully by value investors for generations. In fact the book provides us with some measure of hope as people who follow the ideas advocated in this book help to generate investment possibilities that we can take advantage of.
In the final analysis the book advocates an investment approach dependent on gut feelings and frequent trading with a fatal full in that no thought is given concerning the companies long-term fundamentals and valuation. My suggestion would be to forget his motto: Buy High, Sell Higher and instead remember this motto: Buy Below Intrinsic Value, Sell Above Intrinsic Value. Although the book does contains a few nuggets of investment wisdom the overall message is one to that I think all investors would do well to avoid. leave the speculative investing to the speculators.