• Age of the vintage.
• Average temperature during growing season.
• Amount of rain at harvest.
• Amount of rain in the months before harvest.
…. predicts 80% of future price variability.
Four variables predict the future value of wine.
“When you first start to study a field, it seems
like you have to memorize a zillion things. You
don't. What you need is to identify the core
principles -- generally 3 to 12 of them -- that
govern the field. The million things you
thought you had to memorize are simply
various combinations of the core principles.”
#1 Compound interest is what builds
wealth. And it takes time.
There are four ways to invest:
• Long term (varying degrees to success)
• Short term, successful due to luck
• Short-term, successful due to manipulation/fraud
That's the complete list. Numbers 3 and 4 eventually become number 1.
Time is the most important variable in investing, but the one we have
the least respect for. Buffett: "I think slowness turns off more people
than anything else.“
Of Warren Buffett’s $60 billion net worth, $59.7 billion came after his
50th birthday, $57 billion came after his 60th.
Most investors’ definition of long term is the time between now and
the next bear market.
Real estate feels like the best investment only because people hold it
for the longest time.
Time is your last remaining edge on Wall Street.
#2 You have never been able to predict what the market will do next.
This doesn't stop you from predicting what the market will do next.
Kenneth Arrow: “The Commanding General is well aware the forecast are no good.
However, he needs them for planning purposes.”
Future market returns will equal the dividend yield + earnings growth +/- change in
the earnings multiple (valuations).
Current dividend yield we know. Earnings growth we can reasonably forecast.
Change in multiples is totally unknowable.
If someone said, "I think most people will be in a 8.67% better mood in the year
2024," we'd call them delusional. When someone does the same thing by
projecting 10-year market returns, we call them analysts.
Official forecasts for where the Dow would end in 2008:
• William Greiner, UMB Financial: 14,400
• Tobias Levkovich, Citigroup: 15,100
• Bernie Schaeffer, Schaeffer’s Investment Research: 15,300
• Leo Grohowski, BNY Mellon Wealth Management: 14,800
• Thomas McManus, Banc of America Securities: 14,700
• David Bianco, UBS Investment Research: 15,250
Actual close: 8,776
Always wrong, never in doubt.
Always wrong, never in doubt.
• 2000: Congressional Budget Office projects the government will
effectively be debt free by 2009.
• Newsweek, 2000: Bush win could "help banks, brokers and other
investment firms." By the end of second term, the KBW Bank Index had
• Newsweek, 2008: If Obama wins, sell bank stocks: regulation will kill
them. KBW Bank Index up 186% since.
• The Money Channel, 2000: Bush win: “A broad tax cut ... has the
tendency to increase discretionary spending." By 2005, four of the six
largest airlines were bankrupt.
Life without predictions
• Thinking we can predict leads to overconfidence. Overconfidence
leads to misery.
• Knowing you can’t predict automatically forces you to plan for
contingencies. It forces diversification.
• Investing works best with a wide margin of error. (This is true for
most things in life).
• Graham: “The purpose of the margin of safety is to render the
#3 You don't respect the idea that "do nothing" are
the two most powerful words in investing.
• “The big money is not in the buying or the selling, but in the
sitting.” -- Jesse Livermore
• Anyone who bought an index fund 20 years ago and checked for
first time this morning can call themselves one of the best
investors in the world.
• Sell your house in May and buy it back in October? Insane. But
people do the same with stocks.
• Doing nothing isn’t an option for pros. So advisors trade, shuffle,
rotate, panic, sell in May and go away, and generally make idiots
• Investors think dollar-cost averaging is boring without realizing that
the purpose of investing isn't to minimize boredom; it's to maximize
• Effort in investing increases confidence more than ability.
• Barber and Odean: “Investors who trade the most realize, by far, the
• “All men's miseries derive from not being able to sit in a quiet room
alone." - Blaise Pascal
• The best investors in the world have more of an edge in psychology
than in finance.
Try doing less.
#4 You fail to respect reversion to the mean.
•Reversion to the mean is the simple idea something happens to
keep both good and bad news from going on forever. Capitalism
does not tolerate outliers for very long.
•It’s the second most powerful force in investing, next to
•“Your margin is my opportunity.” – Jeff Bezos
•Boom and bust cycle is a necessity of capitalism. Markets must
always crash and rally, because stability is destabilizing.
#5 You associate all of your financial success with
skill and all of your financial failures with bad luck.
• Most investors suffer a chronic failure to learn. Far too much finger
pointing. October 2008 headlines:
• “Who Should Go to Jail?”
• “Who Is to Blame for This Mess?”
• “The American People Have Been Robbed.”
• The best investors are learning machines. They focus more on
mistakes than wins.
• “It’s a learning process, and mistakes made in one year often
contribute to competence and success in succeeding years.” –Buffett
Paid $97 million from 2004 to 2007 to run Citigroup’s
structured credit division.
After his division blew up, Meheras explained: "Even in
the summer and fall of 2007, I continued to believe,
based upon what I understood from the experts in the
business, that the bank's [CDO] holdings were safe."
“Based in part on a careful study from outside
consultants … the company decided to expand certain
areas of our fixed income business that we believed at
the time offered opportunities for long-term growth.“
#6 Every five to seven years, you forget that
recessions occur every five to seven years.
There will be seven to 10 recessions over the next 50 years. Don't act surprised when they come.
#7 You say you'll be greedy when others are fearful, then
seek the fetal position when the market falls 2%.
99% of long-term investing is doing nothing;
the other 1% will change your life.
• Napoleon’s definition of military genius: “The man who can do
the average thing when everyone else around him is losing his
mind.” Same with investing.
• Pilot’s job: “Hours and hours of boredom punctuated by
moments of sheer terror."
• Same in investing. Your success as an investor is determined by
how you respond to punctuated moments of terror, not the
years and years spent on autopilot.
#8 You’re a pessimist in a world where
pessimists almost always lose.
Since 1850 ….
• 1.3 million Americans died while fighting nine major wars.
• Four U.S. presidents were assassinated.
• 675,000 Americans died in a single year from a flu pandemic.
• 30 separate natural disasters killed at least 400 Americans each
• 33 recessions lasted a cumulative 48 years.
• The stock market fell more than 10% from a recent high at least 97 times.
• Stocks lost a third of their value at least 12 times.
• Inflation exceeded 7% in 20 separate years.
• The words "economic pessimism" appeared in newspapers at least
29,000 times, according to Google.
#9 Your expectations grow faster than your money
Gary Kremen, Match.com Pete, retired
“The quickest way to turn
around your financial life is to
realize that you are in much
more control than you realize.
The moment you can learn to
live a less expensive life,
suddenly the clouds clear up
and the financial picture
The Ultimate Goal: Enough
"Yes, but I have
something he will
never have: enough."
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