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sign of a good decision is not that it turns out to be right this is counterintuitive I believe that most of the things that are important in the investing world are counterintuitive but the point is you can make a good decision and it doesn't work because number one nobody knows everything when they make the decision nobody has all the facts and number two the world is dominated by uncertainty and by Randomness you know you can make a perfectly good decision with a with good data and a good decision process but it turns out not to work because of some random event if you read Fooled by Randomness by Nasim to lab a great book in my opinion you know he said to understand the quality of a decision you have to understand not only the events that occurred but the other events that could have incurred but didn't what he calls alternative histories and only when you consider all the possible outcomes from a decision do you really understand the quality of that decision it's really important to understand this and to understand that there are lots of good decisions that don't work and there are lots of bad decisions that work we all all know about people who are right for the wrong reason so only when we look at the world that way do we understand who really made good decisions or not you can't make a good decision every day these calls of a peak or a trough at the extreme of bubble and crash or high and low Poland bear the decisions the logic is clear and I think compelling and the probabilities are on your side the probability of being right is high but if you do it in between you try to do it every day or every week or every month you try to do it when the market is two percent overvalued or four percent undervalued or something it's very hard to beat right and one of the most important things is to invest as it's right for you and you know for a chicken try to be aggressive or for a cowboy to try to be conservative is challenging I talked about that the fact that liquidity isn't always a great thing and selling and buying too much and trading too much is not a good thing if you look at the chart of a stock that's been up for 25 years and you say man I wish I had that stock think of all the days you would have had to talk yourself out of selling and it's true I mean the hardest thing in the world is to hold the stock for 25 years and have it see it go from 1 to 10 to 100 to a thousand and not sell it and then watch it go to ten thousand and a hundred thousand and that's how you make the big money but you have to hold for a long time instead most people sell it in fixed income there's no such thing as a huge success because turns are asymmetric you can't make much but you can lose a lot so if you're in a market where you can't make much but you can lose a lot then by definition your approach has to be asymmetrical because the possibilities are asymmetrical Graham and Dodd in the Bible security analysis in 1940 called fixed income investing a negative art you succeed not because of what you buy but because of what you exclude from a fixed income portfolio so the point is to hit the big successes you have to hold for the long term the first of the great adages that I remember learning was that being too far ahead of your time is undistinguishable from being wrong people turn negative because they see things in the environment that are going on that spoke them and you may be in principle right but if you do it too soon and it doesn't work for a few years everybody says look at that guy he used to understand this process but look how wrong he is you know now you're not wrong you're right but early but right early looks like being wrong and the question is can you survive in that interim between when you make the decision and when it's proved out and these can be very difficult times and you can show terrible performance and lose most of your money under management even with a decision which is right in prison the necessary condition for outperformance of others is to do something different not every day because there's not something intelligent to do differently every day but to be aware of excesses in the environment and be they extremes of the economic cycle or extremes of the market or of investor Behavior at that time to stand away from the herd I think the only thing you can really do intentionally is be aware and try to as I say not conform emotional control unemotionality is essential because if you are subject to the same emotions as the herd then you'll probably do the same things as the herd not stand away so by definition then you have to not be emotional like the herd people always ask me well how do you be unemotional it helps to be born unemotional and most of the great investors I know are unemotional or have their emotions under control but that seems harder to me it seems harder to recognize the importance of emotional control and practice it given that we're all subject to the same inputs and seems to me to be harder to practice it emotional control rather than be unemotional by Nature the reason Market go to extreme is that many people fail to say oh it's one of those instead what they say is this time is different you know I first came across that phrase on October 11th 1987.
