Chong Ser Jing, Author at The Good Investors : Page 12 of 23

The Disconnect Between Stocks And The Economy

There appears to be a disconnect between stocks and the economy with both moving in different directions. But can there be good reasons behind this?

Note: An earlier version of this article was first published in MoneyOwl’s website. MoneyOwl is Singapore’s first bionic financial advisor and is a joint-venture between NTUC Enterprise and Providend (Singapore’s first fee-only financial advisor). This article is a collaboration between The Good Investors and MoneyOwl and is not a sponsored post.

The apparent disconnect between the stock market and the economy is one of the hottest topics of discussion in the finance community this year.

Let’s look at the USA, for example, since it’s home to the world’s largest economy and stock market (in terms of market capitalisation). Due to the ongoing restrictions on human movement to fight COVID-19, the country’s economy inched up by just 0.6% in the first quarter of 2020 compared to a year ago. The second quarter of the year saw the US’s economic output fall by a stunning 9.0%; that’s an even steeper decline compared to the worst quarter of the 2007-09 Great Financial Crisis. Yet the US stock market – measured by the S&P 500 – is up by 4.1% in price as of 30 September 2020 since the start of the year.

Many are saying that this makes no sense, that stocks shouldn’t be holding up if the economy’s being crushed. But here’s the thing: The stock market and the economy are not the same things, and this has been the case for a long time.

A walk down memory lane

Let’s go back 113 years ago to the Panic of 1907. It’s not widely remembered today but the crisis, which flared up in October 1907, was a period of severe economic distress for the USA. In fact, it was a key reason behind the US government’s decision to set up the Federal Reserve, the country’s central bank, in 1913.

Here are excerpts from an academic report published in December 1908 that highlighted the horrible state of the US economy during the Panic of 1907:

“The truth regarding the industrial history of 1908 is that reaction in trade, consumption, and production, after the panic of 1907, was so extraordinarily violent that violent recovery was possible without in any way restoring the actual status quo.

At the opening of the year, business in many lines of industry was barely 28 per cent of the volume of the year before: by mid- summer it was still only 50 per cent of 1907; yet this was astonishingly rapid increase over the January record. Output of the country’s iron furnaces on January 1 was only 45 per cent of January, 1907: on November 1 it was 74 per cent of the year before; yet on September 30 the unfilled orders on hand, reported by the great United States Steel Corporation, were only 43 per cent of what were reported at that date in the “boom year” 1906.”

You can see that there were improvements in the economic conditions in the USA as 1908 progressed. But the country’s economic output toward the end of the year was still significantly lower than in 1907.

Now let’s look at the US stock market in that same period. Using data published by Nobel-Prize-winning economist Robert Shiller, I constructed the chart below showing the S&P 500’s performance from 1907 to 1917.

*Source: Robert Shiller data; my calculations*

It turns out that the US stock market fell for most of 1907. It bottomed out in November of the year after a 32% decline from January. It then started climbing rapidly in December 1907 and throughout 1908, even though 1908 was an abject year for the US economy. And for the next eight years, US stocks never looked back. What was going on in the US economy back then in 1908 was not the same as what happened to its stocks.

There’s no link

It may surprise you, but studies on the long-term histories of stock markets and economies around the world show that there’s essentially no relationship between economic growth and stock prices over the long run. One of my favourite examples comes from asset manager AllianceBernstein and is shown below:

Despite stunning 15% annual GDP growth in China from 1992 to 2013, Chinese stocks fell by 2% per year in the same period. Mexico on the other hand, saw its stock market gain 18% annually, despite anaemic annual economic growth of just 2%. A wide gap can exist between the performance of a country’s economy and its stocks for two reasons.

First, stocks are ultimately driven by per-share earnings growth as well as changes in valuations (how much investors are willing to pay for each dollar of earnings). On the other hand, a country’s economic growth is driven by the revenue growth of all its companies. There can be many obstacles between a company’s revenue growth and earnings growth. Some examples include poor cost-management, dilution (where a company issues more shares and lowers its per-share growth), and regulatory pressures (such as a company facing an increase in taxes). Second, the presence of revenue growth for all companies in aggregate does not mean that any collection of companies are growing.

What this means is that if we’re investing in stocks, it’s crucial that we focus on companies and valuations instead of the economy. This brings us to the situation today.

Underneath the hood

We have to remember that when we talk about the stock market, we are usually referring to a stock market index, which reflects the aggregate stock price movements for a group of companies. For example, the most prominent index in the USA is the S&P 500, which consists of 500 of the largest companies in the country’s stock market. There are two things worth noting about the index:

The American economy has more than 6 million companies, so the S&P 500 – as large as it is with 500 companies – is still not at all representative of the broader picture.
The S&P 500’s constituents are weighted according to their market cap, meaning that the companies with the largest market caps have the heaviest influence on the movement of the index.

According to the Wall Street Journal, the S&P 500’s five largest companies in the middle of January 2020 – Apple, Microsoft, Alphabet, Amazon, and Facebook – accounted for 19% of the index then. Here’s how the five companies’ businesses performed in the first half of 2020:

*Source: Companies’ quarterly earnings updates*

Although the US economy did poorly in the first half of this year, the S&P 500’s five largest companies in mid-January 2020 saw their businesses grow relatively healthily. What’s happening in the broader economy is not the same as what’s happening at the individual company level, especially with the S&P 500’s largest constituents. From this perspective, the S&P 500’s year-to-date movement (the gain of 4.1%), even with the gloomy economy as a backdrop, makes some sense.

In fact, the recent movement of stocks makes even more sense if we dig deeper. On 4 August 2020, Bloomberg published an article by investor Barry Ritholtz titled Why Markets Don’t Seem to Care If the Economy Stinks. Here are some relevant excerpts from Ritholtz’s piece:

“Start with some of 2020’s worst-performing industries: Year-to-date (as of the end of July), these include department stores, down 62.6%; airlines, off 55%; travel services, down 51.4%; oil and gas equipment and services, down 50.5%; resorts and casinos, down 45.4%; and hotel and motel real estate investment trusts, off 41.9%. The next 15 industry sectors in the index are down between 30.5% and 41.7%. And that’s four months after the market rebounded from the lows of late March…

…Consider how little these beaten-up sectors mentioned above affect the indexes. Department stores may have fallen 62.3%, but on a market-cap basis they are a mere 0.01% of the S&P 500. Airlines are larger, but not much: They weigh in at 0.18% of the index. The story is the same for travel services, hotel and motel REITs, and resorts and casinos.”

It turns out that the companies whose businesses have crashed because of COVID-19 have indeed seen their stock prices get walloped. But crucially, they don’t have much say on the movement of the S&P 500.

Conclusion

Stock market indices are useful for us to have a broad overview of how stocks are faring. But they don’t paint the full picture. They can also move in completely different directions from economies, simply because they reflect business growth and not economic growth. The main takeaway is that when you’re investing in stocks, don’t let the noise about the economy affect you from staying invested as they don’t always move in the same direction. If you invest in stocks, look at companies and not the economy.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of Alphabet, Amazon, Apple, Facebook, and Microsoft. Holdings are subject to change at any time.

