My Investing Mentors

Everybody who ever invested a dime in the market had a mentor. And if they didn’t have one when they started, it probably didn’t take long before they went searching for help. Jesse Livermore said “there is nothing new on Wall Street,” and because there is nothing new, lessons learned 10, 20, and even 100 years ago are as true today as they were the day they were written. And because of this,  you don’t require any physical one-on-one time with somebody for them to be your mentor. Everything they would tell you to your face can be found in their writing.

I want to share the people who have had the biggest influence on me. This list could easily be four times as long, but to avoid this post becoming a book, I had to draw a line somewhere.

This list begins with the godfather Jack Bogle, founder of The Vanguard Group. Bogle taught me the power of indexing, to keep costs down, and to think long-term. Here are two brilliant quotes from The Little Book of Common Sense Investing:

Don’t look for the needle in the haystack. Just buy the haystack!

The stock market is a giant distraction to the business of investing.

And this is Bogle on investor behavior, from Common Sense On Mutual Funds:

When stock prices are high, investors want to jump on the bandwagon; when stocks are on the bargain counter, it is difficult to give them away.

Adam Smith’sThe Money Game is one of my favorite investment books ever written. It was originally published in 1967, and aside from technological changes, you would think it was written today. Smith taught me how much the market, and even more so the investor, are influenced by psychology. Here he is, from his 1967 classic:

A stock is for all practical purposes, a piece of paper that sits in a bank vault. Most likely you will never see it. It may or may not have an Intrinsic Value; what it is worth on any given day depends on the confluence of buyers and sellers that day. The most important thing to realize is simplistic: The stock doesn’t know you own it. All those marvelous things, or those terrible things, that you feel about a stock, or a list of stocks, or an amount of money represented by a list of stocks, all of these things are unreciprocated by the stock or the group of stocks. You can be in love if you want to, but that piece of paper doesn’t love you, and unreciprocated love can turn into masochism, narcissism, or, even worse, market losses and unreciprocated hate.

The Intelligent Investor is the first investment book I ever read, and in my view the best book ever written on the subject. And although Benjamin Graham is known for pioneering value investing, the most important thing he taught me has nothing to do with buying cheap stocks. My biggest takeaway from reading Graham is that emotional fortitude is required to be a successful investor. Here he is from his 1949 classic:

But note this important fact: The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be  better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.

Warren Buffett, Graham’s most successful disciple, taught me that knowing what the future holds is impossible, and also completely irrelevant to successful investing. Here is Buffett in a letter written to his partners in 1956:

I resurrect this “market-guessing” section only because after the Dow declined from 995 at the peak of February to about 865 in May, I received a few calls from partners suggesting that they they thought stocks were going a lot lower. This always raises two questions in my mind: (1) if they knew in February that the Dow was going to 865 in May, why didn’t they let me in on it then and (2) if they didn’t know what was going to happen during the ensuing three months back in February, how do they know in May? There is also a voice or two after any hundred point or so decline suggesting we sell and wait until the future is clearer. Let me again suggest two points: (1) the future has never been clear to me (give us a call when the next few months are obvious to you- or, for that matter the next few hours; and, (2) no one ever seems to call after the market has gone up one hundred points to focus my attention on how unclear everything is, even though the view back in February doesn’t look so clear in retrospect.

Charlie Munger, Warren Buffett’s long-time partner at Berkshire Hathaway, taught me the value of thinking. This sounds obvious, but if you’ve read Munger, you know what I’m talking about. Munger is one of the most quotable investors of all time, these are a few of my favorites:

The liabilities are always 100% good. It’s the assets you have to worry about.

Indeed, the average result has to be the average result. By definition, everybody can’t beat the market. As I always say, the iron rule of life is that only 20% of the people can be in the top fifth.

An idea or fact is not worth more merely because it’s easily available to you.

It’s not supposed to be easy. Anyone who finds it easy is stupid.

Poor Charlie’s Almanack is a great gift to get somebody, or yourself if you haven’t read it.

It’s pretty clear that Howard Marks, chairman and co-founder of Oaktree Capital Management, has read a lot of Charlie Munger. Like Munger, Marks is an exceptional thinker and a brilliant wordsmith. His “second-level” thinking taught me that that I was a first-level thinker, I just didn’t know it. The Most Important Thing is covered with endorsements from the best collection of investors I’ve ever seen on the back of a single book; Joel Greenblatt, Jeremy Grantham, Seth Klarman, John Bogle, and Warren Buffett.

