Perhaps it falls under biases but I'm surprised he didn't mention: Know when to quit. Or more precisely: Define your exit points and stick to them.
That is, we all have a tendency to double down on bad decisions (as things go sideways). Or we get greedy as things go well and hold longer than we should.
"Some people are able to remain rational and continue to follow their process even under great duress or during periods of external upheaval. Others get swept up in the emotion that typically runs amok during such circumstances, and abandon their discipline."
On that note, what’s the easiest way to build a personal trading bot? Something in a simple language, that I can still nacktest perhaps stock and options.
Nah. If you have a bot that invests 10K, and has a reaction time of a minute, and invests in 10-100 equities with, say a couple of months each time, then you are in a completely different world than big bank bots. Its like Warren said, its easy to invest a million.
Obviously nobody should trade cryptocurrencies, but cryptocurrency exchanges tend to have unusually equitable market access for solo quants compared to US equities or whatever.
And then out of the thousands of traits present in these investors, the 5 that this selected group happen to share, and seems quite logical, at times seem insightful, will end up in a blog.
> Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper.
My first question would be: Do "best investors" actually exist?
The title implies that some investors are better than others. But I have not yet seen any data driven argument in favor of this theory. There are so many investors on planet earth, that even if they all have the same ability to predict the future prices of stocks, some will do unbelievably better than others. By pure chance.
The article starts with a photo of Charlie Munger and Warren Buffett. Does this imply that they are "better" than the average investor?
Someone who would have invested in Microsoft 20 years ago and said "Hey, I am sure software will grow like mad! That's enough for me to know about the markets. From now on, all I will do is wait." would have been right. And would have seen about twice the return that Berkshire achieved. There must be many such investors. Are they all "better" than Munger and Buffett?
Now some might say that it is "easy" to outperform the market with a single stock. Pick a very volatile one and your chances are 50%. And that Munger and Buffett made many investments. And that the chance is low to make that many investments and in total still beat the S&P500. Ok. But how low is the chance for the number of trades Berkshire did? Maybe it is totally normal, that some investors do that many trades and beat the S&P500 by pure chance.
By the way, a QQQ certificate which contains the 100 largest tech companies also outperformed Berkshire and had about twice their performance over the last 20 years.
Charles Schwab company did a survey of those of their customers who did very well over the long run, and they found a surprising attribute of a large number of the most successful investors: they had forgotten that they had the account. Buy and hold!
Survivorship bias though; did they report on anyone that held the account for a long time and lost money?
But yeah, this is the generalised advice; spread your investments, index funds, and wait. The market's trend over long term always goes up. It's just that it's more of a retirement plan than a get rich quick plan; people want or need money early in life, buy a house, be financially secure.
I think it was better for everyone back when, when the Simpsons started airing, where a single low education level income was enough to buy a house and support a whole family. That was wealth.
Yes, there are. I won't say it's easy, but it's possible to outperform the market without relying on the element of luck over a long term. Often, you don't hear about these folks because they are succeeding at a much smaller scale.
The reason is simple. The market, even rational as it is, gives you chances to make a great deal of money. META was $89 only a few months back. APPL was once trading at P/E of 10. TSLA is now 2.5x from its recent bottom. Of course, the boat has sailed now. Now, you can say investors who made money here were just lucky, or you can see how they ignored the temporary negative sentiment and invested in a company with solid fundamentals.
It's a myth that you can't beat the market. If you know how to seize an opportunity, you perfectly can. My investment philosophy is to keep investing in ETFs, but also keep an eye on bargains.
Its having the courage to act on your convictions. Meta was on a P/e of 13 earning billions of dollars in profit and generating huge amounts of cash flow, but it had effectively gone ex growth and it's metaverse investment was a dud. I bought because it looked like great value, but once it's repriced to take that into account where's the growth story?
They are not Twitter and are doing Twitter-like things with Threads.
It’s going to be interesting to watch, particularly as someone with no money on either and a dislike of both.
> There must be many such investors. Are they all "better" than Munger and Buffett?
Your reasoning demonstrates that "better" is, strictly speaking, relative to a given set of criteria,[1] that are at least vaguely quantifiable and can be meaningfully (numerically?) combined[2] with each other.
I think that all these discussions who is "better" or "best" (strictly speaking or not) have their merrits. But not in the sense that we ever may arrive at a final, definite ranking. It is more of a recommendation to analyse a certain person's performance because something important might be learned from it.
