Reflections

Thoughts on Markets and Investing

Wise people draw the right conclusions from little information, fools draw the wrong conclusions no matter how much information they have.
Common sense is called common not because it is abundant in the population, but because anyone can have it – a farmer may have more common sense than an economist or fund manager.
It is always better to think without reaching a conclusion than to reach a conclusion without thinking.
An opportunity you don't understand is simply a gamble. Greed without caution is folly.
Be prescient, not complacent.
In investing you often have to be opportunistic, never dogmatic.
If an investment looks good when presented in the worst light, buy it. If it looks shaky when presented in the best light, sell it.
Always bet on hype reversal and against the people who think they can make easy money.
Long-term you should never bet against the economy, short-term you should always bet against overconfidence in the economy.
Many investors spend too much time on data gathering and manipulation and too little on deep thinking.
I believe that with everyone trying so hard to predict the future, one’s time is better invested trying to understand the past, the present, and others’ biases.
One big problem with people is that they tend to infer trends too easily, sometimes from just two data points.
Many investors are too dependent on forecasts. They are then left unanchored when an unforeseen shock throws all forecasts into disarray. All one really needs is a good sense of direction, stemming from the correct appraisal of the current situation.
When listening to investment advice, it is important to distinguish between what could be called "market politicians", spewing generalities and remote forecasts, and true investors sharing experience and sharp analysis of market evidence.
Many investors don’t factor in enough uncertainty into their investments, which too often rely on fragile forecasts and unstable balances of numerous factors, whose joint realisation is in fact highly improbable.
Most people's investor profile is fearful speculator. They make money when things go up by virtue of leverage and concentrated exposure and lose money on the way down due to hybris, greed, or complacency.
There's no point chasing a trade when you have the same expectations as the market.
In investing it is important not to construct a narrative in which you believe and which makes you oblivious to external realities.
When everyone runs in the same direction chasing easy money (e.g. to profit from central bank asset purchases, overvalued IPOs, technology fads, or speculative crowded "meme" trades), refrain from joining them. Do not run immediately in the opposite direction, as you may easily get trampled, but keep your ground, so that when they realise they've been running towards a cliff edge, you can be the first to run in the opposite direction.
Speculation creates noise, which masks the real growth and value signals in stocks. This is why in recent periods the value factor has underperformed in large caps and outperformed in small and mid caps. Only professional value-seeking investors look at small companies, while speculators and macro traders focus on large, popular, and liquid stocks, which are more suited to momentum trading. Thus, the debate is less about growth versus value, and more about speculation versus fundamental investing.
The reason why many managers underperform their benchmarks is not as much their benchmarks' composition, which, although rule-based, is still left to the discretion of the index provider, but rather the passivity of indices: never panic-selling, creating unnecessary trading frictions and attempting to time the market, but rather letting businesses run their course, so that the best ones become a larger share of the index.
Being a contrarian doesn’t mean just blindly doing the opposite of what the market does. Rather, it means not taking your buying and selling signals from the market and being willing to dismiss the market and to stick to your fundamental thesis.
Justifiably, most investors trade the main movements of the markets. To generate alpha, trade the local excesses - the firm that makes no money and whose stock quintuples in a year, or the junk bond secured by quality assets whose yield jumps when the world gets scared.
On selling: don't sell just for the sake of taking profits, or just because you expect volatility. Never forget the reason why you bought in the first place and what the initial strategy materialising would look like.
Build your portfolio based on three pillars: one bullish, one bearish, and one defensive (including cash) and reweigh slightly based on your assessment of the market cycle. Never own more than 40-50 assets and don't collect small non-conviction positions.
A market that sees every macro data release through its second derivative (growth of the growth rate) has become fragile.
When deciding whether to invest in a high-growth, but loss-making business, look at the amount of R&D spending and investment in innovation. If these are high and without them the company would be profitable or nearly profitable, strongly consider investing.
It is crucial for every investor to find his or her own strategy and style and stick with it. Mediocre investors are those whose style permanently changes with the markets.
One can trade based on prices and volumes in a matter of hours, on news in a matter of days, on momentum in a matter of weeks, on macro-economic trends in a matter of months, but should only invest based on growth and value in a matter of years.
From a high-level perspective, investing in stocks is akin to exposure to economic growth, while investing in bonds is akin to exposure to the cost of that growth.
In markets, there's a world of difference between understanding what's happening at any given time and understanding why it's happening.
It is passivity rather than security selection that determines the outperformance of index funds.
While the market may not be entirely efficient, it is better to predict the economy based on the stock market than viceversa.
In the short term, it is often more comfortable to be a momentum trader than a contrarian investor, but in the long-term, almost always the opposite holds true.
Trading is about intuition, speed, and intelligence. Investing is about prudence and wisdom.
One of the current conundrums of asset allocators is that algorithms and systematic strategies aren’t flexible enough, while discretionary portfolio managers aren’t consistent enough.
Investing is more about balance than it is about anticipation.
In investing, certainty is expensive.
As a trader, listen to everyone but take investment advice from no one. Everyone is talking their book, so first identify their biases and incentives.
People focus too much on which assets they should hold and too little on which ones they shouldn't.
People spend too much time trying to anticipate the events that may benefit certain assets instead of finding the assets that do well in any event.
Pundits want investors to be anxious, since this creates volatility and gives them something to talk about.
Most speculators lose money, whereas most investors make money.
Avoid laziness of thought and always reason from first principles. High-level concepts hide the important details.
Falling revenues always hurt stocks more than growing costs.
When everyone starts looking for signs of optimism, the market is poised for a rebound, even if those signs do not appear soon.
In markets, every day you are fighting your psychology and trying to exploit that of others.
When you read in the news about stocks falling, it is usually too late to sell them and too early to buy them.
People who seem to make money too easily are usually not smarter than everyone else. Rather, they are merely taking on some risks they are not aware of.
It is better to buy an asset at a higher price on an upward trend than at a lower price on a downward trend.
It is better to make the same amount of money from large moves on smaller positions than from small moves on larger trades.
People like to worry about markets - it makes them sound smart. In most cases it is just a way to hedge their opinions to avoid being wrong.
Be bullish when markets are doing well, but most people try to find new (and increasingly less plausible) things to worry about. This means most of the likely risks are priced in and few catalysts remain for the market to turn negative.
Fixed-income investors generally have a mean-reverting mindset whereas most equity and commodity investors have a trend mindset. This is why bond bubbles are rare, whereas stock and commodity booms and busts abound.
First-level thinking is to follow the pundits, the media, and the obvious implications. Second-level thinking is to be sceptical of all of these and to take a longer-term approach. Third-level thinking is to understand the most facile reasoning that the market is likely to make at any time regarding any new developments, knowing that it's wrong, and then to bet on it.
All asset prices are composed of fundamental value and speculative value. The former is simply the present value of actual (or at least probable) cash flows. The latter is a reflection of the probability of a greater fool paying more than you paid despite no change in the fundamental value. This definition applies to all assets - stocks, commodities, bonds, crypto. The ratio of the two types of value determines whether the asset is an investment or a trade.
As a short-seller, look for markets in which there is a lot of leveraged positioning. Then bet big taking the opposite side of the trade and wait for the implosion. Examples: MBS/CDOs in 2008, LDI schemes in the UK in 2022.
As a growth investor, you should focus on the most competitive industries, since only competition can provide the incentive to innovate.
Avoid rollercoaster stocks.
The best way to do long/short equity is to be long for the long term and short for the short term.

