Friday, December 27, 2013

Quotes of 2013

A collection of quotes said or written at some point during this calendar year.

Grantham: Investing in a Low-Growth World
"All corporate growth has to funnel through return on equity. The problem with growth companies and growth countries is that they so often outrun the capital with which to grow and must raise more capital. Investors grow rich not on earnings growth, but on growth in earnings per share. There is almost no evidence that faster-growing countries have higher margins. In fact, it is slightly the reverse." - Jeremy Grantham

"The fact that growth companies historically have underperformed the market – probably because too much was expected of them and because they were more appealing to clients – was not accepted for decades, but by about the mid-1990s the historical data in favor of 'value' stocks began to overwhelm the earlier logically appealing idea that growth should win out. It was clear that 'value' or low growth stocks had won for the prior 50 years at least. This was unfortunate because the market's faulty intuition had made it very easy for value managers or contrarians to outperform. Ah, the good old days! But now the same faulty intuition applies to fast-growing countries. How appealing an assumption it is that they should beat the slow pokes. But it just ain't so." - Jeremy Grantham

Buffett on Berkshire's "Powerhouse Five" & "Big Four"
"At Berkshire we much prefer owning a non-controlling but substantial portion of a wonderful business to owning 100% of a so-so business. Our flexibility in capital allocation gives us a significant advantage over companies that limit themselves only to acquisitions they can operate." - Warren Buffett

Buffett on Berkshire's Float
"If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit that adds to the investment income our float produces. When such a profit is earned, we enjoy the use of free money – and, better yet, get paid for holding it. That's like your taking out a loan and having the bank pay you interest." - Warren Buffett

"...we have now operated at an underwriting profit for ten consecutive years, our pre-tax gain for the period having totaled $18.6 billion. Looking ahead, I believe we will continue to underwrite profitably in most years. If we do, our float will be better than free money." - Warren Buffett

"So how does our attractive float affect the calculations of intrinsic value? When Berkshire's book value is calculated, the full amount of our float is deducted as a liability, just as if we had to pay it out tomorrow and were unable to replenish it. But that's an incorrect way to look at float..." - Warren Buffett

"The value of our float is one reason – a huge reason – why we believe Berkshire's intrinsic business value substantially exceeds its book value." - Warren Buffett

Warren Buffett on "The Key to Investing"
"American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don't forget that shareholders received substantial dividends throughout the century as well.)

Since the basic game is so favorable, Charlie and I believe it's a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of 'experts,' or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it." - Warren Buffett

Not Picking Stocks By The Numbers
An exchange between Warren Buffett and Charlie Munger as summarized by the Wall Street Journal's live blog:

"We are looking at businesses exactly like we are looking at them if somebody came in and asked us to buy the whole business," Buffett said. He said they then want to know how it will do in ten years. 

Munger was even more forceful: "We don't know how to buy stocks by metrics ... We know that Burlington Northern will have a competitive advantage in years ... we don't know what the heck Apple will have. ... You really have to understand the company and its competitive positions. ... That's not disclosed by the math.

Buffett: "I don't know how I would manage money if I had to do it just on the numbers."

Munger, interupting, "You'd do it badly."

Buffett on Bonds and Productive Assets
"I bought a piece of real estate in New York in 1992, I have not had a quote on it since. I look to the performance of the assets. piece of real estate have had pull backs, but I don't even know about 'em. People pay way too— way too much attention to the short term. If you're getting your money's worth in a stock, buy it and forget it." - Warren Buffett

"...interest rates have a powerful effect on...all assets. Real estate, farms, oil, everything else...they're the cost of carrying other assets. They're the alternative. They're the yardstick." - Warren Buffett

"...the fact that there are troubles in Europe, and there are plenty of troubles, and they're not going go away fast, does not mean you don't buy stocks. We bought stocks when the United States was in trouble, in 2008 and— and it was in huge trouble and we spent 15 1/2 billion in three weeks in— between September 15th and October 10th. It wasn't because the news was good, it was because the prices were good." - Warren Buffett

"In terms of stocks, you know, stocks are reasonably priced. They were very cheap a few years ago. They're reasonably priced now. But stocks grow in value over time because they retain earnings..." - Warren Buffett
(Stocks prices were, of course, generally much lower when Buffett said this compared to now.)

