Sage Advice on Investing
Posted on Saturday, March 1st, 2014
Howard Marks was interviewed by a Swiss publication titled Swiss Finanz und Wirtschaft late last week. Here are some great tidbits that caught our eye from a Master of Investing on the role of emotions.
I’ve been in this business for over forty-five years now, so I’ve had a lot of experience. In addition, I am not a very emotional person. In fact, almost all the great investors I know are unemotional. If you’re emotional then you’ll buy at the top when everybody is euphoric and prices are high. Also, you’ll sell at the bottom when everybody is depressed and prices are low. You’ll be like everybody else and you will always do the wrong thing at the extremes. Therefore, unemotionalism is one of the most important criteria for being a successful investor. And if you can’t be unemotional you should not invest your own money, period. Most great investors practice something called contrarianism. It consists of doing the right thing at the extremes which is the contrary of what everybody else is doing. So unemotionalism is one of the basic requirements for contrarianism.
There are two main things to watch: valuation and behavior. A great thing about investing is that you have historic valuation standards. You should be aware of them, but you shouldn’t be a slave to them. You can compare the current P/E ratio to historic standards and see that the current P/E ratio is about fair relative to history. So valuations are moderate to a little expensive in most areas. Looking at investor behavior, you can ask yourself: Is everybody at the club, on the train or in the office talking about stocks? Is everybody having fun and making easy money? Is everybody saying even though the market has doubled, I’m going to put more money in? Is every deal sold out? Is every fund sold out? In other words: Is the party rolling? And if that’s the case, then you should be very cautious. It’s like Warren Buffett says in one of my favorite quotes: The less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs.
It must be that time of the year as investing masters are out and about giving sage advice. Warren Buffett gave a preview of his Annual Letter this week to his good friend Carol Loomis at Fortune magazine and he also warns about the effect of emotions on investing. Here is an excerpt.
In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I knew nothing about operating a farm. But I have a son who loves farming, and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.
I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop, and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm.
I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
http://finance.fortune.cnn.com/2014/02/24/warren-buffett-berkshire-letter/
The bulls are still in control although there does seem to be some doubt due to their failure to launch. Friday’s action had the bulls squarely in charge even in light of poor economic numbers. The bulls had the market plus 150 before reports came in that Russia had invaded the Ukraine sending stocks careening to their lows of the day and negative on the session. The market rebounded to up 40 points on the Dow but I would have to say it was not a real confidence builder for the bulls. The bull’s advances, having been repelled 4 times at the old high and now punching through only to rapidly fall back leaves us in doubt about the bull’s ability to maintain the new high. Keep an eye on the new high. Let’s see if the bulls can maintain their ground. Bonds continue to perform well as QE is wound down.
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.