Quotes From The Greats

"I will tell you how to become rich… Be fearful when others are greedy. Be greedy when others are fearful."

— Warren Buffett
"Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell."

— John Templeton
"Buy when most people, including experts, are pessimistic, and sell when they are actively optimistic."

— Benjamin Graham
"To succeed as a contrarian you must recognize what the crowd believes, have concrete justification for why the majority is wrong, and have the patience and conviction to stick with what is, by definition, an unpopular bet."

— Whitney Tilson
“Investment success doesn’t come from 'buying good things', but rather from 'buying things well'."

— Howard Marks
"Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge."

— Howard Marks
"People should like something less when its price rises, but in investing they often like it more."

— Howard Marks
"Skepticism and pessimism aren’t synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive."

— Howard Marks
"Patient opportunism, buttressed by a contrarian attitude and a strong balance sheet, can yield amazing profits during meltdowns."

— Howard Marks
"The big money is not in the buying or selling, but in the waiting."

— Charlie Munger
"Patience is needed if big profits are to be made from investment. It is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens."

— Philip Fisher
"Most people are too fretful, they worry too much. Success means being very patient, but aggressive when it's time."

— Charlie Munger
"When investors in general are too risk-tolerant, security prices can embody more risk than they do return. When investors are too risk-averse, prices can offer more return than risk."

— Howard Marks
"Be extra careful when buying into companies and industries that are the current darlings of the financial community."

— Philip Fisher
"The stock market has an inherently deceptive nature. Doing what everybody else is doing at the moment, and therefore what you have an almost irresistible urge to do, is often the wrong thing to do at all."

— Philip Fisher
"Mimicking the herd invites regression to the mean."