[1] If we were to consider lottery tickets as "investments", the person who spent $1 and won $997,600,000 in the Powerball lottery in 2022[1.1] would be among the best investors of all time.
> Someone who would have invested in Microsoft 20 years ago and said "Hey, I am sure software will grow like mad! That's enough for me to know about the markets. From now on, all I will do is wait." would have been right. And would have seen about twice the return that Berkshire achieved. There must be many such investors. Are they all "better" than Munger and Buffett?
Using overall return as the sole comparison metric isn't really done when comparing managers. You can look at factors such as diversification, Sharpe and Sortino ratios, drawdowns...
Depends on who does the comparison. And what is important to them. The Microsoft investor might say "I'm fine with the price going up and down a bit in the short term. Reducing that is not worth it for me to miss out on 50% of the ROI".
If you say Berkshire's performance is significantly exceptional when including those aspects in a combined performance indicator, then it is up to you to show that.
It may be that risk control is one of the key factors in success. Either through diversification and a broad spread of investments, or having a defined loss per position and then having the discipline to sell. Position sizing is also important, not putting too much into one investment.
Value investors pretty much do not use risk control as known from shorter term trading. They just buy low and sell when facts change (down) or prices change (up).
I think diversification is a key tenet of value investing. The margin of safety applies to the individual company but that doesn't guarantee success, so a diversified portfolio is one key method of reducing risk.
Right, but that diversification is into 5 or 10 companies. Risk management that you can find in various trading shops is a much more involved process than that.
You are right that position sizing is important but for the opposite reason. Knowing your winners and then full on concentrating in them is statistically a big part of what makes successful winners.
For traders maybe, because they pyramid the position on the back of any gains made. But you also don't want to have so much invested in one company that it becomes make or break. A 10% loss on 5% of your portfolio is way more manageable than 10% on 50% of your portfolio.
No even for buy and hold investors. The best investors get only 55% of the bets right. Only a little better than a coin toss. The only reason the performance for them is better than the 55% metric would suggest is because they cut losses on losers early and push on winners.
I read about a study in Scientific American many years ago regarding this topic, and IIRC the results of the study showed that accepting a loss and reinvesting was what separated the good ones from the others.
The argument as I recall it was that stocks that fell hard seldom recovered, at least on shorter timescales, thus it was almost always better to accept that loss and reinvest whatever is left in something else.
except for a lot of the mega caps today. Look at how much apple fell when they almost bankrupted themselves in the past and had to get steve jobs back.
Look at microsoft, when they almost lost to google (and clawed their way back).
The reason they seldom recover from a low, is that a stock being low is synonymous with the business being in financial trouble. Most businesses in financial trouble don't make it out.
But those who do are ones that managed to get somebody good to turn it around. Of course, as an investor, you can't know who's "good" until after they're done turning it around.
So in the end, those with deep pockets that can weather the lows, would end up with a superior return in the long run.
The strategies described in the article are strikingly similar to gambling advise. Applying these in a casino will minimize your chances of ending up broke, but you will still lose money in the long run, because of the house edge. I'd say it is the same thing with investment, if you follow these rules, you will mostly end up with reasonable market-rate returns. But to be really good, you don't just need a good betting strategy, you also need the house edge.
If that is the metric then the best investors are not passive stock picking investors, they run businesses and hammer out deals. Which in some sense just make them the best (or among the best) corporations.
Like with gambling or startups, out of every 1000, maybe 1 will make it big; out of those, a fraction will choose to become famous / a known name, and that's the survivorship bias that gets thousands more amateur investors to try their hand and get rich quick, turning their life savings into another fraction of a percentage of these top investors' accounts.
For most of us regular people, slow and safe investments are the way to go. Get savings, get some interest on that to at least partially counteract inflation, buy a house, avoid debts, loans and subscriptions as much as you can. And I'm aware that all that sane money management advice isn't even an option for a lot of people.
Plenty of evidence contradicts the efficient market hypothesis, showing that it's possible to outperform the average. The market's late response to Covid is a case in point.
The gambling analogy holds up only when you compare it to poker or sports betting, where you can make money if you're better than others.
Your comment sounds cynical but I totally agree with you. As a long time (now ex) trader I can tell you that the professionals have a tremendous information advantage over the retail investor. And even then they don't make money consistently. Edge is everything.