Learning Investing, Redefined

A new micro-learning bot that could revolutionise the way you learn about investing.

I’ve a group of entrepreneurial friends who came together earlier this year to launch Joyful Person, a micro-learning bot. According to the team, who quoted research from Stanford and UPenn, users tend to learn better and faster with bot-based learning programmes.

One of the first few topics Joyful Person wants to help users learn, is investing. To this end, the team behind Joyful Person have built a few different investing courses on their platform. Each course typically consists of 5 to 15 sessions, and each session takes less than 10 minutes to complete.

In the list of the investing courses that are currently on Joyful Person is a course that’s based on the lessons I shared in my article Saying Goodbye: 10 Years, a 19% Annual Return, and 17 Investing Lessons.

Yesterday, I tried out a demo of the investing course and it worked beautifully. Quick but effective quizzes were sprinkled throughout each session of the course to help users better understand the content. You can also learn entirely at your own pace – the content is delivered based on your interaction with the bot. Below are screenshots of my experience with the course.

Screenshot 1:

Screenshot 2:

The only minor gripe I had was that the course could only be accessed through the Telegram messaging app on a mobile device. The team told me that they’re working on launching Joyful Person on other widely-used messaging apps too. Other than that, I was so impressed by the experience that I think Joyful Person’s micro-learning bot could redefine how people learn about investing.

Check out the course based on my article by hitting the link below! (Link works best on mobile, and it opens to the Telegram app)

Joyful Person’s INvesting Course Based on my Article

I hope you will enjoy it as much as I did, and please spread the love to anyone in your network if you think the micro-learning course can be useful to them. I will also be glad to hear feedback from you on the course. Your comments will be passed along to the Joyful Person team – they value your input! Feel free to reach out to me at thegoodinvestors@gmail.com.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

How People Think About Investing

A friend of mine and his colleague recently approached me to give an online presentation. My friend works in a financial advisory organisation and he wanted me to share my thoughts on how people generally think about investing and how could he and his colleagues explain long-term investing in a convincing manner. The presentation took place on 7 September 2020.

I prepared a speech and slide-deck for the session. They are meant to be viewed together. You can download the slide deck here. The speech is found below.

Hello all! Good afternoon, thanks for having me. Before I begin, I would like to thank Sam and Maxxell for inviting me to speak to everyone who’s gathered here.

Max is my friend, and he wanted me to touch on two things today: The mentality of individual investors and how to explain investing convincingly. So I’m going to be talking about these things today, specifically in relation to the stock market, because this is where I think I have some knowledge in. For this session, I will be presenting for 30 minutes, and then we can have the next 30 minutes for Q&A.

[Slide 2]

I need to share a disclaimer too. Everything I say here today should not be seen as a recommendation of any stock or investment product, nor should they be seen as a solicitation for the purchase of any stock or investment product. What I say should also not be taken as financial or investment advice.

Introduction

[Slides 3 to 4]

With this, a quick introduction of myself before I dive into the presentation. I was with The Motley Fool Singapore, an online investment advisory portal, for nearly seven years from January 2013 to October 2019. My role was to conduct research on the stock market and individual stocks, and communicate them to readers of Fool Singapore’s website, so I have a lot of experience interacting with men-on-the-street types of investors. I was a co-leader of the investment team at Fool Singapore and recommended stocks for subscribers to the company’s online investment newsletters.

One of my proudest achievements with the company was to help its flagship investment newsletter, Stock Advisor Gold, beat the market soundly. Stock Advisor Gold was launched in May 2016 and we recommended two stocks per month, one from Singapore, and one from international markets, including the US, UK, Malaysia, and Hong Kong. We measure the return of our recommendations by taking an average of the performance of each stock we recommend; at the same time, we also track the performance of a global stock market index. The newsletter nearly doubled the global stock market’s return over a 3.5 year period as you can see.

Today, I run an investing blog called The Good Investors together with my long-time friend, Jeremy Chia. The Good Investors is our personal investing blog, where we share our investing thoughts freely. I will be sharing this presentation deck on the blog, so you can refer to it later. Jeremy and I also run an investment fund named Compounder Fund, which invests in stocks around the world for the long run. Compounder Fund was launched in May this year and started investing in mid-July. Its mission is to “Grow Your Wealth and Enrich Society” and Jeremy and myself see it as more than just a business – it’s a platform for us to do good.

With the introduction over, let’s dig into the meat of today’s presentation: How individual investors think about stock market investing and how to explain investing in a convincing way. What I want to do is to contrast six investing “beliefs” I commonly come across with actual real world data. And by me doing so, I think you’ll gain a better appreciation for how to better describe stock market investing to your clients.

“Belief” No.1: The economy’s bad (good), so stocks must do poorly (really well)

[Slides 5 to 8]

Throughout my career, one of the most common things I’ve heard from investors is to link the economy with the stock market. If the economy’s surging, stocks should be doing well, and if the economy’s faring poorly, stocks should be doing badly. But real-world data show that this is often not the case.

For instance, we can look at the Panic of 1907 which was a period of severe economic contraction in the USA. It does not seem to be widely remembered today, but it had a huge impact and was in fact one of the key motivations behind the US government’s decision to set up the Federal Reserve (the USA’s central bank) in 1913. For perspective of how tough the Panic of 1907 was, when 1908 started, business volumes in many industries fell by 72% from a year ago; by the middle of 1908, business volumes had recovered to just 50% of what they were in 1907.

Now let’s look at how the US stock market did from 1907 to 1917. US stocks fell for most of 1907. They bottomed in November 1907 after a 32% decline from January. But they then started climbing rapidly in December 1907 and throughout 1908 – and the US stock market never looked back for the next nine years. Earlier, I described the horrible economic conditions in the country for most of 1908. Yes, there was an improvement as the year progressed, but economic output toward the end of 1908 was still significantly lower than in 1907. So this is one great example of why stocks and the economy are not the same things.

I have two more examples. First, you can refer to this chart on the disparity between the stock market returns and economic growth for China and Mexico from 1992 to 2013. Despite stunning 15% annual GDP growth in that period for China, Chinese stocks actually fell by 2% per year. Mexico on the other hand, saw its stocks gain 18% annually, despite its economy growing at a pedestrian rate of just 2% per year. Second, in the second quarter of 2020, US GDP fell by over 9% from a year ago. But some of the US stock market’s largest companies actually experienced revenue growth. For instance, Amazon grew its revenue by an amazing 40%, while Apple, Facebook, and Microsoft each posted low-teens revenue growth.

So when we’re looking at the stock market, I think it’s important to focus on stocks and not the economy. They are not the same things.

