My views on the market, tech, and everything else

A Dozen Things I’ve Learned from Jason Zweig about Investing

1. “The future value of every investment is a function of its present price. The higher the price you pay, the lower your return will be.” Value investors *price* assets based on their value *now* (based on data from the present) rather than make predictions about markets in the *future.*  Value investors put predictions about the future in the “too hard” pile.

2. “A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.” The best way to determine the intrinsic value a business is based on the price a *private* investor would pay for the entire business.

3. “You should do business with [Mr. Market]—but only to the extent that it serves your interests. Mr. Market’s job is to provide you with prices; your job is to decide whether it is to your advantage to act on them. You do not have to trade with him just because he constantly begs you to. By refusing to let Mr. Market be your master, you transform him into your servant…. “It’s harder than ever for long-term investors to ignore the trading madness of Mr. Market. But ignoring it remains the very essence of what it means to be an investor.” Markets are bi-polar and will *always* move up and down. These movements are not (1) rationally based, (2) based on market efficiency or (3) predictable with certainty. The best advice is simple: “be greedy when others are fearful and be fearful when others are greedy.” This is easy to say, but hard to do since it requires courage at the hardest possible time.  To outperform the market you must occasionally be a contrarian and be right on those occasions.

4. “Regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.” That prices of investment assets will wiggle above and below intrinsic value is Mr. Market’s gift to you. Don’t try to predict when the wiggles will happen but rather be patiently waiting for when it happens. The “being patient” part of being a value investor is hard. If you expect the market to give you enough profit to buy a car or a speedboat next week, you will fall down. ” Value investors price stocks” rather than “time markets.”

5. “Investors have never liked uncertainty–and yet it is the most fundamental and enduring condition of the investing world.” An investor faces these situations: 1) possible future state known, probability known (risk), (2) Possible future state known, probability unknown (uncertainty) and (3) future state unknown, probability not computable (ignorance). How an investor deals with risk, uncertainty and ignorance will determine their level of success.

6. “The intelligent investor realizes that stocks become more risky, not less, as their prices rise, and less risky, not more, as their prices fall.” Risk is *not* equal to volatility as some people claim. There are many money managers who want you to believe/convince you that volatility is equal to risk because volatility is a major risk for them since if stocks drop in price investors will flee the money manager. These managers also love equating risk with volatility since it gives investors the impression that risk can be precisely quantified which justifies their fees. Since some probabilities are unknown and some future states are unknown, “risk” is not computable number.  It is “volatility” after all which enables an investor to benefit from Mr. Market’s bi-polar behavior (i.e., volatility is actually the source of a value investor’s opportunity). For the best essay on the proper definition of risk read Warren Buffett’s 1993 Berkshire Shareholder’s letter.

7. “Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.” As an investor you should bet seldom and only when the odds of success are substantially in your favor. The temptation of investors is too often toward action when inaction is their friend.  Keeping fees and expenses very low is important and avoiding hyperactivity helps with that objective.

8. “Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” Overcoming dysfunctional psychological heuristics is a trained response. That trained response requires work and discipline – if you want to avoid that, buy an index fund.

9. “Keep better records of your decisions.” By writing down your decisions and measuring their outcomes you are confronted with the fact that you are often a muppet. Hindsight bias, denial, overconfidence and other psychological biases are powerful. The easiest person to fool is yourself. I have a friend who thought he was a great investor until he wrote down his investing results for three years.  Now he is an index fund zealot.

10. “The way I like to think of day trading is that it’s probably the most effective weapon ever to commit financial suicide, … It’s an absolutely lethal way for the typical person to invest because it’s not even really a form of investing, it’s gambling pure and simple.” People love to gamble as anyone driving by a casino can see. In far too many cases this gambling finds its way into a person’s investing behavior. The difference between making a bet when the odds are substantially in your favor and when “the house” has an advantage is night and day.

11. “Most people will buy more when something goes up and either sell it or freeze when it goes down. The brain is really built as a pattern-recognition machine and a performance-chasing mechanism, and when you combine automatically perceiving patterns where they don’t actually exist with pursuing performance right before it disappears, you have a recipe for disaster.” Training yourself not to “chase performance” is essential.

12. “Most financial journalism, like most of Wall Street itself, is dedicated to a basic principle of marketing: When the ducks quack, feed ‘em…. Every columnist knows that if you ever write something that didn’t make anybody angry, you blew it.”

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