Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.

Source:   Berkshire Hathaway Shareholder Letters

Now, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason: to pump or support the stock price. The shareholder who chooses to sell today, of course, is benefited by any buyer, whatever his origin or motives. But the continuing shareholder is penalized by repurchases above intrinsic value. Buying dollar bills for $1.10 is not good business for those who stick around.

Source:   Berkshire Hathaway Shareholder Letters

Usually, the range must be so wide that no useful conclusion can be reached. Occasionally, though, even very conservative estimates about the future emergence of birds reveal that the price quoted is startlingly low in relation to value. (Let’s call this phenomenon the IBT: Inefficient Bush Theory.) To be sure, an investor needs some general understanding of business economics as well as the ability to think independently to reach a well-founded positive conclusion. But the investor does not need brilliance nor blinding insights.

Source:   Berkshire Hathaway Shareholder Letters

Over the last 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous. There have been three primary causes: first, high costs, usually because investors traded excessively or spent far too much on investment management; second, portfolio decisions based on tips and fads rather than on thoughtful, quantified evaluation of businesses; and third, a start-and-stop approach to the market marked by untimely entries (after an advance has been long underway) and exits (after periods of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.

Source:   Berkshire Hathaway Shareholder Letters

Charlie and I love the idea of shareholders thinking and behaving like owners. Sometimes that requires them to be pro-active. And in this arena large institutional owners should lead the way. a. So far, however, the moves made by institutions have been less than awe-inspiring. Usually, they’ve focused on minutiae and ignored the three questions that truly count. First, does the company have the right CEO? Second, is he/she overreaching in terms of compensation? Third, are proposed acquisitions more likely to create or destroy per-share value?

Source:   Berkshire Hathaway Shareholder Letters

...the market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market. This does not bother Charlie and me. Indeed, we enjoy such price declines if we have funds available to increase our positions. Long ago, Ben Graham taught me that “Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.

Source:   Berkshire Hathaway Shareholder Letters

You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”

Source:   Berkshire Hathaway Shareholder Letters

Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.

Source:   Berkshire Hathaway Shareholder Letters

Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.

Source:   Berkshire Hathaway Shareholder Letters

Owners of stocks, however, too often let the capricious and often irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits – and, worse yet, important to consider acting upon their comments.

Source:   Berkshire Hathaway Shareholder Letters

Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of “Don’t just sit there, do something.” For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.

Source:   Berkshire Hathaway Shareholder Letters

A “flash crash” or some other extreme market fluctuation can’t hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.

Source:   Berkshire Hathaway Shareholder Letters

If the investor, instead, fears price volatility, erroneously viewing it as a measure of risk, he may, ironically, end up doing some very risky things.

Source:   Berkshire Hathaway Shareholder Letters

When Warren lectures at business schools he says “I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you get to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”

Source:   Poor Charlie's Almanack

Opportunity meeting the prepared mind; that’s the game.

Source:   Poor Charlie's Almanack

You must know the big ideas in the big disciplines and use them routinely – all of them, not just a few. Most people are trained in one model – economics, for example – and try to solve all problems in one way. You know the old saying: To the man with a hammer, the world looks like a nail. This is a dumb way of handling problems.

Source:   Poor Charlie's Almanack

Eighty or Ninety important models will carry about ninety percent of the freight in making you a worldly-wise person. And, of course, only a mere handful really carry very heavy freight.

Source:   Poor Charlie's Almanack

The one thing all those winning bettors in the whole history of people who’ve beaten the pari-mutuel system is quite simple: they bet very seldom.

Source:   Poor Charlie's Almanack

It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a mispriced bet - that they can occasionally find one. And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time they don't. It's just that simple.

Source:   Poor Charlie's Almanack

The way to win is to work, work, work, work, and hope for a few insights.

Source:   Poor Charlie's Almanack

There are huge advantages for an individual to get into a position where you make a few great investments and just sit on your ass. You're paying less to brokers. You're listening to less nonsense. And if it works, the governmental tax system gives you an extra one, two, or three percentage points per annum compounded. And if you think that most of you are going to get that much advantage by hiring investment counselors and paying them one percent to run around, incurring a lot of taxes on you behalf, Lots of luck.

Source:   Poor Charlie's Almanack

The word “intelligent” in our title will be used throughout the book in its common and dictionary sense as meaning “endowed with the capacity for knowledge and understanding”. It will not be taken to mean “smart” or “shrewd” or gifted with unusual foresight or insight. Actually the intelligence here presupposed is a trait more the character than of the brain. This is particularly true of that major class of investors whom we shall call the defensive – or the conservative, in the sense of conserving capital. Such an investor – whom we envisage, typically as a widow who must live on the money left her – will place her chief emphasis on the avoidance of any serious mistakes or losses. Her second aim will be freedom from effort, annoyance, and the need for making frequent decisions.

