You are doomed to loose unless you are good at figuring out odds
I started to work on reverse engineering successful investors, I started to think and analyze what characteristics successful investors have,
After interviewing 20+ successful investors, i started to think,
Question eventually became "How to live ?"
What we are talking about is,
John Templeton was one the great investors of last century. He has got consistent 15% return every year for 60 years. Lived in a gated community in Bahamas. I hide behind a palm tree. He is in the water and pumping limbs in water with sunscreen full on face. This is key to Templeton. He does not care what others think of him. He does things his way.
Templeton says: During Great Depression, There are 104 stocks on NYSE that are trading under 1 dollars during Great Depression. I called the broker. The Broker says 34 companies in 104 are bankrupt.
Howard marks said "Most of the time (with big events) world does not end". This is what Templeton knew.
Templeton says fine, buy me all those too, buy all 104. He held all companies for 5 years and sold 100/104 at huge profits and he quintupled his money. Templeton borrowed $10k and started his career. Great investors are mavericks and free thinker, don't grow with the crowd.
If you don't want to diverge buy index funds.
Munger always says, this is from algebra "Invert. Always invert".
Famous line from Marty whitman is "Market prediction is the last refuge of the incompetent."
Monish pabrai in 1994 tried to reverse engineer Buffett but said "Buffett basically laid out the rules of investing" and nobody is following it. If no one is doing it, indian guy will do it.
Some of the things to remember are,
Self awareness is important starting point.
Howard Marks overseeing $97 billion in assets has extraordinary reputation where Warren says "When something arrives in mail from Howard marks it’s the first thing I read".
Howard Marks said "The stupidest thing you can do is think you are market of universe. The only constant is impermanence. We should be constantly looking where we are in the cycle and think "Am I getting carried away", "Am I taking too much risk given where we are in the cycle."
When looking at his own life, Howard Marks said becoming a successful investor was a total fluke as I had got drunk and missed Lehman Brothers interview.
Bill Miller said "At certain point the scariest resource is time not money". Right after 9/11 market had the worst week in ages, Miller is buying like crazy. His stake in AMZN dropped from 95 to 5 dollars and in the meeting he said "If I am wrong I lose 100 % times of my money, If I am right, I will make 100 times my money". Now that stock is 100-fold from then.
Another instance: A colleague calls and says "We lost 50 Million in A stock as earnings were massively". Miller at Lunch, says, lets look at my cash positions, Ok buy more.
Always have a constant reminde on Why you need to be humble ? You need to be humble because, what if you are wrong.
Any time you let your ego in the way of investing is kind of disaster.
Son, in course of your travel, someone will give offer you a bet, hold you a deck of cards. Jack of Spade will jump out of deck of cards and will squirt cider in your ear! Do Not take this bet.
- Sky Masterson in Skies and Dolls
Lets get back to Bill Miller and think about what he went through Financial crisis. Divorce halved his assets and invested half in margins. Loses 80% of his investments. His funds at peak it was $77Billion and it goes down to $800M and that time he had to lay off 100s of his employees. People lost job because of me. During this period he gained 40lbs as he ate lots of comfort food.
Powerful reminder is, you really need to pay attention, if you want to be long term successful investor, need to build emotional resilience.
When going through good period you tend to assume things will be always good. Tend to over reach and get over confidence.
Howard Marks says "Life is like a pendulum. Market euphoria is a pendulum. Do not get carried away by market pendulum. Do not overreach." You want to work on the basis that there is going to be a time where I am going to get hit.
Never use margin, when market gets hit you are emotionally devastated on margin, you can't be rational.
Bill Miller was reading Epictetus and Seneca during market collapse. What it says is "General attitude towards misfortune". They are saying , "You cant control necessarily what happens to you, but you can control your attitude towards it". To develop emotional resilience.
All great Don Yackman all went through crashes and losses. Eveillard said "When you underperform for 3 years, first year your stock customers are upset, second year they are furious on third year they are gone".
