How much do I want to read more? 4/10
This is most likely a book about investment. But the notion of cycles is everywhere from season to days and nights.
The good insight here is to be aware and listen closely to our environment.
Investment is seen here as taking a guess on what's the future will look like.
It's interesting in a way, but also boring. And I guess it's more boring than interesting for me.
[quote, Warren Buffett]
“When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something.”
the most important thing is being attentive to cycles.
[quote, Vince Lombardi]
“winning isn’t everything, it’s the only thing.”
Some patterns and events recur regularly in our environment, influencing our behavior and our lives. The winter is colder and snowier than the summer, and the daytime is lighter than the night. Thus we plan ski trips for the winter and sailing trips for the summer, and our work and recreation for the daytime and our sleeping at night. We turn on the lights as evening draws nigh and turn them off when we go to bed. We unpack our warm coats as the winter approaches and our bathing suits for the summer. While some people swim in the ocean in winter for exhilaration and some elect to work the night shift to free up their days, the vast majority of us follow the normal circadian patterns, making everyday life easier.
Economies, companies and markets also operate pursuant to patterns.
They arise from naturally occurring phenomena but, importantly, also from the ups and downs of human psychology and from the resultant human behavior.
Because human psychology and behavior play such a big part in creating them, these cycles aren’t as regular as the cycles of clock and calendar, but they still give rise to better and worse times for certain actions.
If we study past cycles, understand their origins and import, and keep alert for the next one, we don’t have to reinvent the wheel in order to understand every investment environment anew.
the investor has to maintain a high level of attention. Events happen equally to everyone who is operating in a given environment. But not everyone listens to them equally in the sense of paying attention, being aware of them, and thus potentially figuring out their import.
And certainly not everyone heeds equally. By “heed” I mean “obey, bear in mind, be guided by or take to heart.” Or, in other words, “to absorb a lesson and follow its dictates.” Perhaps I can better convey this “heeding” sense for listening by listing its antonyms: ignore, disregard, discount, reject, overlook, neglect, shun, flout, disobey, tune out, turn a deaf ear to, or be inattentive to. Invariably, investors who disregard where they stand in cycles are bound to suffer serious consequences.
In order to get the most out of this book—and do the best job of dealing with cycles—an investor has to learn to recognize cycles, assess them, look for the instructions they imply, and do what they tell him to do.
If an investor listens in this sense, he will be able to convert cycles from a wild, uncontrollable force that wreaks havoc, into a phenomenon that can be understood and taken advantage of: a vein that can be mined for significant outperformance.
essential elements for investment success:
- A technical education in accounting, finance and economics provides the foundation: necessary but far from sufficient.
- A view on how markets work is important—you should have one before you set out to invest, but it must be added to, questioned, refined and reshaped as you proceed.
- Some of your initial views will come from what you’ve read, so reading is an essential building block. Continuing to read will enable you to increase the efficacy of your approach. Legendary investor Charlie Munger often points to the benefits of reading broadly; history and processes in other fields can add greatly to effective investment approaches and decisions.
- Exchanging ideas with fellow investors can be an invaluable source of growth. Given the non-scientific nature of investing, there’s no such thing as being finished with your learning, and no individual has a monopoly on insight. Investing can be solitary, but I think those who practice it in solitude are missing a lot, both intellectually and interpersonally.
- Finally, there really is no substitute for experience. Every year I have come to view investing differently, and every cycle I’ve lived through has taught me something about how to cope with the next one. I recommend a long career and see no reason to stop any time soon.
1. WHY STUDY CYCLES?
The odds change as our position in the cycles changes. If we don’t change our investment stance as these things change, we’re being passive regarding cycles; in other words, we’re ignoring the chance to tilt the odds in our favor. But if we apply some insight regarding cycles, we can increase our bets and place them on more aggressive investments when the odds are in our favor, and we can take money off the table and increase our defensiveness when the odds are against us.
Investing is a matter of preparing for the financial future. It’s simple to define the task: we assemble portfolios today that we hope will benefit from the events that unfold in the years ahead.
For professional investors, success consists of doing this better than the average investor, or outperforming an assigned market benchmark (the performance of which is determined by the actions of all the other investors). But achieving that kind of success is no small challenge: although it’s very easy to generate average investment performance, it’s quite hard to perform above average.
One of the most important foundational elements of my investment philosophy is my conviction that we can’t know what the “macro future” has in store for us in terms of things like economies, markets or geopolitics. Or, to put it more precisely, few people are able on balance to know more about the macro future than others. And it’s only if we know more than others (whether that consists of having better data; doing a superior job of interpreting the data we have; knowing what actions to take on the basis of or our interpretation; or having the emotional fortitude required to take those actions) that our forecasts will lead to outperformance.
In short, if we have the same information as others, analyze it the same way, reach the same conclusions and implement them the same way, we shouldn’t expect that process to result in outperformance.
And it’s very difficult to be consistently superior in those regards as relates to the macro.
I think we can most gainfully spend our time in three general areas:
- trying to know more than others about what I call “the knowable”: the fundamentals of industries, companies and securities,
- being disciplined as to the appropriate price to pay for a participation in those fundamentals, and
- understanding the investment environment we’re in and deciding how to strategically position our portfolios for it.
One of the key words required if one is to understand the reasons for studying cycles is “tendencies.”
What is the origin of risk? One of my favorite investment philosophers, the late Peter Bernstein, said in an issue of his Economics and Portfolio Strategy newsletter titled “Can We Measure Risk with a Number?”
- Essentially risk says we don’t know what’s going to happen. . . . We walk every moment into the unknown. There’s a range of outcomes, and we don’t know where [the actual outcome is] going to fall within the range. Often we don’t know what the range is.
[quote, Elroy Dimson]
“Risk means more things can happen than will happen.”
But in life and in investing, since there can be many different outcomes, uncertainty and risk are inescapable.
As a consequence of the above, the future should be viewed not as a single fixed outcome that’s destined to happen and capable of being predicted, but as a range of possibilities and—hopefully on the basis of insight into their respective likelihoods—as a probability distribution. Probability distributions reflect one’s view of tendencies.
Superior investors are people who have a better sense for what tickets are in the bowl, and thus for whether it’s worth participating in the lottery. In other words, while superior investors—like everyone else—don’t know exactly what the future holds, they do have an above-average understanding of future tendencies.
In addition to an opinion regarding what’s going to happen, people should have a view on the likelihood that their opinion will prove correct. Some events can be predicted with substantial confidence (e.g., will a given investment grade bond pay the interest it promises?), some are uncertain (will Amazon still be the leader in online retailing in ten years?) and some are entirely unpredictable (will the stock market go up or down next month?) It’s my point here that not all predictions should be treated as equally likely to be correct, and thus they shouldn’t be relied on equally. I don’t think most people are as aware of this as they should be.
Of course, your betting partner will only give you even odds on a bet on black (a) if he doesn’t know the balls are 70% black and 30% white and (b) if he doesn’t know that you do know. If he knew as much as you do about the contents of the jar, he would give you only 30:70 odds on a bet on black, and the bet would be back to being profitless.
In other words, in order to win at this game more often than you lose, you have to have a knowledge advantage. That’s what the superior investor has: he knows more than others about the future tendencies.