"There could be conditions under which we...would own bonds. But— they're conditions far different than what exist now." - Warren Buffett

"I would have productive assets. I would favor those enormously over fixed dollars investments now, and I think it's silly — to have some ratio like 30 or 40 or 50% in bonds. They're terrible investments now." - Warren Buffett

"News is better now. Stocks are higher. They're still not— they're not ridiculously high at all, and bonds are priced artificially. You've got some guy buying $85 billion a month. (LAUGH) And— that will change at some point. And when it changes, people could lose a lot of money if they're in long-term bonds." - Warren Buffett

"...I bought a farm in 1985, I haven't had— had a quote on it since. But I know what it's produced every year. And I know it's worth more money now. You know, it— if I'd gotten a quote on it every day and somebody's said, "You know, maybe you oughta sell because there's, you know, there's clouds in the West," or something. (LAUGH) It's — it's crazy." - Warren Buffett

Charlie Munger: What Buying a House and Rabbit Hunting Have in Common
"Partly there was a time you felt foolish you didn't buy a house because you weren't making all the money everybody else was making, so it was a typical crazy boom. Now people have learned house prices can go down as well as up." - Charlie Munger

"It's like a fella who goes rabbit hunting and thoroughly enjoys himself. And then the rabbits haul out guns and start firing back. It would dim your enthusiasm for rabbit hunting, and that's what happened in the housing market." - Charlie Munger

More quotes in a follow-up.


Long position in Berkshire Hathaway (BRKb) established at much lower prices

Quotes of 2012

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Friday, December 20, 2013

Forecasters & Fortune Tellers

"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children." - Warren Buffett in the 1992 Berkshire Hathaway (BRKaShareholder Letter

Well, with that Buffett quote in mind, this The Motley Fool article by Morgan Housel points out that it doesn't pay to ignore analyst ratings, it actually pays to do the exact opposite:

"...the 50 stocks with the lowest Wall Street analyst ratings at the end of 2011 outperformed the S&P 500 by seven percentage points in 2012. Think about that. Warren Buffett's goal was once to outperform the market by 10 percentage points a year. Doing the opposite of what Wall Street's smartest minds recommended last year got you two-thirds of the way there."

(More on going with "the opposite" approach later on in this post.)

The article also points out that essentially something very similar happened this past year:

Stocks with the Most Sell Ratings - January 2013

YTD Average Return: 75%
YTD Median Return: 52%

Stocks with the Most Buy Ratings - January 2013

YTD Average Return: 22%
YTD Median Return: 20%

Including dividends, the S&P 500 is up 27.4% over the same time frame.

Now, one year just isn't a long enough horizon to judge investment performance.

So, as a result, I'd generally say this means very little.

What makes this a bit more meaningful is when you consider that many analysts DO often set price targets that are over relatively short time frames like, for example, 12 months or so.
(Here are four examples of 12-month price targets by analysts on stocks of otherwise, at least for me, no particular significance.)

In other words, if an analyst is making a recommendation to buy or sell a stock because they believe it can now be bought with a margin of safety (i.e. a nice discount to per share intrinsic value exists) and will produce a good result, all risks considered, over 5-10 years or more then it would be unfair to focus on the 1-year performance.

Well, for a variety of reasons, analysts just generally don't deal with those kind of time horizons.

On the other hand, when you are setting 12-month price targets (or anything similar), highlighting these unimpressive results seems a whole lot more fair.

I have no idea if this awkward performance is an anomaly or a persistent pattern over time but, whether it is or not, trying to guess what the price action of something will be over such time horizons is essentially like flipping coins.

"Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they're going to be higher or lower in two to three years, you might as well flip a coin to decide." - Peter Lynch

It's just not a good use of valuable time and energy in my view. I understand, at least in part, some of the incentives and cultural factors at work that lead to these attempts at predicting near term price moves.

More from the article:

"One of the most important lessons in all of finance is to understand the incentives of the guy sitting across the table from you. 

It sounds crazy, but a lot of professional stock analysts aren't terribly concerned with the accuracy of their picks."