— Charlie Munger
"You must force yourself to consider opposing arguments. Especially when they challenge your best-loved ideas."

— Charlie Munger
"Invert, always invert: Turn a situation or problem upside down. Look at it backward."

— Charlie Munger
"No idea can be any better than the action taken on it."

— Howard Marks
"Never take investment advice from someone who has to work for a living."

— Nassim Taleb
"Forecasting is like trying to turn lead into gold."

— Philip Fisher
"Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself."

— Philip Fisher
"The disadvantage of having eggs in so many baskets is that a lot of eggs do not end up in really attractive baskets, and it is impossible to keep watching all the baskets after the eggs are put in."

— Philip Fisher
"I like putting all my eggs in one basket and then watching the basket very carefully."

— Stanley Druckenmiller
"It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong."

— George Soros
"People calculate too much and think too little."

— Charlie Munger
"More data—such as paying attention to the eye colours of the people around when crossing the street—can make you miss the big truck."

— Nassim Taleb
"The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs."

— Warren Buffett
"They think that intelligence is about noticing things that are relevant (detecting patterns); in a complex world, intelligence consists in ignoring things that are irrelevant (avoiding false patterns)."

— Nassim Taleb
"The market is like a large movie theatre with a small door."

— Nassim Taleb
“Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world.”

— Charlie Munger
"Most people get interested when everyone else is. The time to be interested is when no one else is. You can't buy what is popular and do well"

— Warren Buffett

Reflections

Wise people draw the right conclusions from little information, fools draw the wrong conclusions no matter how much information they have.

Common sense is called common not because it is abundant in the population, but because anyone can have it – a farmer may have more common sense than an economist or fund manager.

It is always better to think without reaching a conclusion than to reach a conclusion without thinking.

An opportunity you don't understand is simply a gamble. Greed without caution is folly.

Be prescient, not complacent.

In investing you often have to be opportunistic, never dogmatic.

If an investment looks good when presented in the worst light, buy it. If it looks shaky when presented in the best light, sell it.

Always bet on hype reversal and against the people who think they can make easy money.

Long-term you should never bet against the economy, short-term you should always bet against overconfidence in the economy.

Many investors spend too much time on data gathering and manipulation and too little on deep thinking.

I believe that with everyone trying so hard to predict the future, one’s time is better invested trying to understand the past, the present, and others’ biases.

One big problem with people is that they tend to infer trends too easily, sometimes from just two data points.

Many investors are too dependent on forecasts. They are then left unanchored when an unforeseen shock throws all forecasts into disarray. All one really needs is a good sense of direction, stemming from the correct appraisal of the current situation.

When listening to investment advice, it is important to distinguish between what could be called "market politicians", spewing generalities and remote forecasts, and true investors sharing experience and sharp analysis of market evidence.

Many investors don’t factor in enough uncertainty into their investments, which too often rely on fragile forecasts and unstable balances of numerous factors, whose joint realisation is in fact highly improbable.

Most people's investor profile is fearful speculator. They make money when things go up by virtue of leverage and concentrated exposure and lose money on the way down due to hybris, greed, or complacency.

There's no point chasing a trade when you have the same expectations as the market.

In investing it is important not to construct a narrative in which you believe and which makes you oblivious to external realities.

Being a contrarian doesn’t mean just blindly doing the opposite of what the market does. Rather, it means not taking your buying and selling signals from the market and being willing to dismiss the market and to stick to your fundamental thesis.

Justifiably, most investors trade the main movements of the markets. To generate alpha, trade the local excesses - the firm that makes no money and whose stock quintuples in a year, or the junk bond secured by quality assets whose yield jumps when the world gets scared.

On selling: don't sell just for the sake of taking profits, or just because you expect volatility. Never forget the reason why you bought in the first place and what the initial strategy materialising would look like.

Build your portfolio based on three pillars: one bullish, one bearish, and one defensive (including cash) and reweigh slightly based on your assessment of the market cycle. Never own more than 40-50 assets and don't collect small non-conviction positions.

A market that sees every macro data release through its second derivative (growth of the growth rate) has become fragile.

When deciding whether to invest in a high-growth, but loss-making business, look at the amount of R&D spending and investment in innovation. If these are high and without them the company would be profitable or nearly profitable, strongly consider investing.

It is crucial for every investor to find his or her own strategy and style and stick with it. Mediocre investors are those whose style permanently changes with the markets.

One can trade based on prices and volumes in a matter of hours, on news in a matter of days, on momentum in a matter of weeks, on macro-economic trends in a matter of months, but should only invest based on growth and value in a matter of years.