Regarding insider info, I apply the cockroach theory: there's never just one. You see the SEC bring insider trading charges all the time. This is probably a fraction of what really goes on in the markets.
I guess it pays to be temperamentful and "do nothing" if the pool of money you get to play with is huge to begin with. If you have limited funds to invest with, the temptation to take risk to make a significant profit looms large.
I think the strongest edge one can have is to be able to invest independent of any market sentiment. If a stock looks cheap, and according to your research it is cheap, then you need to be able to ignore any market sentiment regarding that stock and buy it anyway.
It is far too easy to get wrapped up into wanting the best possible return by buying at the lowest price, and selling at the highest price. The reality is that's near impossible. However, buying companies that by the numbers indicate a 20% return, even if they night get cheaper in a crash, is a decent way to actually get a 20% return. The problem is those kinds of investments only show up with severe uncertainty and negative sentiment. By the time they feel good to invest in the price has reflected that change in sentiment.
Of course, this all presupposes skill at evaluating these businesses accurately and reliably, so losers don't drag you down when the negative sentiment is actually correct :/.
> If a stock looks cheap, and according to your research it is cheap, then you need to be able to ignore any market sentiment regarding that stock and buy it anyway.
and take the risk that you just overlooked something the rest of the market has priced in. But i guess to invest, one must have conviction that they're right about their investment thesis.
> 1. Temperament [...] My observation of many investors over my 20+ years of professional investing has led me to believe that temperament cannot be learned
I would be interested in whether this is a justified belief or not and whether there is actual research on that topic. Does anyone have any insights on this?
All I know in relation to this is that some Parkinson's medications can increase the desire to gamble with high risk, which I guess is a negative temperament for an investor.
I think they managed to use data and pattern recognition to find arbitrage opportunities between different chains of commodities (and stocks perhaps).
It's also why they have limits on the fund's size - they cannot move the market or risk breaking that arbitrage in the first place (where breaking it also could mean their trades show up and get noticed by a third party).
62 comments
[ 4.0 ms ] story [ 129 ms ] threadThat is, we all have a tendency to double down on bad decisions (as things go sideways). Or we get greedy as things go well and hold longer than we should.
"Some people are able to remain rational and continue to follow their process even under great duress or during periods of external upheaval. Others get swept up in the emotion that typically runs amok during such circumstances, and abandon their discipline."
https://business.columbia.edu/cgi-finance/chazen-global-insi...
The title implies that some investors are better than others. But I have not yet seen any data driven argument in favor of this theory. There are so many investors on planet earth, that even if they all have the same ability to predict the future prices of stocks, some will do unbelievably better than others. By pure chance.
The article starts with a photo of Charlie Munger and Warren Buffett. Does this imply that they are "better" than the average investor?
Someone who would have invested in Microsoft 20 years ago and said "Hey, I am sure software will grow like mad! That's enough for me to know about the markets. From now on, all I will do is wait." would have been right. And would have seen about twice the return that Berkshire achieved. There must be many such investors. Are they all "better" than Munger and Buffett?
Now some might say that it is "easy" to outperform the market with a single stock. Pick a very volatile one and your chances are 50%. And that Munger and Buffett made many investments. And that the chance is low to make that many investments and in total still beat the S&P500. Ok. But how low is the chance for the number of trades Berkshire did? Maybe it is totally normal, that some investors do that many trades and beat the S&P500 by pure chance.
By the way, a QQQ certificate which contains the 100 largest tech companies also outperformed Berkshire and had about twice their performance over the last 20 years.
But yeah, this is the generalised advice; spread your investments, index funds, and wait. The market's trend over long term always goes up. It's just that it's more of a retirement plan than a get rich quick plan; people want or need money early in life, buy a house, be financially secure.
I think it was better for everyone back when, when the Simpsons started airing, where a single low education level income was enough to buy a house and support a whole family. That was wealth.
Actually it is mostly just population growth + inflation - which is almost always positive.
The reason is simple. The market, even rational as it is, gives you chances to make a great deal of money. META was $89 only a few months back. APPL was once trading at P/E of 10. TSLA is now 2.5x from its recent bottom. Of course, the boat has sailed now. Now, you can say investors who made money here were just lucky, or you can see how they ignored the temporary negative sentiment and invested in a company with solid fundamentals.