Consider this carefully the next time, for whatever reason, an analyst opinion on a particular stock is highlighted by one of the major business media outlets.

What they are saying may be articulated extremely well and sound compelling.

It may even be informed by significant industry specific knowledge and insight.*

Unfortunately, for investors, that doesn't logically mean that their predictions will prove particularly useful or lucrative.

Toward the end of Morgan Housel's article, he makes the point that analysts tend to, in herds, project forward what recently happened. 
(i.e. When a stock rises predict it will keep rising, when a stock falls predict it will keep falling, etc.)

So I guess they're generally better historians than forecasters.

The Seinfeld episode where George Costan
za finally implements an effective strategy to overcome his innately terrible instincts comes to mind. The title of that episode happens to be "The Opposite".

"If every instinct you have is wrong, then the opposite would have to be right." - Jerry Seinfeld speaking to George in "The Opposite"

So maybe it's time for some on Wall Street to adopt George's strategy.

"A job with the New York Yankees! This has been the dream of my life ever since I was a child, and it's all happening because I'm completely ignoring every urge towards common sense and good judgment I've ever had." - George Costanza in "The Opposite"

Finally, I'd point out it's best to be at least a little bit wary of what is a special category of prognosticator; that'd be those who are primarily in the business of making attention grabbing -- occasionally extreme in nature -- predictions (and not necessarily limited to stock selection).

Sometimes, a little charisma (and maybe a charming accent) can make what's otherwise mostly useless -- or maybe even nonsensical -- seem informed, thoughtful, and intelligent.

Whether the predictions end up being frequently right or not ends up being mostly irrelevant.

Make enough predictions and at least a couple of them are bound to end up being correct.

Of course, better if the predictions are provocative in nature to maximize exposure.

Moderate forecasts just don't sell.

"...techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising 'Take two aspirins'". -Warren Buffett in the 1987 Berkshire Hathaway Shareholder Letter

The illusion of forecasting skill only then need be promoted in a clever way by the soothsayer. Unfortunately, if marketed well, the evidence seems to suggest there'll be no shortage of willful buyers.

So the fortune teller does not actually need a crystal ball.

In order to sell the illusion, what they say just has to be cloaked in complex sounding terminology, sound compelling, and, even if due mostly to pure chance, end up occasionally making what seems a brilliant prediction.**

That's not necessarily profitable for those who act in accordance with the next prognostication, but probably ends up being fruitful for the prophet.


Long position in BRKb established at much lower than recent prices

* Mutual funds, hedge funds, and other large institutional investors tend to be buyers of this kind of research. These entities are apparently more interested in their industry knowledge, less interested in their stock selection skills according to an Institutional Investor magazine survey. 
** Some seem to be very good at using language that makes it difficult to actually pin down what the prediction is.
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Friday, December 13, 2013

Is Buffett Just Lucky?

Well, a recent paper* answers the above question with a resounding no.

"Buffett's returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks. Decomposing Berkshires' portfolio into ownership in publicly traded stocks versus wholly-owned private companies, we find that the former performs the best, suggesting that Buffett's returns are more due to stock selection than to his effect on management. These results have broad implications for market efficiency..."

At first glance, this would seem to qualify as one of the least surprising conclusions in history.

Yet, for adherents to efficient markets and related ideas, somehow it is not.

"While much has been said and written about Warren Buffett and his investment style, there has been little rigorous empirical analysis that explains his performance. Every investor has a view on how Buffett has done it, but we seek the answer via a thorough empirical analysis..." 

In fact, some still think it may just be luck:

"Buffett's success has become the focal point of the debate on market efficiency that continues to be at the heart of financial economics. Efficient market academics suggest that his success may simply be luck, the happy winner of a coin-flipping contest as articulated by Michael Jensen at a famous 1984 conference at Columbia Business School celebrating the 50th anniversary of the book by Graham and Dodd (1934). Tests of this argument via a statistical analysis of the extremity of Buffett's performance cannot fully resolve the issue. Instead, Buffett countered at the conference that it is no coincidence that many of the winners in the stock market come from the same intellectual village, 'Graham-and-Doddsville' (Buffett (1984))."