First level thinking says “It’s a good company; let’s buy the stock.” Second-level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell.”

Fred Schwed Jr., no doubt a mentor to others on this list, taught me the value of not believing your own bullshit. Here he is , from his 1940 classic, Where Are The Customers’ Yachts?:

On the economic side there is no denying that the more financial predictions you make the more business you do and the more commissions you get. That, we all know, is not the right way to act at all. But I doubt if there are many, or any, Wall Streeters who sit down and say to themselves cooly, “Now let’s see. What cock-and-bull story shall I invent and tell them today?” I don’t think you can supply any guarantee of accuracy when looking into the heart and mind of someone else. But I feel, from years of personal observation, that the usual thought process is far more innocent. The broker influences the customer with his knowledge of the future, but only after he convinced himself. The worst that should be said of him is that he wants to convince himself badly and that he therefore succeeds in convincing himself- generally badly.

Here is a classic line from Schwed that people will still be quoting 100 years from now, on the difference between speculating and investing:

Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.

Charley Ellis worked at Yale along side David Swensen. Ellis taught me the importance of avoiding unforced errors. Here he is, with one of the best investing analogies I’ve ever read, from Winning The Loser’s Game:

Professional tennis is a winner’s game: The outcome is determined by the actions of the winner. Amateur tennis is a loser’s game: The outcome is determined by the actions of the loser, who defeats himself….Likewise, the “money game” we call investment management has evolved in recent decades from a winner’s game to a loser’s game…No longer was the active investment manager competing with cautious custodians or amateurs who were out of touch with the market: Now he or she was competing with other experts in a loser’s game where the secret to winning is to lose less than the others lose.

I first met Wes Gray, CEO/CIO of Alpha Architect in late 2014 and remember thinking, holy shit, this guy rules. Wes is the rare combination of a total data nerd who is completely in tune with the behavioral side of investing. Wes has a great take on superior returns; “Sustainable alpha requires sustainable clients.” Wes taught me a critical lesson that every investor eventually learns; no matter how hard you look, there is no holy grail when it comes to investing.

Below are his sobering conclusions.

The sad conclusion is that none of these ideas stand up to intense robustness tests, except for the simplest, technical rules. You just can’t beat them. It’s kind of crazy when you think about it. We had hoped that having tested every model and approach under the sun that we would be able to triumphantly announce that we had identified a way to reliably predict the market using fancy algorithms derived from hundreds of academic researchers. But it just wasn’t the case. We’ve built these models: They aren’t reliable; they aren’t robust; and they are littered with data-mining. A large swath of the financial services industry would love to have you believe in their magic. I’m here to tell you that it doesn’t exist. Sorry.

Daniel Kahneman, a pioneer of behavioral psyhcology taught me not to underestimate the power of the brain, for it has infinite ways of tricking us. Here he is from Thinking, Fast And Slow:

A story in Nassim Taleb’s The Black Swan illustrates this automatic search for causality. He reports that bond prices initially rose on the day of Saddam Hussein’s capture in his hiding place in Iraq. Investors were apparently seeking safer assets that morning, and the Bloomberg News service flashed this headline: U.S. TREASURIES RISE, HUSSEIN CAPTURE MAY NOT CURB TERRORISM. Half an hour later, bond prices fell back and the revised headline read: U.S. TREASURIES FALL; HUSSEIN CAPTURES BOOSTS ALLURE OF RISKY ASSETS. Obviously Hussein’s capture was the major event of the day, and because of the way the automatic search for causes shape our thinking, that event was destined to be the explanation of whatever happened in the market on that day. The two headlines look superficially like explanations of what happened in the market, but a statement that can explain two contradictory outcomes explains nothing at all. 

William Bernstein, neurologist turned money manager is the epitome of wisdom. He taught me a lot about the realities of investing and the importance of focusing on long-term returns, which are the only ones that really matter.

Here he is from The Investor’s Manifesto:

In almost every country where economists have studied securities returns, stocks have had higher returns than bonds. Further, if you want those high stock returns, you are going to have to pay for them by bearing risk; this is a polite way of saying that in the course of earning those higher returns, your portfolio is going to lose a truckload of money from time to time. Conversely, if you desire perfect safety, then resign yourself to low returns. It really cannot be any other way.