Source:   The Intelligent Investor

The first rule of intelligent action by the enterprising investor must be that he will never embark on a security purchase which he does not comprehend and which he cannot justify by reference to the results of his personal study or experience.

Source:   The Intelligent Investor

You may take it as an axiom that you cannot profit in Wall Street by continuously doing the obvious or the popular thing.

Source:   The Intelligent Investor

Once a competent analysis has been made and the salient facts presented, the intelligent investor will have the material needed to satisfy his own mind that the commitment is sound and attractive. He will not have to subordinate his own judgement to that of his advisors – which is often required of him in other types of security operations.

Source:   The Intelligent Investor

As a matter of business practice, or perhaps of thorough-going conviction, the stock brokers and the investment services seem wedded to the principle that both investors and speculators in common stocks should devote careful attention to market forecasts. The farther one gets from Wall Street the more skepticism one will find, we believe, as to the pretensions of stock-market forecasting or timing. The investor can scarcely take seriously the innumerable predictions which appear almost daily and are his for the asking. Yet in many cases he pays attention to them and even acts upon them. Why? Because he has been persuaded that it is important for him to form some opinion of the future course of the stock market, and because he feels that the brokerage or service forecast is at least more dependable that his own. This attitude will bring the typical investor nothing but regrets.

Source:   The Intelligent Investor

This point is vital: The investor cannot enter the arena of the stock market with any real hope of success unless he is armed with mental weapons that distinguish him in KIND – not in a fancier superior degree – from the trading public. One possible weapon is indifference to market fluctuations; such an investor buys carefully when he has money to place and then lets prices take care of themselves.

Source:   The Intelligent Investor

You are neither right or wrong because the crowd disagrees with you. You are right because of your data and reasoning.

Source:   The Intelligent Investor

The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.

Source:   The Intelligent Investor

Aside from forecasting the movements of the general market, much effort and the ability is directed in Wall Street toward selecting stocks or industrial groups that in the matter of price will “do better” than the rest over a fairly short period in the future. Logical as this endeavor may seems, we do not believe it is suited to the needs of temperament of the true investor – particularly since he would be competing with a large number of stock market traders who are trying to do the same thing. As in all other activities which emphasize price movements first and underlying values second, the work of many intelligent minds constantly engaged in this field tends to be self-neutralizing and self-defeating over the years.

Source:   The Intelligent Investor

The [intelligent] investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizeable declines nor become excited by sizeable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored.

Source:   The Intelligent Investor

For years the financial services have been making stock-market forecasts without anyone taking this activity seriously. Like everyone else in the field they are sometimes right and sometimes wrong. Wherever possible they hedge their opinions so as to avoid the risk of being proved completely wrong. (There is a well-developed art of Delphic phrasing which adjusts itself successfully to whatever the future brings.) In our view – perhaps a prejudiced one – this segment of work has no real significance except for the light it throws on human nature in the securities markets. Nearly every-one interested in common stocks wants to be told by someone else what he thinks the market is going to do. The demand being there, it must be supplied.

Source:   The Intelligent Investor

Thus we reach our conclusion, with its overtones of a spiritual paradox, that the investor can profit from market fluctuations only by paying them little heed. He must not fix his eye on what the market has been doing – or what it apparently is going to do – but only on the result of its action as expressed in the relationship between the price level and the level of underlying or central themes.

Source:   The Intelligent Investor

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions. The purchasers view the current good earnings to “earning power” and assume that prosperity is synonymous with safety.

Source:   The Intelligent Investor

It is a mistake to use, as journalists and some economists do, statistics without logic but the reverse does not hold: It is not a mistake to use logic without statistics. (Roundtrip Fallacy).

Source:   Fooled By Randomness

…an increase in personal performance (regardless of whether it is caused deterministically or by the agency of Lady Fortuna) induces a rise of serotonin in the subject, itself causing an increase of what is commonly called leadership ability. One is "on a roll". Some imperceptible changes in deportment, like an ability to express oneself with serenity and confidence, makes the subject matter look credible - as if he truly deserved the shekels. Randomness will be ruled out as a possible factor in the performance, until it rears its head once again and delivers the kick that will induce the downward spiral.