“Belief” No.2: There’s so much uncertainty now, let’s invest later

[Slides 9 to 13]

Another common thing I’ve heard individual investors say over the years is that “There’s so much uncertainty now, I prefer to wait for the dust to settle before I invest.” Today, with COVID-19 as a backdrop, this sentiment is likely to be even stronger than before.

But let’s imagine that sometime in the future, there’s one single year in which the price of oil will spike, the US will go to war in the Middle East, and the US economy will experience a recession. How do you think the US stock market will fare over the next five years or the next 30 years after this particular horrendous year? Take a second to think about your answer and remember it.

The events I mentioned all happened in 1990. The price of oil spiked in August 1990, the same month that the US went into an actual war in the Middle East. In July 1990, the US entered a recession. But from the start of 1990 to 1995, the S&P 500 was up by nearly 80%, including dividends and after inflation. From the start of 1990 to the end of 2019, US stocks were up by nearly 800%. What’s really fascinating is that the world has actually seen multiple crises in every single year from 1990 to today as shown in the table, which is constructed partially with data from finance writer and venture capitalist, Morgan Housel – uncertainty was always around, but that has not stopped US stocks from rising over time.

“Belief” No.3: What goes up, must come down

[Slides 14 to 15]

“What goes up must come down” is also one of the common things about the stock market that I’ve heard investors say. But the historical evidence shows otherwise.

This chart from Credit Suisse shows the returns of stocks from developed economies as well as developing economies from 1990 to 2013 – this is more than 110 years. In this timeframe, stocks in developed economies (the blue line) have produced an annual return of 8.3% while stocks in developing economies (the red line) have generated a return of 7.4% per year. There are clearly bumps along the way, but the real long run trend is crystal clear. For perspective, an annual return of 8.3% for 113 years turns $1,000 into nearly $8.2 million.

So what goes up, does not necessarily have to come down permanently – when it comes to the stock. But there is an important caveat to note here: Diversification is crucial. Single stocks, or stocks from a single country can face catastrophic, near-permanent losses for various reasons. Devastation from war or natural disasters. Corrupt or useless leaders. Incredible overvaluation at the starting point. These are some of factors that can cause single stocks or stocks from a single country to do poorly even after decades. By diversifying, we lower our risk.

“Belief” No.4: It’s risky to invest in stocks for the long run

[Slide 16]

The fourth “belief” I want to highlight is the commonly-held idea that it’s risky to invest in stocks for the long run. What the data shows is the complete opposite: The longer you hold your stocks (assuming you have a diversified portfolio of stocks), the lower your chances are of losing money.

The chart I’m showing now comes from Morgan Housel. Morgan once studied the S&P 500’s data for the years stretching from 1871 to 2012 and found that if you hold stocks for two months, you have a 60% chance of making a profit. If you hold stocks for a year, you have a 68% chance of earning a positive return. If your holding period becomes 20 years, then there’s a 100% chance of making a gain.

So instead of it being risky to hold your stocks for the long run, the reverse is true – the longer your holding period, the less risky investing in stocks becomes.

“Belief” No.5: Stocks are so risky because they move up and down so much!

[Slides 17 to 20]

There are also investors who believe that stocks are really risky financial products because they move up and down violently over the short run. But it’s all a matter of perspective. To explain further, I want to play a quick game with all of you. I will introduce two companies – both are real companies – and I want to ask you to think about which of the two you will like to own.

The first company has been a nightmare for investors. From 1995 to 2015, it has fallen by 50% or more on four separate occasions. It has also declined by over 66% twice. The chart you see, from a Motley Fool article by Morgan Housel, shows when and by how much the company’s share price was below its high from the previous two years.

The second company has been a dream for investors. From 1995 to 2015, its share price surged by 105,000%. A $1,000 investment in the company’s shares in 1995 would have become more than $1 million by 2015.

You have five seconds to think about which company you want to own. Ready? I’m going to reveal their names now..

Both the first and second company are the same! They are Monster Beverage, a US-listed company that sells energy drinks. What this shows is that volatility in stocks is a feature, not a bug. When stocks go through their ups and downs, it’s not because they are risky – it’s just what they do! Even the best stock in the world will not give you a smooth ride up, but this does not mean it’s risky.

“Belief” No.6: I just need to find a world-class fund manager

[Slides 21 to 22]

The last common belief investors have that I’m going to discuss today is the idea that all they need to succeed in the stock market is to find a really good fund manager. If only it were that easy..

From November 1999 to November 2009, the US-based investment fund, the CGM Focus Fund, gained 18.2% annually. I’ll need all of your help to make a guess as to what return the fund’s investors earned over the same period…

Okay, now for the reveal. The fund’s investors lost 11% annually in the decade ended November 2009. How did this happen? CGM Focus Fund’s investors piled into the fund when it was doing well, but sold at the first whiff of trouble. This caused the fund’s investors to basically buy high and sell low.

CGM Focus Fund’s experience is not an isolated case because it happened with Peter Lynch, who is one of the best stock market fund managers the world has seen. From 1977 to 1990, Peter Lynch earned an annual return of 29% for Fidelity Magellan Fund, turning every thousand dollars invested with him into $27,000. But the average investor in his fund made only 7% per year – $1,000 invested with an annual return of 7% for 13 years would become just $2,400. The same problem with CGM Focus Fund happened to Lynch too. When he would have a setback money would flow out of his fund through redemptions. When he got back on track, money would flow back in after missing the recovery.

So investing with the best fund manager in the world is not enough – investors need the discipline to stay with the manager too.

Conclusion

[Slides 23 to 25]

To conclude, this is the important takeaway from my presentation that I hope you have: The stock market is a wonderful wealth-creation machine for investors who are able to invest for the long run in a diversified manner, both geographically and across industries.

The ride up is not going to be smooth. This is because humanity’s progress has never been smooth. It took us only 66 years to go from the first demonstration of manned flight by the Wright brothers at Kitty Hawk to putting a man on the moon. But in between was World War II, a brutal battle across the globe from 1939 to 1945 that killed an estimated 66 million. This is how progress looks like.

The stock market, ultimately, is a reflection of human ingenuity. The stock market is a collection of businesses that have been formed by entrepreneurs seeking to solve a problem. And so because human progress has never been smooth, the stock market won’t be a smooth ride up. But what an amazing ride it’s going to be.

Happy 90th Birthday, Mr Buffett!

30 August 1930 is the birthday of Warren Buffett. To celebrate the 90th year of his extraordinary life, here are some of my favourite stories about him.

Warren Buffett is one of my heroes, not just in investing, but also in life. On 30 August 2020, he turned an amazing 90 years old. But as his dear friend Bill Gates n otes, Buffett still “has the mental sharpness of a 30-year-old, the mischievous laugh of a 10-year-old, and the diet of a 6-year-old.”

To celebrate Buffett’s extraordinary life, I want to share a few of my favourite stories about him.

