My views on the market, tech, and everything else


What is a muppet?

Henry Blodgett:  “The definition of “muppet,” say those who live on the other side of the pond (where ‘muppet’ is apparently a common term on trading floors to describe the guy on the other side of the trade) is “idiot.”

Can a muppet become an investor?

David Swensen:  “Instead of concentrating on the central issue of creating sensible long-term asset-allocation targets, [muppets]  too frequently focus on the unproductive diversions of security selection and market timing.”

Is this always the case?  

Warren Buffett:  “If you are a know-something investor, able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you.  It is apt simply to hurt your results and increase your risk.”

What are the odds that I am not a muppet?

Charlie Munger:   “Most people who try [to become know- something investors]  don’t do well at it.  But the trouble is that if even 90% are no good, everyone looks around and says, ‘I’m the 10%.’”

What is the key to becoming a know-something investor?

Warren Buffett: “Success in investing doesn’t correlate with I.Q. once you’re above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

What dangers should I look out for?

Benjamin Graham: “Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble… to give way to hope, fear and greed.

Any other things I should look out for?

David Swensen: “Overconfidence contributes to a litany of investor errors, including inadequate diversification, overzealous security selection, and counterproductive market timing.”

Do you have any tips on a good investment process? 

Warren Buffett:  “You ought to be able to explain why you’re taking the job you’re taking, why you’re making the investment you’re making, or whatever it may be. And if it can’t stand applying pencil to paper, you’d better think it through some more. And if you can’t write an intelligent answer to those questions, don’t do it.”

If I have run or worked for a business will it help me be an investor?

Charlie Munger: “Understanding how to be a good investor makes you a better business manager and vice versa.”

Will being a know something investor make me better at business?

Warren Buffett: “I am a better investor because I am a businessman and a better businessman because I am an investor.”

What is the best approach for investors not willing to do the work to become know-something investors?  

Warren Buffett: “A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money.”

Is a 401K a retirement plan?

John Bogle:  “A 401(k) is a thrift plan trying to be a retirement plan.  It was never designed to be a retirement.  To be a retirement plan, you have to keep putting money in and can’t be allowed to take money out, and you can’t be allowed to borrow from it.”

Why should muppets diversify their investments?  

Warren Buffett:  “Diversification is a protection against ignorance.”

How should muppets diversify? 

Charlie Munger:  “Our standard prescription for the know-nothing investor with a long-term time horizon is a no-load index fund. I think that works better than relying on your stock broker. “

Why is a no-load low fee fund important?

John Bogle: “In investing, you get what you don’t pay for.  Costs matter.” “The case for indexing isn’t based on the efficient market hypothesis. It’s based on the simple arithmetic of the cost matters hypothesis. In many areas of the market, there will be a loser for every winner so, on average, investors will get the return of that market less fees.”

Why are fees so high?

Charlie Munger:  “The people who are telling you to do something else are all being paid by commissions or fees. The result is that while index fund investing is becoming more and more popular, by and large it’s not the individual investors that are doing it. It’s the institutions.”

How will fees impact my performance?

Bill Gross:  “If you choose an investment advisor, a mutual fund or an ETF, make sure that your fees are minimized. After all, if overall returns average 3–4% annually, how can you possibly afford to give 100 basis points [1%] of it back? You cannot.”

Are fees as low as Bill Gross notes?

John Bogle: “heavy costs incurred by investors in actively managed equity funds can easily amount to 2% to 3% annually. Typical expense ratios run from 1% to 1.5%; the hidden costs of portfolio turnover often come to 0.5% to 1.0%; a 5% front-end sales load, amortized over a holding period of five to 10 years, adds another 0.5% to 1.0% per year in costs.

What real value can an investment advisor provide?

John Bogle:  “The goal of the advisor shouldn’t be to beat the market by picking stocks or winning funds. Advisors add value by providing the discipline required for successful investing. They add value in areas like tax efficiency, risk management, estate planning and retirement planning.”  “I don’t think beating the market is where they add value, so I believe charging on a fee-only basis, or a fixed or hourly professional fee, will grow.”  “The most valuable services advisors can provide are in areas of financial planning like integrating Social Security into one’s portfolio. They can help the client set the right asset allocation and then avoid the temptation to change it. Assisting the client in coordinating the will and estate planning aspects of life is a critical area. Planners can save their clients in taxes by building tax-efficient portfolios with little turnover and the assets located in the right tax vehicles – taxable, tax-deferred or tax-free. Making sure clients have the right and most cost-effective insurance is another key area of value. Finally, helping the consumer understand how much they need to save to reach their financial goals, applying all of the areas above, is a critical service planners provide to their clients.”

What motivates mutual funds?

David Swensen: “The mutual fund industry is not an investment management industry. It’s a marketing industry.”

What is a closet indexer?

Charlie Munger:  “[With] closet indexing, you’re paying a manager a fortune and he has 85% of his assets invested parallel to the indexes.  If you have such a system, you’re being played for a sucker.”

Why not use an ETF since fees can be lower in some cases?

John Bogle: “You’re probably 25% more likely to trade with an ETF.” [use an ETF only if you are a  disciplined investor]

What is asset allocation?

David Swensen:  “Asset allocation is the tool that you use to determine the risk and return characteristics of your portfolio. It’s overwhelmingly important in terms of the results you achieve. In fact, studies show that asset allocation is responsible for more than 100 percent of the positive returns generated by investors.”

Should I re-balance my asset allocation?

David Swensen:  “Rebalancing to long-term policy targets plays a central role in the portfolio management process.”

Should I speculate in currencies?

David Swensen: “Sensible investors avoid speculating on currencies.”

Should I own US Treasuries?

David Swensen: “No other asset type comes close to matching the diversifying power created by long-term, noncallable, default-free, full-faith-and-credit obligations of the U.S. government.”

How can I protect against inflation?

David Swensen: “TIPS constitute a compelling addition to the tool-set available to investors.”

Should real estate be part of my asset allocation strategy?

David Swensen:  “With its inflation-sensitive nature, real estate provides powerful diversification to investor portfolios.”

How much should I hold in bonds vs stocks?

John Bogle:  “A good place to start is a bond percentage that equals your age.  Although I don’t slavishly adhere to that rule…”  “My personal, non-retirement accounts are about 80 percent bonds and 20 percent stocks, reflecting my old rule of thumb that your bond allocation should roughly equal your age.    My retirement accounts are more like a 50-50 split between stocks and bonds, because of a longer time horizon and because yields on bonds are extremely unattractive right now. Bonds in my retirement accounts are about 30 percent Treasuries and 70 percent investment-grade corporates.”

What is the importance of having some cash and cash equivalents?

John Bogle:  “Virtually all investors should keep some “dry powder” in their portfolios in the form of high-grade short- and intermediate-term bonds. Investors who failed to learn that lesson fell on especially hard times in 2008.”

Is there any upside to acknowledging that you are a muppet?

Buffett:  “By periodically investing in an index fund…the know-nothing investor can actually out- perform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”

What is investing?

Benjamin Graham: “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.” “ The individual investor… should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money’s worth for his purchase.”

What is speculation?

Jesse Livermore:  “The speculator is not an investor. His object is not to secure a steady return on his money at a good rate of interest, but to profit by either a rise or a fall in the price of whatever he may be speculating in.”

Is it easy to spot investing versus speculation? 

Warren Buffett: “The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”

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