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Good information, thoughtful analysis, quick but not impulsive reactions, and
knowledge of the historic interaction between companies, sectors, countries, and asset
classes under similar circumstances in the past are all important ingredients in getting the
legendary it right that we all strive so desperately for.
[T]here are no relationships or equations that always work. Quantitatively based
solutions and asset-allocation equations invariably fail as they are designed to capture
what would have worked in the previous cycle whereas the next one remains a riddle
wrapped in an enigma. The successful macro investor must be some magical mixture of
an acute analyst, an investment scholar, a listener, a historian, a river boat gambler, and
be a voracious reader.Reading is crucial. Charlie Munger, a great investor and a very
sagacious old guy, said it best: I have said that in my whole life, I have known no wise
person, over a broad subject matter who didnt read all the time none, zero. Now I
know all kinds of shrewd people who by staying within a narrow area do very well
without reading. But investment is a broad area. So if you think youre going to be good
at it and not read all the time you have a different idea than I do.
[T]he investment process is only half the battle. The other weighty component is
struggling with yourself, and immunizing yourself from the psychological effects of the
swings of markets, career risk, the pressure of benchmarks, competition, and the
loneliness of the long distance runner.
Ive come to believe a personal investment diary is a step in the right direction in coping
with these pressures, in getting to know yourself and improving your investment
behavior.
As I reflect on this crisis period so stuffed with opportunity but also so full of pain and
terror, I am struck with how hard it is to be an investor and a fiduciary.
The history of the world is one of progress, and as a congenital optimist, I believe in
equities. Fundamentally, in the long run, you want to be an owner, not a lender. However,
you always have to bear in mind that this time truly may be different as Reinhart and
Rogoff so eloquently preach. Remember the 1930s, Japan in the late 1990s, and then, of
course, as Rogoff said once with a sly smile, there is that period of human history known
as The Dark Ages and it lasted three hundred years.
Mr. Market is a manic depressive with huge mood swings, and you should bet against
him, not with him, particularly when he is raving.
As investors, we also always have to be aware of our innate and very human tendency to
be fighting the last war. We forget that Mr. Market is an ingenious sadist, and that he
delights in torturing us in different ways.
Buffett, a man, like me, who believes in America and the Tooth Fairy, presents the
dilemma best. Its as though you are in business with a partner who has a bi-polar
personality. When your partner is deeply distressed, depressed, and in a dark mood and
offers to sell his share of the business at a huge discount, you should buy it. When he is
ebullient and optimistic and wants to buy your share from you at an exorbitant premium,
you should oblige him. As usual, Buffett makes it sound easier than it is because
measuring the level of intensity of the mood swings of your bipolar partner is far from an
exact science.
Fifty some years ago, Sir Alec Cairncross doodled it best:
A trend is a trend is a trend
But the question is, will it bend?
Will it alter its course
Through some unforeseen force
And come to a premature end?
Nations, institutions, and individuals always have had and still have a powerful tendency
to prepare themselves to fight the last war.
[W]hats the moral of this story? Know thyself and know thy foibles. Study the history
of your emotions and your actions.
"At the extreme moments of fear and greed, the power of the daily price momentum and
the mood and passions of the crowd are tremendously important psychological
influences on you. It takes a strong, self-confident, emotionally mature person to stand
firm against disdain, mockery, and repudiation when the market itself seems to be
absolutely confirming that you are both mad and wrong.
Also, be obsessive in making sure your facts are right and that you havent missed or
misunderstood something. Beware of committing to mechanistic investing rules such as
stop-loss limits or other formulas. Work very hard to better understand how you as an
investor react to both prosperity and adversity, and particularly to the markets manic
swings, both euphoric and traumatic. Keep an investment diary and re-read it from time
to time but particularly at moments when there is tremendous exuberance and also panic.
We are in a very emotional business, and any wisdom we can extract from our own
experience is very valuable.
Understanding the effect of emotion on your actions has never been more important than
it is now. In the midst of this great financial and economic crisis that grips the world,
Central Banks are printing money in one form or another. This makes our investment
world even more prone to bubbles and panics than it has been in the past. Either plague
can kill you.