At certain point, you start to say am I an idiot "How come I don't get it?" and "How come everyone else gets it?". When we talk about willingness to be lonely, willingness to go your own direction, it requires a degree of strength, it requires emotional fortitude. In the course of lifetime, there are period that are very intense and you need to figure out where am I going to get my emotional strength. It doesn't necessarily matter whether its from stoic philosophy or spirituality.
Don Yactman said, if it hadn't been his faith, his family and the fact he volunteered for scouts, period of financial crisis would have destroyed me.
Irving Kahn of Kahn Investments, who lived till 108 was smoking till 50 and ate red meat till the end. When asked what was his secret to long fulfilling happy life. What can we learn from you ? Family is very important. Happy, Healthy family members, company he'd created and he met people who are smarter than him(Ben Graham) give him the answers and learning.
John Spiers, bought a house with 5 million dollars in cash , did nt like taking risk. Bought a big house, so that son and grandsons could live with him. People always talk about ROI, people need to worry more about Return of Life.
Mohnish Pabrai, Epitomizes WB and CM Ideologies, Mohnish will be remembered for his charitable foundation Dakshna Foundation. Dakshna takes teen agers from poor and rural areas and gives them 2 years of free coaching to get into IITs.
IIT has admission rate of 2%, Dakshna has IIT clearance of 54%. One kid got top spot in IIT. I asked, where your parents smart. the kid, yes, my dad was skilled mathematician but he never got opportunity. He bought a house for parents.
Mohnish has figured out key to fulfilling life. Happiness does not come from flash cars and yacht, but from helping others you have a successful and meaningful life.
You are tilting playing field in your direction. You are stacking the odds in your favor, so that you can have happy and successful and meaningful life.
How diversified you should be to control risk ?
Mohnish Had all his money in 5 stocks, he had tremendous confidence and knowledge in these 5 stocks and one of them blew up. So it is risky. Mohnish is extremely temperment and is aware of Dangers of overconfidence.
Joel Green blatt: 80% of his money 6-8 stocks through all his years. Returned 50% money in 5 years to investors and 10 years returned all their money. Only Holders were family and friend, if something went wrong Greenblatt will help them out.
Diversify if you plan to be in market in 35 years going through several depression recession cycles.
Guy Speir : You want to be the last man standing, Be anti-fragile so you can be resilient always.
French Investors: I have 3 principles: Doubt, Doubt, doubt !!!
IK: Single most important financial advice: Focus on Downside. These days People gallop very fast, don't really know what direction they galloping in. If you focus on downside, reasonable returns and avoid terrible losses, you outperform all your gambler friends and also good cure for your sleeping problem.
Bill Ackman : All Investors are human, they make mistakes. Ackman is intelligent and has analytical brain. Overconfidence is a bull market phenomenon. He is prepared to go into difficult situations, extremely strong convictions.
Differentiate Hubris from confidence
Peter Lynch Bet on an company in 1969, an apparel company. It got in the cover of vogue 3 times. Then a movie with long pleated skirts. Company became out of fashion and from huge earnings, it went bankrupt same year. Sometimes stuff comes out of left field. Remember jack of spades jumps out of deck of cards and squirts cider in your ear ( Meaning black Swan events can destroy your career).
There is a thin line between "Willingness to be lonely" and "arrogance" where you say everbody else is wrong and I am right and you end up blowing yourself. I asked Marty Whitman once if you were to own one stock for 10 years what would that be? MBIA. This is the company that Bill Ackman shorted. Bill Ackman contacted Marty and said "I want to go through this and explain to you why this is crap and why its going to fall apart". He dismissed him and bad-mouthed before press. I asked Marty why did you mess up. He said "As I became richer and older , I have became lazy. I should have sold, My housing stocks and I just did not get around to it."
Bill Nygren: This is a full on game, Lots of people have decided going into semi retirement. Either you switch is fully ON or fully OFF.
Templeton: However smart you are, you will screw up 1/3 of the times.
I said to Bill Miller, "You need to have balls to do what you do", He said, "Yeah you have to have balls, but you also have to be right". Shows a chart with steadily monthly trajectoryand then it just collapses and goes down 90% that’s "long term capital management". The thing that really hard to tell is, am I here(low side) in my career or here(on the high side).
This is why Margin of Safety is very important.