there was an article in the New York Times written by a woman called Denise Wallace and the title was something like this time it's not any different what she said is that when the market goes to extremes people always say oh this time it's different in other words the old rules don't apply this is this is such a unique experience that the old rules don't apply and so the old valuation limitations you know well yes yeah the normal post-war PE 16 but it's selling at 30 now and that's fine because this sign is different you know this whether it's the internet or the nifty 50 or the housing miracle in 20056 you know this time is different the old rules don't apply and then there's a correction and people say oh yes I guess the old rules do apply so it's very important to when you hear people say This Time It's Different your a red light should go on I think the phrase came from Sir John Templeton but he said but sometimes it is different 20 of the time it really is different and the world does change and if that was true when he said it in the 80s I think it's much more true today maybe it's 40 or 50 when I was a kid or even a young man the world felt like it was a static Place nothing ever changed I always say that when I was a kid comic books were 10 cents through my whole childhood we didn't have inflation we didn't have changing prices we didn't have rapid technological change or Communications that changed everything so rapidly and we didn't have the partisan Communications that we had now Communications operated under something called the fairness Doctrine so the world didn't change and events played out in front of an unchanging backdrop shall we say today the world changes every day so it's much more likely today that things really are different so I think it's important to recognize that today and be more flexible in our approach Mark Twain said history doesn't repeat but it Rhymes there are some things that are kind of Eternal verities but there is much more that's different from day to day here we are you invested in the best companies in America in the end of the 60s early 70s and you lost almost all your money now I'm investing in the worst public companies in the world and I'm making money safely and steadily so I drew two conclusions it's not what you buy it's what you pay there's nothing so good that it can't become overpriced and a bad idea and there are a few things so bad that they can't be underpriced and a good idea it's not what you buy it's what you pay and the corollary of that is that good investing is not a matter of buying good things it's a matter of buying things well and if you don't understand the difference between buying good things and buying things well then you shouldn't be doing this there are three stages to a bull market the first stage when very few people only a gifted few understand that there could be Improvement the second when most people accept that Improvement is actually taking place and the third when everybody believes that things can only get better forever and it is which stage we're in and which feelings people are Guided by that really determines the status of the market so are people being too pessimistic in the first stage that's when you get Bargains or too optimistic in the third stage which is when you know the excesses on the upside are taking place and when you can really get killed if you participate the real easy and big money in investing comes when you are willing to do something that nobody else will do and when that's bi nobody else is willing to buy you buy you get a buyer the real easy way to lose money is when you do that everybody else is doing to access yes because clearly there now there's too much optimism to be realistic and you pay prices that vastly exceed the intrinsic value that's an easy time to lose money living life your way is the most important thing this is how I conclude most of my talks with students on campus because they always ask well what should I do and I said well number one there's no right answer for everybody no one size fits all the worst thing you can do is do what other people tell you to do or emulate what other people are doing or what's popular or what society says you should do and certainly you shouldn't choose a career because you can make the most money I mean for most people that's not going to be end up successful you have to live your life your way it was a time believe it or not when most people wanted to be accountants because it was a very profession in demand then there was a time when everybody wanted to be a consultant and then in the 90s and maybe even I guess in in the Arts everybody wanted to be an investment banker and now everybody wants to be a venture capitalist and a techie but I mean obviously what a terrible idea is to choose your career because it's the one everybody else is choosing number one it'll be crowded and competitive and number two it may not be satisfactory to you so I always say to kids your career you choose should play to your strengths and avoid your weaknesses and it should be the thing that will make you the happiest we only get one life as far as I know and what a mistake it is to squander it on something that doesn't play to your strength and make you happy and something which is chosen just because it will make you the most money unless that's the thing that'll make you happy but I mean that's my most important piece of advice that the things that work the best are the things that are unconventional and correct it's a little hard to be unconventional most people don't do it naturally and the things that are conventional are often the right thing because they're the thing that so many people have thought about and chosen to do so it's hard to be unconventional and it's hard to be right when you're unconventionally but when you do both it's the most successful there is no one most important thing there are many things which are essential and you have to get right and so that's why I use that format in the memo it talked about a good partnership which is the most important thing and I said in there that the most important thing in a partnership is shared values and complementary skills and I think that if you work with people who have different values than you do it's unlikely to be successful if your skills are duplicative and you have the same strengths then you probably have the same weaknesses and the weaknesses can get you into trouble and the strengths are duplicative and what ends up happening is one person eventually says well I can do everything he does and more I don't need him and so he says I want you to go cut your share I need more and that jeopardizes the organization risk cannot be Quantified in advance risk is the probability of a bad outcome you can't measure uh probabilities of Uncertain events there's no place you can look to measure the probability of a bad outcome and you can't even figure out the probability of a loss after the fact you can't tell whether something was risky after the fact if you invest a hundred dollars and a year later you sell it for two hundred dollars was it risky you can't tell why because the outcome that happened was only one of the outcomes that could have happened we're back to celeb as an alternative histories and so if many things could have happened but didn't then you can't say what the real range of possibilities was you can't say what the probability distribution governing that investment was that is to say you can't tell whether it was risky one of my heroes was John Kenneth Galbraith and he wrote a book called The Short history of financial Euphoria which I thought was very good and one of the first ones that got me formally thinking about Cycles because what it was was about the some of the excesses of optimism that he had seen and some of the extreme bull markets Peter Bernstein's built Against The Gods which discusses the origin of the science of probabilities and it's only because of the creation of the science of probabilities that we can understand and risk and transfer risk I mean it took the insurance industry couldn't exist just if there was no sense for the probabilities of bad things happening which is what we we transfer the risk of that to the insurance company by taking out car insurance and so forth so against the gods was very important and devil take the high most by Edward Chancellor which talked about things like the south sea bubble and tulip bubble that book was the inspiration for my memo bubble.com the first day of 2000 which talked about the excesses of the tech bubble and that's the first one that got a response and that's what put me on the map because it was right quickly remember I said if you're right but it takes five years looks like you're wrong this one was right right away because I did it in 2000 and yeah that was terrific thank you foreign
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