Story 1: Philanthropy and the meaning of wealth

In August 2014, Buffett, together with his friends Bill and Melinda Gates, created The Giving Pledge, a movement that encourages society’s wealthiest individuals to pledge the majority of their immense wealth to philanthropic causes. The Giving Pledge started with 40 of America’s wealthiest people and today includes more than 200 families from 23 countries. The Giving Pledge has its roots in Buffett’s decision in 2006 to gradually give all of his wealth to philanthropic foundations. As part of The Giving Pledge, Buffett has committed to giving more than 99% of his wealth to philanthropy during his lifetime or at his death. According to a July 2020 New York Times article, Buffett has donated at least US$37 billion to philanthropic causes since his 2006 pledge.

For me, the admirable actions of Buffett and the Gateses are a reminder to myself that the accumulation of wealth gains meaning only if it’s used to better the lives of others and not for purely hedonistic personal enjoyment.

Story 2: Trust

In 1983, Buffett acquired 90% of The Nebraska Furniture Mart from the then-89 year-old Rose Blumkin (popularly known as Mrs B) for US$55 million. When he made the acquisition, he did not request for an audit of Nebraska Furniture Mart’s business, take an inventory, verify the receivables, nor check the company’s property titles. The contract was just over one page long.

Buffett had full trust in Blumkin’s character. It’s easy to see why. In 1950, Blumkin was sued by competitors who complained that she was engaging in unfair trading by offering low prices for furniture to consumers. This is how she responded:

“I went to Marshall Field in Chicago. I tell them I need 3,000 yards of carpet for an apartment building — I got, actually, an apartment building. I buy it from Marshall Field for $3 a yard, I sell it for $3.95 a yard. Three lawyers from Mohawk take me into court, suing me for unfair trade — they’re selling for $7.95. Three lawyers and me with my English. I go to the judge and say, ‘Judge, I sell everything 10 percent above cost, what’s wrong? I don’t rob my customers?’ He throws out the case. The next day, he comes in and buys $1,400 worth. I take out an ad with the whole case and put it in the Omaha World-Herald: ‘Here’s proof how I sell my customers.”

I have a firm belief that it’s hard to make a bad deal with a good person no matter how poorly-written the contract is. I also believe it’s equally hard to make a good deal with a bad person, no matter how strong the contract is. Buffett’s experience with Mrs B taught me so.

Story 3: Patience

In July 2020, I published the article, The Fascinating Facts Behind Warren Buffett’s Best Investment. It discusses Buffett’s investment in The Washington Post Company (WPC), now known as Graham Holdings Company, in the 1970s.

It’s one of my favourite Buffettt stories for two reasons. First, Buffett’s WPC shares gained over 10,000% from the 1970s to 2007, making it one of the best – if not the best – investments he has ever made. Second, WPC’s share price actually fell by more than 20% shortly after Buffett invested, and then stayed there for three years.

To achieve great returns in stock market investing, patience is almost always a necessity. Buffett’s investing results show exactly why.

This article will never be seen by Warren Buffett, but I hope my birthday wishes for him can still be received by him in some way or another. Happy 90th birthday, Mr Buffett! Stay healthy and strong, always!

Puzzles vs Mysteries In The Investing World

There are two kinds of problems in this world: puzzles and mysteries. Puzzles can be solved by collecting information. Mysteries, on the other hand, require insight – they can’t be solved simply with more information.

Here’s writer Malcolm Gladwell explaining the difference between a puzzle and a mystery in a 2007 article:

“The national-security expert Gregory Treverton has famously made a distinction between puzzles and mysteries. Osama bin Laden’s whereabouts are a puzzle. We can’t find him because we don’t have enough information. The key to the puzzle will probably come from someone close to bin Laden, and until we can find that source bin Laden will remain at large.
The problem of what would happen in Iraq after the toppling of Saddam Hussein was, by contrast, a mystery. It wasn’t a question that had a simple, factual answer. Mysteries require judgments and the assessment of uncertainty, and the hard part is not that we have too little information but that we have too much. The C.I.A. had a position on what a post-invasion Iraq would look like, and so did the Pentagon and the State Department and Colin Powell and Dick Cheney and any number of political scientists and journalists and think-tank fellows. For that matter, so did every cabdriver in Baghdad.”

I believe investing is a mystery, and not a puzzle. There are seldom clear-cut answers in the financial markets.

Investing is a mystery-problem to me because you can have billionaire investor Bill Ackman invest in a company (formerly Valeant Pharmaceuticals, now Bausch Health Companies) after conducting such deep research that he had to sign confidentiality agreements and yet have the company’s share price do this:

The slide below shows the extent of the due-diligence that Pershing Square (Ackman’s investment firm) conducted on Valeant:

*Source: Pershing Square* *presentation* *on Valeant*

I’m not trying to have a dig at Ackman. I have immense respect for his long-term accomplishments as an investor. I’m using his experience with Valeant because I think it is a wonderful example of the puzzle/mystery dichotomy in investing. Having a mountain of information on Valeant had no use in the eventual outcome that Pershing Square had with the company.

Investing is a mystery-problem to me because you can give two great investors the exact same information about a company and they can arrive at wildly different conclusions about its investment merits.

Credit card company Mastercard currently has 39 analysts covering its stock, according to its own website. Its market capitalisation is more than US$330 billion right now and it was never below US$200 billion at any point over the past year. It’s very likely that the investing community knows all there is to know about Mastercard’s business.

Chuck Akre runs the Akre Focus Fund, which had generated an impressive annual return of 16.8% from inception in August 2009 through to 30 September 2019. Over the same period, the S&P 500’s annual return was just 13.5%. Mohnish Pabrai is also a fund manager with a fantastic long-term record. His return of 13.3% per year from 1999 to 30 June 2019 is nearly double that of the US market’s 7.0%.

At the end of September 2019, Mastercard made up 10% of the Akre Focus Fund. So Akre clearly thought highly of the company. Pabrai, on the other hand, did not want to touch Mastercard even with a 10-feet barge pool. In the October 2019 edition of Columbia Business School’s investing newsletter, Graham and Doddsville, Pabrai said:

“Is MasterCard a compounder? Yeah. But what’s the multiple? I can’t even look. Investing is not about buying great businesses, it’s about making great investments. A great compounder may not be a great investment.”

Investing is a mystery-problem to me because even the tiniest investment firms can beat the most well-staffed ones.

I once spoke to an employee of a US college endowment fund with an excellent history of investing in fund managers who go on to produce stellar long-term results. During our conversation, I asked him what was the most surprising thing he found about the best fund managers his endowment fund had worked with. He said that the fund managers with the best results are the one or two-man shops. If investing is a puzzle-problem – meaning that collecting information is the key to success – there is simply no way that the two-man-shop fund manager can beat one with 50 analysts. But if investing is a mystery-problem – where insights matter the most – then you can have David triumph over Goliath.

So what are the key implications for investors if investing is a mystery and not a puzzle? I have one.