It's a myth that you can't beat the market. If you know how to seize an opportunity, you perfectly can. My investment philosophy is to keep investing in ETFs, but also keep an eye on bargains.
They are not Twitter and are doing Twitter-like things with Threads. It’s going to be interesting to watch, particularly as someone with no money on either and a dislike of both.
Your reasoning demonstrates that "better" is, strictly speaking, relative to a given set of criteria,[1] that are at least vaguely quantifiable and can be meaningfully (numerically?) combined[2] with each other.
I think that all these discussions who is "better" or "best" (strictly speaking or not) have their merrits. But not in the sense that we ever may arrive at a final, definite ranking. It is more of a recommendation to analyse a certain person's performance because something important might be learned from it.
[1] If we were to consider lottery tickets as "investments", the person who spent $1 and won $997,600,000 in the Powerball lottery in 2022[1.1] would be among the best investors of all time.
[1.1] https://en.wikipedia.org/wiki/Lottery_jackpot_records
[2] Does it make sense to ask whether Michael Jordan is a "better" sportsperson than Magnus Carlsen?
Using overall return as the sole comparison metric isn't really done when comparing managers. You can look at factors such as diversification, Sharpe and Sortino ratios, drawdowns...
If you say Berkshire's performance is significantly exceptional when including those aspects in a combined performance indicator, then it is up to you to show that.
This is for a small company of 6
I read about a study in Scientific American many years ago regarding this topic, and IIRC the results of the study showed that accepting a loss and reinvesting was what separated the good ones from the others.
The argument as I recall it was that stocks that fell hard seldom recovered, at least on shorter timescales, thus it was almost always better to accept that loss and reinvest whatever is left in something else.
except for a lot of the mega caps today. Look at how much apple fell when they almost bankrupted themselves in the past and had to get steve jobs back.
Look at microsoft, when they almost lost to google (and clawed their way back).
The reason they seldom recover from a low, is that a stock being low is synonymous with the business being in financial trouble. Most businesses in financial trouble don't make it out.
But those who do are ones that managed to get somebody good to turn it around. Of course, as an investor, you can't know who's "good" until after they're done turning it around.
So in the end, those with deep pockets that can weather the lows, would end up with a superior return in the long run.
- Get the best information, possibly insider
- Manipulate the market
- Not get caught doing these things
The strategies described in the article are strikingly similar to gambling advise. Applying these in a casino will minimize your chances of ending up broke, but you will still lose money in the long run, because of the house edge. I'd say it is the same thing with investment, if you follow these rules, you will mostly end up with reasonable market-rate returns. But to be really good, you don't just need a good betting strategy, you also need the house edge.
For most of us regular people, slow and safe investments are the way to go. Get savings, get some interest on that to at least partially counteract inflation, buy a house, avoid debts, loans and subscriptions as much as you can. And I'm aware that all that sane money management advice isn't even an option for a lot of people.
The gambling analogy holds up only when you compare it to poker or sports betting, where you can make money if you're better than others.
"Over a period of 39 years, Walters had only one losing year, with a 30-year winning streak"
name some.
I think the market is quite close to, but not perfect. There's _some_ places where you can eck out an edge, but it's very slight.
Regarding insider info, I apply the cockroach theory: there's never just one. You see the SEC bring insider trading charges all the time. This is probably a fraction of what really goes on in the markets.
but do these traders beat the market on average though?
which is good enough. You do not need to have outsized returns.
aka, greed.
It is far too easy to get wrapped up into wanting the best possible return by buying at the lowest price, and selling at the highest price. The reality is that's near impossible. However, buying companies that by the numbers indicate a 20% return, even if they night get cheaper in a crash, is a decent way to actually get a 20% return. The problem is those kinds of investments only show up with severe uncertainty and negative sentiment. By the time they feel good to invest in the price has reflected that change in sentiment.
Of course, this all presupposes skill at evaluating these businesses accurately and reliably, so losers don't drag you down when the negative sentiment is actually correct :/.
and take the risk that you just overlooked something the rest of the market has priced in. But i guess to invest, one must have conviction that they're right about their investment thesis.
I would be interested in whether this is a justified belief or not and whether there is actual research on that topic. Does anyone have any insights on this?
Does anyone know of an investor with a better record?
It's also why they have limits on the fund's size - they cannot move the market or risk breaking that arbitrage in the first place (where breaking it also could mean their trades show up and get noticed by a third party).