Some context is in order. Back in 1984, Columbia Business School arranged a conference to celebrate the 50th Anniversary of the influential book Security Analysis by Benjamin Graham and David Dodd.

At least in part, the celebation essentially became a contest between competing schools of thought with Warren Buffett representing one side and Michael Jensen, a University of Rochester professor, representing the other.

Jensen made the case for the efficient markets view of the world.

In fact, Jensen did argue that an apparent outperformance like Buffett's might be the result of pure luck.

"If I survey a field of untalented analysts all of whom are doing nothing but flipping coins, I expect to see some who have tossed two heads in a row and even some who have tossed 10..." - Michael Jensen

Buffett, in his now well-known speech at the conference, made the case for Graham and Dodd and against efficient markets. The speech became the basis of this article published later that same year.
(The article remains well-worth reading in its entirety.)

The Superinvestors of Graham-and-Doddsville

For those, like myself, who are convinced that...umm...Buffett just might be onto something (considering the track record over more than half a century), it at first all seems more than just a little bit amazing that there'd still be doubt there is real skill involved.

Skills that, at least in part even if with varying degrees of success, can be learned and applied.

It's only when certain aspects of human nature are taken into account that what is surprising at first glance becomes much less so.

"When you hatch a theory, you don't easily let go..." - Robert Shiller in this CNBC Interview

That's true even for theories that are influential yet also the highly flawed variety. In any case, I'm of the view that this question about Buffett's capabilities was answered a very long time ago.
(I know this will come as a shock to those who might read this blog from time to time).

More from the paper...

"We show that Buffett's performance can be largely explained by exposures to value, low-risk, and quality factors. This finding is consistent with the idea that investors from Graham-and-Doddsville follow similar strategies to achieve similar results and inconsistent with stocks being chosen based on coin flips. Hence, Buffett's success appears not to be luck. Rather, Buffett personalizes the success of value and quality investment, providing out-of-sample evidence on the ideas of Graham and Dodd (1934). The fact that both aspects of Graham and Dodd (1934) investing – value and quality – predict returns is consistent with their hypothesis of limited market efficiency. However, one might wonder whether such factor returns can be achieved by any real life investor after transaction costs and funding costs? The answer appears to be a clear 'yes' based on Buffett's performance and our decomposition of it."

Well, it may be achievable in the real world but those that go to the other extreme (i.e. assume investing effectively is easy to do well versus impossible to do well as some efficient market adherents seem to believe) will likely end up with disappointing results. Naturally, intelligence matters to an extent. Yet the importance of that alone sometimes gets overestimated. Among other things, investing well requires the right combination of knowledge, skills, temperament, hard work, discipline, patience and an awareness of psychological factors.

It also requires a realistic appraisal of one's own limits.

If it was just about I.Q., then the disaster at Long-Term Capital Management (LTCM) should probably not have happened.

The paper points out that Buffett's performance was "very good but not super-human," so "how did Buffett become among the richest in the world? The answer is that Buffett has boosted his returns by using leverage, and that he has stuck to a good strategy for a very long time period, surviving rough periods where others might have been forced into a fire sale or a career shift."

For those who think that Buffett's ability to negotiate special deals on private transactions is the key driver of returns consider this:

"We find that both public and private companies contribute to Buffett's performance, but the portfolio of public stocks performs the best, suggesting that Buffett's skill is mostly in stock selection."

The lucrative deals he made during the financial crisis understandably get lots of attention but this leads, I think, to the incorrect conclusion that Buffett's results are primarily the result of the unique perch from which he now sits. Well, while those deals are surely good for shareholders, they just aren't big enough relative to the all other assets to really drive increases to intrinsic value.**

Now, the modest leverage Buffett uses -- mostly in the form of insurance float which provides cheap and, crucially, stable funding -- plays an important role. Yet it would also be a mistake to conclude it alone is the dominant driver of his long-term outperformance:

"...Buffett's leverage can partly explain how he outperforms the market, but only partly."