Source:   Fooled By Randomness

MBAs learn the concept of clarity and simplicity - the five-minute-manager take on things. The concept may apply to the business plan of a fertilizer plant, but not to highly probabilistic arguments - which is the reason I have anecdotal evidence in my business that MBAs tend to blow up in financial markets, as they are trained to simplify matters a couple of steps beyond their requirement. (I beg the MBA reader not to take offense; I am myself the unhappy holder of the degree.)

Source:   Fooled By Randomness

…it is not natural for us to learn from history…It is a platitude that children learn only from their own mistakes; they will cease to touch a burning stove only when they are themselves burned; no possible warning by others can lead to developing the smallest part form of consciousness. Adults, too, suffer from such a condition...This congenital denigration of the experience of others is not limited to children or to people like myself; it affects business decision-makers and investors on grand scale.

Source:   Fooled By Randomness

Veteran Trader Marty O'Connell's Firehouse Effect: He had observed that firemen with much downtime who talk to each other for too long come to agree on many things that an outside, impartial observer, would find ludicrous.

Source:   Fooled By Randomness

Our brain is not cut out for non-linearities. People think that if, say, two variables are causally linked, then a steady input in one variable should always yield a result in the other one. Our emotional apparatus is designed for linear causality.

Source:   Fooled By Randomness

"Satisificing" was [Herb Simon's] idea (the melding together of satisfy and suffice): You stop when you get a near-satisfactory solution. Otherwise it may take you an eternity to reach the smallest conclusion or perform the smallest act.

Source:   Fooled By Randomness

Perfection in investing in generally unobtainable; the best we can hope for is to make a lot of good investments and exclude most of the bad ones.

Source:   The Most Important Thing

When I speak of [the efficient market] theory, I also use the word "efficient" but I mean it in the sense of speedy, quick to incorporate information, not "right". I agree that because investors work hard to evaluate every new piece of information, asset prices immediately reflect the consensus view of the information's significance. I do not, however, believe the consensus view is necessarily correct.

Source:   The Most Important Thing

If prices in efficient markets already reflect the consensus, then sharing the consensus view will make you likely to earn just an average return. To beat the market you must hold and idiosyncratic, or nonconsensus, view.

Source:   The Most Important Thing

SETH KLARMAN: Psychological influences are a dominating factor governing investor behavior. They matter as much as—and at times more than—underlying value in determining securities prices.

Source:   The Most Important Thing

Whereas investors are supposed to be open to any asset—and to both owning it and being short—the truth is very different. Most professionals are assigned to particular market niches, as in “I work in the equity department” or “I’m a bond manager.” SETH KLARMAN: Silos are a double-edged sword. A narrow focus leads to potentially superior knowledge. But concentration of effort within rigid boundaries leaves a strong possibility of mispricings outside those borders. Also, if others’ silos are similar to your own, competitive forces will likely drive down returns in spite of superior knowledge within such silos.

Source:   The Most Important Thing

In the great debate over efficiency versus inefficiency, I have concluded that no market is completely one or the other. It’s just a matter of degree. I wholeheartedly appreciate the opportunities that inefficiency can provide, but I also respect the concept of market efficiency, and I believe strongly that mainstream securities markets can be so efficient that it’s largely a waste of time to work at finding winners there.

Source:   The Most Important Thing

The longer I’m involved in investing, the more impressed I am by the power of the credit cycle. It takes only a small fluctuation in the economy to produce a large fluctuation in the availability of credit, with great impact on asset prices and back on the economy itself. The process is simple: 1) The economy moves into a period of prosperity. 2) Providers of capital thrive, increasing their capital base. 3) Because bad news is scarce, the risks entailed in lending and investing seem to have shrunk.  4) Risk averseness disappears. 5) Financial institutions move to expand their businesses—that is, to provide more capital. 6) They compete for market share by lowering demanded returns (e.g., cutting interest rates), lowering credit standards, providing more capital for a given transaction and easing covenants.   At the extreme, providers of capital finance borrowers and projects that aren’t worthy of being financed. As The Economist said earlier this year, “the worst loans are made at the best of times.”

Source:   The Most Important Thing

In Field of Dreams, Kevin Costner was told, “If you build it, they will come.” In the financial world, if you offer cheap money, they will borrow, buy and build—often without discipline, and with very negative consequences.

Source:   The Most Important Thing

Time and time again, the combination of pressure to conform and the desire to get rich causes people to drop their independence and skepticism, overcome their innate risk aversion and believe things that don’t make sense. However negative the force of greed might be, always spurring people to strive for more and more, the impact is even stronger when they compare themselves to others. This is one of the most harmful aspects of what we call human nature. People who might be perfectly happy with their lot in isolation become miserable when they see others do better. In the world of investing, most people find it terribly hard to sit by and watch while others make more money than they do.

