As an Investor, You May Be Your Own Worst Enemy

A: When I was getting out of grad school at the University of Chicago in 1969, I applied for six different jobs in six different finance fields. I was not dedicated to any one, but I had had a summer job at Citibank. I liked the people. I liked what I did. And so I went to Citibank in the equity research department.

A: Every day is different, and every investment is different. The variability of investing makes it an interesting intellectual challenge. That’s incredibly enjoyable.

A: Here’s an example.

Superior investing is taking advantage of the errors of others. In order to get an above-average return in the long run, you have to buy things for less than they’re worth, which is to say that the other people out there have to be selling that thing for less than its worth.

They’re making a mistake and you need to act in a contrarian way to take advantage of that.

A: Most people think the goal is to buy good things and sell bad things. How many people understand that there is no asset that is so good that it can’t become overpriced and lethal? And there are few assets that are so bad that they can’t become cheap enough to become compellingly attractive?

A: If you look at assets that everybody knows about, understands and is objective toward, then it’s less likely you’re going to find mispricings. If you’re going to find bargains or overpricings to short, then it has to be in things that are not understood, known and appreciated.

A: One of the best ways to have a handle on macrorisk, marketwide risk, is by understanding where we stand in a cycle. When the market is high in its cycle, it’s probably pretty risky. When it’s low, most of the time, it turns out that they were giving away money, if only you could figure that out at the time.

A: If you understand the role of emotion, you probably can teach yourself to be less emotional.

But can the emotional person become an unemotional person through intention? I would be somewhat skeptical.

I think it’s easier if you’re born unemotional.

A: But that’s the point. You remember what Dirty Harry said? “A man’s got to know his limitations.”

I don’t write to make investing easy. I write to show how hard it is so that people won’t try tricks that they can’t do. You know what they say, don’t try this at home, right?

A: I believe it is highly possible to improve your long-term results by adjusting your investment position at the extremes of the cycle. Not that often. But at the extremes.

And by the way, I think that it works fairly dependably at the extremes, but it does not work at all dependably otherwise.

A: Unless the situation is compelling, trading doesn’t make sense. Waiting patiently is an essential part of being an investor. And when you do take action, do it dynamically, forcefully.

If you do a little trading all the time it is going to be a disaster. I always wondered what would happen if we set up a trading room so that it only accepted orders on Thursdays. And in between, all people could do is think. Maybe you would do better.

A good percentage of the money we manage here is 10-year money. You put your money in and you can’t get it out for 10 years.

I believe denying clients the ability to be hyper-traders is doing them a favor. Most people are not adept enough to take advantage of short-term mis-valuations, and I put myself in that category.

A: They’ve gotten more information. They know more about more asset classes. There are fewer secrets in the world today.

On the other hand, I think they are more shortsighted, more short-term oriented than they used to be.

And while people now understand more about contrarianism and counterintuitiveness, I don’t think the human race has become less emotional.

So it’s kind of a holding action.