The fact that the leverage is employed in moderation is also an important element here. The paper estimates Buffett's leverage at ~ 1.6-to-1, so we aren't exactly talking about extreme leverage.
(During the financial crisis some large financial institutions employed extreme leverage -- easily 25-to-1 and even much worse with an appropriate consideration for what, in many cases, was off-balance-sheet -- while often relying too much on short-term funding sources.)

So the leverage Buffett uses is cheap, stable, and moderate. He keeps lots of cash on hand. All these things matter.

The strongest adherents to efficient markets essentially believe that, when it comes to publicly-traded equities, participants should not be able to systematically profit from market inefficiencies.

"In summary, if one had applied leverage to a portfolio of safe, high-quality, value stocks consistently over this time period, then one would have achieved a remarkable return, as did Buffett. Of course, he started doing it half a century before we wrote this paper!"

For some, Buffett's argument nearly 30 years ago was very persuasive while others still, to this day, don't think sufficient evidence exists.***

This recent paper certainly attempts to remedy this.

More in a follow up.


* By AQR Capital Management's Andrea Frazzini and David Kabiller along with NYU professor Lasse Pedersen. 
** Of course, those deals have been a good thing for shareholders. That doesn't logically mean that they are the key driver of overall investment results. Do some quick math and it becomes pretty obvious that those deals, at least relative to the size of all the investments he is responsible for, do not really move the needle in terms of increasing intrinsic value.
*** From this Morningstar article: "There are two ways to validate an economic or financial theory: wait 100 years and collect new data, or look at a fresh new data set, such as another time period or different markets. It can take decades before someone's held accountable for a bunk theory." This gives a huge advantage to the promoter of a questionable financial theory. Those trying to achieve a good balance between risk and reward in the real world can't afford to wait for undeniable proof based upon unbiased data. In the meantime, someone with impressive academic credentials can continue promoting their ideas knowing that, not only is it not easy to obtain sufficient data, that most data can be made to say just about whatever one wants with a tweak or two. Some theories may be mostly about getting published and looking brilliant among academic peers. Whether it happens to reveal anything useful in the real world a secondary consideration. With or without this recent paper, I happen to think that Buffett's approach is built upon sound investment principles. I also think that are well worth learning and putting to use within one's own inevitably unique set of capabilities and limits.
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Friday, December 6, 2013

Apple's Buyback: Does It Still Make Sense?

Not long ago, Carl Icahn began calling for Apple (AAPL) to buyback $ 150 billion worth of its stock.

He eventually pushed for a large and immediate tender offer.

Prior post: A Bigger Buyback For Apple?

Essentially, Icahn wanted the company to quickly buyback lots of its stock before the window of opportunity closed.

Here's what he wrote in a late October letter to Tim Cook:

"In our view, irrational undervaluation as dramatic as this is often a short term anomaly. The timing for a larger buyback is still ripe, but the opportunity will not last forever."

This more recent CNBC article points out that Icahn has now reduced the amount of stock he thinks Apple should repurchase to more like $ 50 billion.

Well, I'll just point out that the stock has not only risen nearly 20% since he started pushing for the $ 150 billion buyback, but is also up more than 40% from its lows earlier this year.

The better time to buyback at that kind of scale has, at the very least, temporarily passed.

So the window of opportunity to buyback stock may not have completely closed, but eventually that rising price begs for the scale of the buyback to be smaller.

The arithmetic is such that what would have had powerful effects on per share intrinsic value at lower prices increasingly becomes less compelling.

Each dollar invested in the stock simply goes less far and naturally, as a result, returns less for continuing shareholders.

So, inevitably, the "relentless rules of humble arithmetic" dictate what makes sense here. For those who own Apple with longer term outcomes in mind, the merit of a very large buyback is just not quite as clear as it was not too long ago.

Naturally, those attempting to trade around the company's nearer term prospects likely have a totally different agenda.

Warren Buffett, who had talked to Steve Jobs about whether buying back Apple's stock was a smart thing to do several years back, did say the following about the idea of increasing the buyback this past October:

"I think the Apple management and directors have done a pretty darn good job of running the company. My vote would be with them."

Now, keep in mind that earlier this year Apple expanded its share repurchase authorization to $ 60 billion and, when the stock was much lower, did buyback a nice chunk of their own shares. So it's not like they don't already have a meaningful buyback program in place even if not at the scale Icahn seems to want.