Investing can never be fully taught. There are the technical aspects of investing – such as how to read financial statements and the workings of the financial markets – that can be learned. But there will come a point in the research process where the collection of more information will not help us, where insight is necessary. And the development of insights, unfortunately, can’t be transmitted from teacher to student. Insights depend on an individual’s life experiences and knowledge-base. The books I’ve read are different from the ones you have. Even for the same books, our takeaways can be wildly different.

I believe one can become a competent investor by following rote methods. But to become a great investor, I don’t think there’s any manual that can be followed, because investing is a mystery, not a puzzle.

The Key Investing Lessons From COVID-19

It’s only been seven months or so since COVID-19 appeared. But there are already some investing lessons from COVID-19 that we can glean.

Note: This article was first published in The Business Times on 29 July 2020.

It may feel like a lifetime has passed, but it’s only been around seven months since COVID-19 emerged and upended the lives of people all over the world.

Given the short span of time, I don’t think there can be many definitive investing lessons that we can currently draw from the crisis. But I do think there are already key lessons we can learn from. At the same time, we should be wary of learning the wrong lessons.

A mistaken notion

As of 21 July 2020, the S&P 500 index – a broad representation for US stocks – is flat year-to-date. Meanwhile, the Nasdaq – a tech-heavy index of US-listed companies – is up by more than 17% in the same period. Even more impressive is the BVP Nasdaq Emerging Cloud Index’s 55.5% year-to-date gain. The BVP Nasdaq Emerging Cloud Index is created by venture capital firm Bessemer Venture Partners and it is designed to track US-listed SaaS (software-as-a-service) companies.

The huge gap between the performances of the S&P 500 and the Nasdaq and Bessemer’s cloud index is not surprising.

Large swathes of the physical economy have been shut or slowed down because of measures that governments have put in place to stamp out COVID-19. Meanwhile, companies operating in the digital economy are mostly still able to carry on business as usual despite lockdowns happening across the world. In fact, COVID-19 has accelerated adoption of digital technologies.

Given this, it’s easy to jump to the following conclusion: A key investing lesson from COVID-19 is that we should invest a large portion of our portfolios into technology stocks. But I think that would be the wrong lesson.

We have to remember that crises come in all kinds of flavours, and they are seldom predictable in advance. It just so happened that COVID-19 affected the physical world. There could be crises in the future that harm the digital realm. For instance, a powerful solar flare – an intense burst of radiation from the sun – could severely cripple our globe’s digital infrastructure.

I think there are two key investing lessons from COVID-19.

In the face of adversity

First, we should invest in companies that are resilient – or better yet, are antifragile – toward shocks. Antifragility is a term introduced by Nassim Taleb, a former options trader and the author of numerous books including Black Swan and Antifragile. Taleb classifies things into three groups:

The fragile, which breaks when exposed to stress (like a piece of glass, which shatters when dropped)
The robust, which remain unchanged when stressed (like a football, which does not get affected much when kicked or dropped)
The antifragile, which strengthens when exposed to stress (like our human body, which becomes stronger when we exercise)

Companies too, can be fragile, robust, or even antifragile.

The easiest way for a company to be fragile is to load up on debt. If a company has a high level of debt, it can crumble when facing even a small level of economic stress. On the other hand, a company can be robust or even antifragile if it has a strong balance sheet that has minimal or reasonable levels of debt.

During tough times (for whatever reason), having a strong balance sheet gives a company a high chance of surviving. It can even allow the company to go on the offensive, such as by hiring talent and winning customers away from weaker competitors, or having a headstart in developing new products and services. In such a scenario, companies with strong balance sheets have a higher chance of emerging from a crisis – a period of stress – stronger than before.

Expect – don’t predict

Second, when investing, we should have expectations but not predictions. The two concepts seem similar, but they are different.

An expectation is developed by applying past events when thinking about the future. For example, the US economy has been in recession multiple times throughout modern history. So, it would be reasonable to expect another downturn to occur over the next, say, 10 years – I just don’t know when it will happen. A prediction, on the other hand, is saying that a recession will happen in, say, the third quarter of 2025.

This difference between expectations and predictions results in different investing behaviour.

If we merely expect bad things to happen from time to time while knowing we have no predictive power, we would build our investment portfolios to be able to handle a wide range of outcomes. In this way, our investment portfolios become robust or even antifragile.

Meanwhile, if we’re making predictions, then we think we know when something will happen and we try to act on it. Our investment portfolios will thus be suited to thrive in only a narrow range of situations. If things take a different turn, our portfolios will be hurt badly – in other words, our portfolios become fragile.

It should be noted too that humanity’s collective track record at predictions are horrible. And if you need proof, think about how many people saw the widespread impact of COVID-19 ahead of time.

Conclusion

There will be so much more to come in the future about lessons from COVID-19. We’re not there yet, but I think there are already important and lasting ones to note.

My lessons rely on understanding the fundamental nature of the stock market (a place to buy and sell pieces of actual businesses) and the fundamental driver of stock prices (the long run performance of the underlying business).

COVID-19 does not change the stock market’s identity as a place to trade pieces of businesses, so this is why I think my lessons will stick.

What We’re Reading (Week Ending 2 August 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 2 August 2020:

1. The Ugly Scramble – Morgan Housel

There is no topic in business and investing that gets more attention than risk. But it’s almost always viewed through a universal lens: “What risks are we going to face in the future?” Or just simply, “What’s the economy going to do next?”

But risk has little to do with what’s going to happen next and a lot to do with how much you can endure, and how calmly you can react to, whatever happens next.

To the leveraged investor a small setback is a huge risk because of how they’re forced to deal with decline: by selling to cover their debts, right now, this moment, whatever the price is. Don’t think, just scramble to do you gotta do in the face of panic. They’re like the cat locking its limbs into place, doing whatever they can to survive even if it breaks them to pieces.

To the patient investor with a ton of cash, a huge market decline requires no immediate action. And not because it doesn’t affect them – it often does – but because however it affects them can be dealt with slowly and methodically. Maybe they realize they want a more conservative allocation. They can come to that conclusion after thinking it through, hearing opposing views, weighing alternatives, and calmly executing at the right time. Doing so may lead them to a different choice than their initial gut reaction. Taking time to understand a complicated problem often does.

2. Everyone’s a Day Trader Now – Michael Wursthorn, Mischa Frankl-Duval, and Gregory Zuckerman

Much of the rapid-fire day trading culture plays out on social media, which has helped usher in a new class of social-media influencers who hype stocks to followers eager for get-rich-quick stock tips. They swap trading ideas over Twitter, Discord and Reddit, an update from the boiler-room chat rooms of the ’90s that sent dot-com stocks into a frenzy.

Stanley Barsch, Ms. Viswasam’s boss who got her into investing, touts the stocks he trades to his more than 76,000 Twitter followers, who refer to him by his handle, StanTheTradingMan. He also hosts his own Discord channel, where a tighter-knit group of day traders circulate unconfirmed rumors as potential catalysts for big gains.

Mr. Barsch, 42, is a former police officer turned real-estate broker, who said he had been making a steady six figures since 2010. Now, he boasts of how he says he turned the $20,000 he put into the market in January and February into more than $450,000 as of mid-July without any prior trading experience.