From a high-level perspective, investing in stocks is akin to exposure to economic growth, while investing in bonds is akin to exposure to the cost of that growth.

In markets, there's a world of difference between understanding what's happening at any given time and understanding why it's happening.

It is passivity rather than security selection that determines the outperformance of index funds.

While the market may not be entirely efficient, it is better to predict the economy based on the stock market than viceversa.

In the short term, it is often more comfortable to be a momentum trader than a contrarian investor, but in the long-term, almost always the opposite holds true.

Trading is about intuition, speed, and intelligence. Investing is about prudence and wisdom.

One of the current conundrums of asset allocators is that algorithms and systematic strategies aren’t flexible enough, while discretionary portfolio managers aren’t consistent enough.

Investing is more about balance than it is about anticipation.

In investing, certainty is expensive.

As a trader, listen to everyone but take investment advice from no one. Everyone is talking their book, so first identify their biases and incentives.

People focus too much on which assets they should hold and too little on which ones they shouldn't.

People spend too much time trying to anticipate the events that may benefit certain assets instead of finding the assets that do well in any event.

Pundits want investors to be anxious, since this creates volatility and gives them something to talk about.

Most speculators lose money, whereas most investors make money.

Avoid laziness of thought and always reason from first principles. High-level concepts hide the important details.

Falling revenues always hurt stocks more than growing costs.

When everyone starts looking for signs of optimism, the market is poised for a rebound, even if those signs do not appear soon.

In markets, every day you are fighting your psychology and trying to exploit that of others.

When you read in the news about stocks falling, it is usually too late to sell them and too early to buy them.

People who seem to make money too easily are usually not smarter than everyone else. Rather, they are merely taking on some risks they are not aware of.

It is better to buy an asset at a higher price on an upward trend than at a lower price on a downward trend.

It is better to make the same amount of money from large moves on smaller positions than from small moves on larger trades.

People like to worry about markets - it makes them sound smart. In most cases it is just a way to hedge their opinions to avoid being wrong.

Be bullish when markets are doing well, but most people try to find new (and increasingly less plausible) things to worry about. This means most of the likely risks are priced in and few catalysts remain for the market to turn negative.

Fixed-income investors generally have a mean-reverting mindset whereas most equity and commodity investors have a trend mindset. This is why bond bubbles are rare, whereas stock and commodity booms and busts abound.

As a short-seller, look for markets in which there is a lot of leveraged positioning. Then bet big taking the opposite side of the trade and wait for the implosion. Examples: MBS/CDOs in 2008, LDI schemes in the UK in 2022.

As a growth investor, you should focus on the most competitive industries, since only competition can provide the incentive to innovate.

Avoid rollercoaster stocks.

The best way to do long/short equity is to be long for the long term and short for the short term.

"I will tell you how to become rich… Be fearful when others are greedy. Be greedy when others are fearful."

"Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell."

"Buy when most people, including experts, are pessimistic, and sell when they are actively optimistic."

"To succeed as a contrarian you must recognize what the crowd believes, have concrete justification for why the majority is wrong, and have the patience and conviction to stick with what is, by definition, an unpopular bet."

“Investment success doesn’t come from 'buying good things', but rather from 'buying things well'."

"Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge."

"People should like something less when its price rises, but in investing they often like it more."

"Skepticism and pessimism aren’t synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive."

"Patient opportunism, buttressed by a contrarian attitude and a strong balance sheet, can yield amazing profits during meltdowns."

"The big money is not in the buying or selling, but in the waiting."

"Patience is needed if big profits are to be made from investment. It is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens."

"Most people are too fretful, they worry too much. Success means being very patient, but aggressive when it's time."

"When investors in general are too risk-tolerant, security prices can embody more risk than they do return. When investors are too risk-averse, prices can offer more return than risk."

"Be extra careful when buying into companies and industries that are the current darlings of the financial community."

"The stock market has an inherently deceptive nature. Doing what everybody else is doing at the moment, and therefore what you have an almost irresistible urge to do, is often the wrong thing to do at all."

"Mimicking the herd invites regression to the mean."

"You must force yourself to consider opposing arguments. Especially when they challenge your best-loved ideas."

"Invert, always invert: Turn a situation or problem upside down. Look at it backward."

"No idea can be any better than the action taken on it."

"Never take investment advice from someone who has to work for a living."

"Forecasting is like trying to turn lead into gold."

"Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself."

"The disadvantage of having eggs in so many baskets is that a lot of eggs do not end up in really attractive baskets, and it is impossible to keep watching all the baskets after the eggs are put in."

"I like putting all my eggs in one basket and then watching the basket very carefully."