Diversification among different kinds of stock asset classes works well over the years and decades, but often quite poorly over weeks and months.

Investors who can earn an 8 percent annualized return will multiply their wealth tenfold over the course of 30 years, and if they have half a brain, they will care little that many days, or even years, along the way their portfolios will suffer significant losses.

These are two of my favorite quotes From The Intelligent Asset Allocator:

Asset allocation is the only factor affecting your investments that you can actually influence.

Probably the most relevant definition of risk is the likelihood of running out of money,

Rick Ferri and William Bernstein are cut from the same cloth. Ferri was an early champion of indexing and asset allocation for financial advisors. He taught me that asset allocation matters. A lot. Here he is, from his book, All About Asset Allocation:

It is easier to predict portfolio risk than it is to predict portfolio return.

A prudent asset allocation that is followed by discipline will increase your chances for reaching and maintaining financial security over your lifetime. That being said, no investment strategy can protect your portfolio all the time. You must be prepared for some bumps in the road. There will be poor months, quarters, and occasionally years. There is no getting around this fact.

I’m lucky to call Ben Carlson a friend and a partner. Ben has been an invaluable mentor to me, teaching me the power of keeping things simple. Here is Ben from his excellent book, A Wealth of Common Sense:

The financial markets are a messy, complex system that is constantly evolving. But the answer to a complex system isn’t necessarily a complex investment portfolio that requires constant activity. On the contrary, the best response to the complexities inherent in the markets is a portfolio management process that relies heavily on simplicity, transparency, and reduced levels of activity. One of the ultimate status symbols in the financial world is to consider yourself a sophisticated investor. This word evokes feelings of superiority and privilege.  Sophistication is defined as having a great deal of experience, wisdom, and the ability to interpret complex issues. But sophistication does not mean that you have to utilize complexity, just that you understand it.

Jason Zweig might be the most under appreciated writer in the financial industry, and given his already high stature, I can offer no higher praise. If you were to go on Amazon and buy a copy of Where Are The Customers’ Yachts?, you would see that Zweig wrote the foreword. He also wrote the commentary in the updated The Intelligent Investor. He also helped to write Thinking Fast and Slow. And oh yes, he also wrote his own masterpiece, Your Money Your Brain. Wow, just Wow. Jason has been a mentor to me because he taught me the value of consistency. Here he is, from 2013.

I was once asked, at a journalism conference, how I defined my job. I said: My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.

That’s because good advice rarely changes, while markets change constantly. The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.

Jason Zweig once said “Peter Bernstein may know more about investing than anyone alive.” That might be because Bernstein was something of a renaissance man. From writing, to managing money, to teaching, he really did it all. And he never stopped. At 85 years old, when he was writing a book about the Erie Canal, Jason Zweig, understandably so asked him, why he was doing it? Here is how he answered.

Barbara and I are good friends with [economist John Kenneth Galbraith and his wife]. They have a house near here. We were there one day, and if you go into the middle of town there’s a Civil War memorial, with about five names on it. And we commented on why there were so few names, and Ken said, “Well, you know, Vermont used to have much more farmland…. But then the Erie Canal opened up in 1825 and just emptied out the state; everybody left.” And that got us thinking. The canal opened the West to the Atlantic Ocean and opened the Atlantic to the West. It’s a story of globalization and technological progress, and that gives it current resonance.

Bernstein was an incredible man whose knowledge had no bounds. He has written some absolute classics, including Against The Gods, Capital Ideas, and The Power of Gold. Bernstein has inspired me beyond words and taught me perhaps the greatest lesson of all, which is to never stop learning

I would also like to thank Josh Brown, for teaching me to think beyond the numbers; Barry Ritholtz, for teaching me not to take everything at face value, Patrick O’Shaughnessy for the importance of reading (Patrick is also one heck of a quant); Sir John Templeton for teaching me to go global; Gene Fama and Ken French for teaching me that much of what passes as alpha can be explained by a few factors, and Morgan Housel for teaching me that the best way to solve complex problems is boil them down to their simplest point.

If you’ve been going at this on your own, you’re doing yourself a big disservice. There is no need to reinvent the wheel, it doesn’t cost much to stand on the shoulders of giants.

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