3. Statement by Jeff Bezos to the U.S. House Committee on the Judiciary – Jeff Bezos

In my view, obsessive customer focus is by far the best way to achieve and maintain Day One vitality. Why? Because customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and a constant desire to delight customers drives us to constantly invent on their behalf. As a result, by focusing obsessively on customers, we are internally driven to improve our services, add benefits and features, invent new products, lower prices, and speed up shipping times—before we have to. No customer ever asked Amazon to create the Prime membership program, but it sure turns out they wanted it. And I could give you many such examples. Not every business takes this customer-first approach, but we do, and it’s our greatest strength.

Customer trust is hard to win and easy to lose. When you let customers make your business what it is, then they will be loyal to you—right up to the second that someone else offers them better service. We know that customers are perceptive and smart. We take as an article of faith that customers will notice when we work hard to do the right thing, and that by doing so again and again, we will earn trust. You earn trust slowly, over time, by doing hard things well—delivering on time; offering everyday low prices; making promises and keeping them; making principled decisions, even when they’re unpopular; and giving customers more time to spend with their families by inventing more convenient ways of shopping, reading, and automating their homes. As I have said since my first shareholder letter in 1997, we make decisions based on the long-term value we create as we invent to meet customer needs. When we’re criticized for those choices, we listen and look at ourselves in the mirror. When we think our critics are right, we change. When we make mistakes, we apologize. But when you look in the mirror, assess the criticism, and still believe you’re doing the right thing, no force in the world should be able to move you.

4. Earth’s Asteroid Impact Rate Took A Sudden Jump 290 Million Years Ago – Phil Plait

We know that there’s a lack of old craters on the Earth, and it’s always been assumed that’s due to erosion. Wind, water, geologic activity: Over long stretches of time our Earth remakes itself, scrubbing the surface of blemishes like impacts*.

But the evidence for this is lacking. That’s what initially motivated the scientists, to try to see if there’s a way to support this idea. So they looked to the Moon. Our satellite is in the same region of space we are, so should get hit at very close to the same rate as Earth does. The idea is to look at big craters on the Moon, figure out a way to get their ages, do the same on Earth, then compare the two and see what you find.

The problem is getting the lunar crater ages, since very few have absolute ages found for them. But they came up with a clever idea. In a big impact, one that leaves a crater 10 kilometers across or wider, rocks from the lunar bedrock get ejected from the explosion and deposited around the crater. Over long periods of time these erode. Not due to air or water, of course, since the Moon doesn’t have those.

Instead, they erode from tiny micrometeorites raining down constantly. These sandblast the rocks, slowly wearing them away (this doesn’t happen on Earth because our atmosphere stops them). Also, the temperature change from day to night on the Moon is hundreds of degrees Celsius. The rocks are constantly expanding and contracting from this, which causes them to crack and erode.

They figured that by looking at the abundance of rocks around a crater compared to the fine powdery eroded rock material (called regolith), they can get a relative age; craters with more intact rocks are younger, and ones with more eroded ones are older.

5. Bill Gates says 3 coronavirus treatments being tested now ‘could cut the death rate dramatically.’ They may be available within months. – Hilary Brueck

“The very first vaccine won’t be like a lot of vaccines, where it’s a 100% transmission-blocking and 100% avoids the person who gets the vaccine getting sick,” the billionaire philanthropist told Insider.

Vaccine trials take months, they don’t have to create completely effective inoculations, and they won’t help protect people who are already sick.

That’s why Gates is more excited, in the immediate term, about coronavirus therapeutics.

6. How a power-hungry CEO drained the light out of General Electric – Mary Kay Linge

For years, GE’s profits had been a mirage built on whirlwind mergers and accounting sleight of hand. The funds that had been doled out to shareholders as fat dividends — and had covered its managers’ lavish perks and pay — had largely been borrowed on the strength of the company’s golden credit.

The book’s authors paint a damning portrait of Immelt’s 16 years at the helm of GE, where a rubber-stamp board of directors allowed him to hemorrhage money almost unchecked…

… At the same time, GE’s established divisions were expected to meet earnings goals far removed from reality. “Under Immelt, the company believed that the will to hit a target could supersede the math,” Gryta and Mann report.

It was a recipe for a disaster. Up-and-coming middle managers knew that a missed goal could stymie their climb up GE’s ladder; division heads “didn’t necessarily know how his underlings got to the finish line and it didn’t really matter,” the authors write.

Those toxic incentives drove the debacle that Flannery uncovered at GE Power. The division made its money not on the generators and turbines it built, but on the service contracts it sold to maintain the machines.

All a manager had to do was tweak the future cost estimates on those decades-long contracts to jack up profits as needed — and to paper over real losses from unsold inventory and declining demand.

7. Tweet storm from an executive who worked with Jeff Bezos to launch the Kindle – Dan Rose

Ignore the “institutional no”. Amazon’s core retail business was pummeled after dot-com crash, and we were still pulling out of the tail spin in 2004 when Jeff started the Kindle team (same year he started AWS team). Everyone told him it was a distraction, he ignored them.

Cannibalize yourself. Steve Kessel was running Amazon’s media business in 2004 (books/music/DVD’s). Books alone generated more than 50% of Amazon’s cash flow. Jeff fired Steve from his job and reassigned him to build Kindle. Steve’s new mission: destroy his old business…

… Make magic. Syncing over WiFi without cables was innovative, and our team was proud of it. But Jeff didn’t think it was magical enough. He insisted on syncing over cellular, and he didn’t want to charge the customer for data. We told him it couldn’t be done, he did it anyway.

How You Can Beat Professional Investors

You can beat professional investors. Career risk is one of the biggest reasons that hold professional investors back from performing their best.

It’s only natural for us to believe that individual investors don’t stand a chance against professional investors. After all, the pros have access to research capabilities, analytical support, and technology that individuals don’t.

But if you’re an individual investor, you can still beat professional investors at their game. The trick is part patience, and part something else.

Long term investing

In Board Games, Coffee Cans, and Investing, I shared investment manager Robert Kirby’s Coffee Can Portfolio article that was penned in the 1980s. Here’s what I wrote in my piece:

“In The Coffee Can Portfolio, Kirby shared a personal experience he had with a female client of his in the 1950s. He had been working with this client for 10 years – during which he managed her investment portfolio, jumping in and out of stocks and lightening positions frequently – when her husband passed away suddenly. The client wanted Kirby to handle the stocks she had inherited from her deceased husband. Here’s what happened next, according to Kirby:
“When we received the list of assets, I was amused to find that he had secretly been piggy-backing our recommendations for his wife’s portfolio. Then, when I looked at the total value of the estate, I was also shocked. The husband had applied a small twist of his own to our advice: He paid no attention whatsoever to the sale recommendations. He simply put about $5,000 in every purchase recommendation. Then he would toss the certificate in his safe-deposit box and forget it.
Needless to say, he had an odd-looking portfolio. He owned a number of small holdings with values of less than $2,000. He had several large holdings with values in excess of $100,000. There was one jumbo holding worth over $800,000 that exceeded the total value of his wife’s portfolio and came from a small commitment in a company called Haloid; this later turned out to be a zillion shares of Xerox.”
The revelation that buying and then patiently holding shares of great companies for the long-term had generated vastly superior returns as compared to more active buying-and-selling helped Kirby to form the basis for his Coffee Can Portfolio idea. He explained:
“The Coffee Can portfolio concept harkens back to the Old West, when people put their valuable possessions in a coffee can and kept it under the mattress. That coffee can involved no transaction costs, administrative costs, or any other costs. The success of the program depended entirely on the wisdom and foresight used to select the objects to be placed in the coffee can to begin with.””