Share count is down to 909 million compared to 948 million a year earlier (and seems certain to be even lower when they next report).

Buffett, who is no small fan of buybacks when they make sense, also added the following about the pressure on Apple to buyback even more of their stock:

"I do not think that companies should be run primarily to please Wall Street and largely shareholders who are going to sell. I believe in running Berkshire for the shareholders who are going to stay and not the one's who are going to leave."

His emphasis is always on doing what's best for those who are willing to have a longer investment time horizon.

That doesn't change the fact that, as I've said before, tech stocks are generally not what I like -- and that includes an enterprise as capable as Apple -- unless extremely cheap (i.e. selling at a substantial discount to conservatively estimated intrinsic value). It has to be priced in such a way that little good has to happen to get a nice result considering the risks.

With the company's already sizable repurchase authorization and increased stock price in mind, I'm not sure whether an increased/accelerated buyback plan matters a whole lot at this point.

What matters more right now is whether the stock can remain cheap enough to warrant buying more.

"The first law of capital allocation – whether the money is slated for acquisitions or share repurchases – is that what is smart at one price is dumb at another." - Warren Buffett in the 2011 Berkshire Hathaway (BRKa) Shareholder Letter

In fact, if Apple's stock does continue to rise, it will eventually make sense to put a halt to their buyback plans altogether.

More generally speaking, continuing long-term shareholders are generally better off when a stock underperforms in the near term (or even intermediate term) and the business continues to have sound long run economics. Potential reward is actually increased while risk is reduced* when the stock of a sound business remains cheap, there's no imminent intent or need to sell, and the investment time horizon is long enough. The further an investor is away from selling, the better off they become much further down the road. The reason is simple: It not only allows the investor to buy more shares cheap, it allows the company to buyback shares cheap over time. This can have a significant compounding effect longer term.
(Buybacks can make sense when both a stock is cheap AND more than sufficient funds are available to meet all the operational/liquidity needs of the business.)

With patience, the combination of a not so great performing inexpensive stock and a sound business that's been bought at a reasonable price can be a powerful one.**

It may not be a lot of fun -- and professional money managers must consider "career risk" -- to stare at the quoted price of a listless stock, but the arithmetic at work here is undeniable.***

An investor can develop a trained response that more heavily weighs the longer run big picture while mostly ignoring the short-term noise. A more rational response should, on the surface, not exactly be difficult or impossible to learn but things like loss aversion do tend to make it a real challenge.

An investor has to also consider the opportunity costs and make high quality ongoing assessments of future business prospects. Sometimes prospects change; other times they're misjudged out of the gate.

In other words, this approach to investing works for a sound business that's bought well.

It doesn't work for a broken business.

It doesn't work when a big premium to intrinsic value was paid in the first place.

Stubbornly holding onto shares of an unsound business is a great way to wreck investment results.

The same is true for the investor who stubbornly holds onto shares after it becomes clear that a dumb price was paid (usually in a desperate attempt to get their money back out).

These are mistakes that must be avoided.


Long position in AAPL and BRKb established at much lower than recent prices. No intent to buy or sell shares near current prices.

Related posts:
A Bigger Buyback for Apple
Apple's Buyback
Technology Stocks

* Risk and reward need not always positively correlated even if modern finance theory, not to mention cultural norms, seem to more than suggest otherwise.
** The potential impact on risk and reward over time from this is not insignificant but also may not be completely obvious. For me, creating and working with simple, but meaningful, spreadsheets is one useful way to develop this into something that's more intuitive. The compounded effect over, lets say, 20 years or so isn't small at all. That can be easier to see with a thoughtful, but not unnecessarily complex, spreadsheet.
*** Especially a stock that ends up selling quite a bit below where it was bought -- and for a long period of time. Even if an unpleasant experience for some (I mean, nobody really likes seeing even paper losses no matter how rational this may be) and maybe just a bit counterintuitive, this approach still works out over the long haul if the company produces lots of cash flow, capital gets allocated well over time, and the price paid made sense. This way of thinking will no doubt be of little interest to those primarily in the business of trading price action.
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
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