The twist

In his article, Kirby also shared how he would use the Coffee Can Portfolio concept to build an actual portfolio. His solution: (1) Select a group of 50 stocks with desirable investment-qualities, (2) buy them all in equal proportions, and then (3) simply hold the shares for a decade or more. Kirby’s reasoning that such a portfolio will do really well has two legs:

“First, the most that could be lost in any one holding would be 2% of the fund. Second, the most that the portfolio could gain from any one holding would be unlimited.”

But here’s the twist. Kirby did not put his solution into action, even when he thought it was a brilliant idea. There were two big problems. First, Kirby thought that the hurdles involved with assembling a team of investment professionals who can excel in constructing a long-term portfolio is too high to overcome. Second, there was massive career risk for him. “Who is going to buy a product, the value of which will take 10 years to evaluate,” Kirby wrote.

The latter problem holds the huge edge that individual investors have over professional investors: There is zero career risk. After all, you can’t fire ourselves, can you? This means that individual investors can use the best portfolio management idea they have.

Earlier, I said that the trick to beat professional investors at their game consists of part patience and part something else. The patience bit involves the necessity of investing for the long run. The something else refers to individual investors not having to face career risk.

Stacking the odds

I first came across Kirby’s The Coffee Can Portfolio article a few years ago. I remember I was stunned to learn that Kirby was unable to act on a great investing strategy due to something (the career risk) that was not at all related to the effectiveness of the strategy. Individual investors have the luxury of not having to worry about this.

It is true that professional investors have a certain edge over individual investors in parts of the investing game. But not all hope is lost. Being able to invest for the long-term – a wise investing strategy, I should add – without career risk is a huge advantage that individual investors have over the pros.

What We’re Reading (Week Ending 26 July 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

Here are the articles for the week ending 26 July 2020:

1. I Gave a Talk to a Federal Credit Union – Nathan Tankus

First we have the idea of a legal system. It may seem obvious that money starts with law, but that isn’t necessarily obvious to most academics. It’s certainly not where a traditional money and banking textbook would start. MMT emphasizes that money is inherently legally designed and grounds money in the functioning of the legal system which authorizes its existence and enforces legal obligations denominated in money. We’ll return to this crucial point in a bit.

Second there is the idea of physical resources. These are raw materials, physical land, machinery, factories etc. which are necessary to produce goods and services that the government needs to accomplish its goals. Production is the combination of these physical resources with labor and technology to produce useful goods and services. The most obvious example of this is of course war time. Governments need to produce tanks, guns, rations, uniforms etc. to fight wars and they need their domestic populations to produce those resources. Modern Monetary Theory may have “monetary” in the name, but the ultimate object of MMT academics in the policy sphere is to use our monetary system in order to mobilize physical resources. Thus, the availability and usability of physical resources is important to Modern Monetary Theorists.

The final part of the definition is the most important part. In my experience, this is the idea at the foundation of MMT that people learning about it tend to have the most difficult time grasping. It’s also a point that is consistently overlooked and underemphasized by mainstream journalists who try to produce “explainers” about MMT. This is the idea that specific financial instruments have value, in fact that they are monetized, because those instruments can be used to pay legally enforceable obligations. The most obvious and important obligation that money can settle is one’s tax bill, but all sorts of legal obligations can be settled with money. Lawsuits, child support, damages, fines, fees and all sorts of other court ordered monetary payments can be settled with specific financial instruments which legal systems treat as money. I can’t emphasize enough that money is money because it can be used to settle legal obligations within a specific jurisdiction.

2. Hacked Printers. Fake Emails. QuestionableFriends. Fahmi Quadir Was Up 24% Last Year, But It Came at a Price – Michelle Celarier

In response, she believes, the company initiated “cybersurveillance, including numerous hacking attempts with aggressive measures to obtain sensitive information about us and our personal lives,” she wrote to investors in August.

“We are not fearful,” she bragged in that letter. “When companies resort to such intrusive and illegal tactics against a small fry, perhaps we are not as small as they think we are and more importantly, perhaps it’s the company that’s shaking in its boots,” she added.

Quadir declined to tell Institutional Investor the name of the company, but said she’d received emails falsely purporting to be a journalist she knew, leading her to believe it was an attempted hacking.

That wasn’t all.

“We’ve received documents from lawyers, but it’s not actually from those lawyers. And there was a time in my home — I have a basically defunct printer at my home — when suddenly, in the middle of the night, I think it was like 2:00 a.m., the printer just turns on and starts printing emails from whistleblowers. In the middle of the night!”

Quadir has since brought on cybersecurity experts “to clean everything,” she says. “I’m not concerned for my safety; I think this just comes with the territory. Did we expect it to all happen in the first year of launching? No. But it’s just the lengths these companies go to intimidate.”

3. How the U.S. Consumer Became the Most Resilient Force in the Economy – Ben Carlson

To pay for all of this stuff the Roaring Twenties also introduced installment payment plans. The phrase “buy now, pay later” became part of the popular nomenclature during this time.

Robert Gordon estimates by the end of the 1920s consumer credit financed 80-90% of furniture sales, 75% of washing machines, 65% of vacuums, 25% of jewelry and 75% of radios.

Previous generations attached a social stigma to borrowing. The 1920s chipped away at this idea as people purchased products that didn’t exist for those generations.

And while the country as a whole achieved a level of prosperity from 1923-1929 like never before, farmers were decimated. The depression of 1920-1921 cut the price of farm products in half and they regained just a fraction of those losses by the end of the decade. Incomes for farmers fell more than 60%.

The end of agriculture as the dominant career choice in the early part of the 20th century led to an urbanization boom. The first Sears store opened in Chicago in 1925. By the time the expansion was coming to an end in 1929 they were up to 300 stores, mainly in big cities.

4. Quarterly Investment & Market Update, Summer 2020 Q2 – Ensemble Capital

One mistake we think some investors have made during this unprecedented period is substituting a forecast of the virus for a forecast about the economy or financial market performance.

While clearly, the pandemic is a huge negative impact on the economy, they are not the same thing. And stocks are not a direct reflection of the US economy.

The market doesn’t care about the economy today, it cares about corporate cash flows over time.

So while today it seems that the stock market and the economy are totally disconnected, in reality stock prices are reflecting a view that while the economy is very bad now, it will recover in the years ahead. And in fact, you don’t even need to believe the entire US economy will recover to understand the rebound in the market.

While the S&P 500 is often referred to as “the market” and is the benchmark by which we evaluate our strategy, it represents what are essentially the 500 largest, most well capitalized companies in the country. These are the companies best positioned to manage through a period of very severe economic conditions. Meanwhile, the S & P 600, an index of smaller companies shown by the dotted orange line on the chart, is still down 20% this year.

5. The Nine Essential Conditions to Commit Massive Fraud – Josh Brown

When it comes to the massive frauds – the kind that wipe out tens of billions of dollars and result in career-ending, corporation-killing infernos, there are some necessary conditions that seem to appear with great regularity accompanying them. These are the conditions that allow the seed of a fraud to take root and germinate, they provide the fertile ground and atmosphere letting the sprout become something larger, thornier and more interconnected with the flora around it.

Ivar Krueger aka The Match King was one of the most notorious purveyors of investment fraud who ever lived. His story is relatively unknown in modern times despite the fact that the global scale of what he did was ten times more intricate and ultimately destructive than anything Madoff attempted. When you read about the details of the Krueger saga, you realize that everything that’s happened since (and will happen hence) is merely an echo of an old story.

6. Repetition Economics: The Story of the Hunter, the Mammoth, and The Wolves – Breaking The Market

You decide to throw the wolves a bone, literally, and give up the deer to them. As hoped, they leave you alone and start to eat the deer. Oh well, there is still some food at home. Hopefully you don’t see them again.

But the next day you catch another deer and on your way back the wolves show up again. It was pretty clear the way they devoured the deer last time they can be vicious animals so you don’t really want to mess with them. You lose the deer to the wolves again and leave. There’s not as much food at home, but there is still some.

Same thing happens again the next day, losing the deer to the wolves.

And then on the 4th day, when the wolves show up to the hunt again, you’ve had enough. The food has run out at home. It’s pretty clear if you keep losing your kills to the wolves you’re going to starve. You can’t keep repeating this process. And so on day 4 you decide to roll the dice and fight them off.

7. A Golden Oldie: The Best Investor You’ve Never Heard Of – Jason Zweig

That was the same year that another Grinnell trustee, Robert Noyce, called Rosenfield to tell him about a new company he was starting. Noyce had been kicked out of Grinnell in his junior year for stealing a 25-pound pig from a nearby farm and roasting it at a campus luau; his physics professor, who felt Noyce was his best student ever, got the expulsion reduced to a one-semester suspension. Noyce had never forgotten the favor, which was why he was offering the college a stake in his start-up, NM Electronics.

Was Rosenfield interested? “The college wants to buy all the stock that you’re willing to let us have,” he told Noyce instantly.

Grinnell’s endowment put up $100,000, while Rosenfield and another trustee each kicked in $100,000 more, enabling the school to supply 10% of the $3 million in venture capital that Noyce and his sidekicks, Gordon Moore and Andrew Grove, raised for the company that they soon renamed Intel.

By 1974, three years after Intel went public, Grinnell’s endowment had more than doubled to $27 million — even as the stock market lost 40% of its value.

Meanwhile, Rosenfield was keeping his eyes, and his mind, wide open. In 1976, Rosenfield heard from Buffett that a TV station, WDTN of Dayton, was for sale. Endowments rarely control private companies, but Rosenfield thinks like a businessman, not a bureaucrat. He grabbed WDTN for Grinnell at just $12.9 million, or a mere 2 1/2 times revenues at a time when TV stations were selling for three to four times revenues.

Board Games, Coffee Cans, and Investing

Doing nothing is one of the most important actions we can take as stock market investors, but it is also one of the hardest things to do.

David Gardner is the co-founder of The Motley Fool, and he’s one of the best stock market investors I know.

There’s a fascinating short story involving David that can be found in a 2016 Fool.com article written by Morgan Housel titled Two Short Stories to Put Successful Investing Into Context.

In the article, Morgan shared a conversation he had with David. Once, Morgan spotted David playing video games at the Fool’s office and asked him in jest: “If you had to give up board games, video games, or stocks, which would you quit?” (For context, David is a huge fan of board games.)

David’s response surprised Morgan: He would choose to quit stocks rather than board games or video games. Here’s Morgan recounting David’s brilliant explanation in Two Short Stories to Put Successful Investing Into Context:

“Games are hands-on by design. They are meant to be played, not left alone.
But a good portfolio can prosper for decades with minimal intervention. A basket of stocks is not a board game with turns and rounds. It’s something that should be mostly hands-off. After a proper allocation is set up, one of the biggest strengths of individual investors is what they don’t do. They don’t trade. They don’t fiddle. They don’t require daily monitoring. They let businesses earn profit and accrue to shareholders in uneven ways.
David’s point was that he could be happy never touching his investments again, because he currently owns a big, diverse set of companies whose long-term future he’s bullish on.”

David’s response echoes one of my favourite investing articles, The Coffee Can Portfolio, written by investment manager Robert G. Kirby in the 1980s.

In The Coffee Can Portfolio, Kirby shared a personal experience he had with a female client of his in the 1950s. He had been working with this client for 10 years – during which he managed her investment portfolio, jumping in and out of stocks and lightening positions frequently – when her husband passed away suddenly. The client wanted Kirby to handle the stocks she had inherited from her deceased husband. Here’s what happened next, according to Kirby:

“When we received the list of assets, I was amused to find that he had secretly been piggy-backing our recommendations for his wife’s portfolio. Then, when I looked at the total value of the estate, I was also shocked. The husband had applied a small twist of his own to our advice: He paid no attention whatsoever to the sale recommendations. He simply put about $5,000 in every purchase recommendation. Then he would toss the certificate in his safe-deposit box and forget it.
Needless to say, he had an odd-looking portfolio. He owned a number of small holdings with values of less than $2,000. He had several large holdings with values in excess of $100,000. There was one jumbo holding worth over $800,000 that exceeded the total value of his wife’s portfolio and came from a small commitment in a company called Haloid; this later turned out to be a zillion shares of Xerox.”

The revelation that buying and then patiently holding shares of great companies for the long-term had generated vastly superior returns as compared to more active buying-and-selling helped Kirby to form the basis for his Coffee Can Portfolio idea. He explained:

“The Coffee Can portfolio concept harkens back to the Old West, when people put their valuable possessions in a coffee can and kept it under the mattress. That coffee can involved no transaction costs, administrative costs, or any other costs. The success of the program depended entirely on the wisdom and foresight used to select the objects to be placed in the coffee can to begin with.”

Doing nothing is one of the most important actions we can take as stock market investors, and it has served me immensely well. It is also one of the hardest things to do. But I hope those of you reading this article can achieve this. Don’t just do something – sit there!