Source:   The Most Important Thing

Active management strategies demand uninstitutional behavior from institutions, creating a paradox that few can unravel. Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom.

Source:   The Most Important Thing

Not only should the lonely and uncomfortable position be tolerated, it should be celebrated. Usually—and certainly at the extremes of the pendulum’s swing—being part of the herd should be a reason for worry.

Source:   The Most Important Thing

One of the great things about investing is that the only real penalty is for making losing investments. There’s no penalty for omitting losing investments, of course, just rewards. And even for missing a few winners, the penalty is bearable.

Source:   The Most Important Thing

Whatever limitations are imposed on us in the investment world, it’s a heck of a lot better to acknowledge them and accommodate than to deny them and forge ahead. Oh yes; one other thing: the biggest problems tend to arise when investors forget about the difference between probability and outcome—that is, when they forget about the limits on foreknowledge: when they believe the shape of the probability distribution is knowable with certainty (and that they know it), when they assume the most likely outcome is the one that will happen, when they assume the expected result accurately represents the actual result, or perhaps most important, when they ignore the possibility of improbable outcomes.

Source:   The Most Important Thing

It would be wonderful to be able to successfully predict the swings of the pendulum and always move in the appropriate direction, but this is certainly an unrealistic expectation. I consider it far more reasonable to try to (a) stay alert for occasions when a market has reached an extreme, (b) adjust our behavior in response and, (c) most important, refuse to fall into line with the herd behavior that renders so many investors dead wrong at tops and bottoms.

Source:   The Most Important Thing

I don’t think many investment managers’ careers end because they fail to hit home runs. Rather, they end up out of the game because they strike out too often—not because they don’t have enough winners, but because they have too many losers.

Source:   The Most Important Thing

Loss of confidence and resolve can cause investors to sell at the bottom, converting downward fluctuations into permanent losses and preventing them from participating fully in the subsequent recovery. This is the greatest error in investing—the most unfortunate aspect of pro-cyclical behavior—because of its permanence and because it tends to affect large portions of portfolios.

Source:   The Most Important Thing

The psychology of the investing herd moves in a regular, pendulum-like pattern—from optimism to pessimism; from credulousness to skepticism; from fear of missing opportunity to fear of losing money; and thus from eagerness to buy to urgency to sell. The swing of the pendulum causes the herd to buy at high prices and sell at low prices. Thus, being part of the herd is a formula for disaster, whereas contrarianism at the extremes will help to avert losses and lead eventually to success.

Source:   The Most Important Thing

The concept of reflexivity is simple. In situations that have thinking participants, there is a two-way interaction between the participants' thinking and the situation in which they participate. On the one hand, participants seek to understand reality; on the other, they seek to bring about a desired outcome. The two functions work in opposite directions: in the cognitive function reality is the given; in the participating function, the participants' understanding in the constant...I call the interference between these two functions reflexivity.

Source:   The Alchemy of Finance

We live in the real world, but our view of the world does not correspond to the real world. The theory of rational expectations itself provides a striking example of how far our interpretation can stray from the real world. Yet our view of the world is part of the real world - we are participants. And the gap between reality and our interpretation of it introduces an element of uncertainty into the real world. Again, this sounds like circular reasoning, but it accurately describes situations with thinking participants.

Source:   The Alchemy of Finance

I can proclaim what I call the "human uncertainty principle". That principle holds that people's understanding of the world in which they live cannot correspond to the facts and be complete and coherent at the same time. Insofar as people's thinking is confined to the facts, it is not sufficient to reach decisions; and insofar as it serves as the basis of decisions, it cannot be confined to the facts. The human uncertainty principle applies to both thinking and reality. It ensures that our understanding is often incoherent and always incomplete and introduces an element of genuine uncertainty - as distinct from randomness - into the course of events. [and hence the need for margin of safety]

Source:   The Alchemy of Finance

Reflexivity has been strangely neglected in economic theory. By taking the demand-supply curves as given, economic theory can treat market prices as a mere reflection of the underlying fundamentals (i.e. supply) and the participants' preferences (i.e. demand). This leaves out of account the active, creative and distortive effect of the participants' imperfect understanding. It gives a very misleading picture of financial markets. For instance, it implies that investors base their decisions on the fundamentals, whereas the goal of market participants is to make money. Only if market prices reflected the fundamentals accurately would it make sense to be guided by those fundamentals - and in that case, nobody could make more money than anybody else and everyone ought to invest in index funds. This is absurd conclusion yet it is still widely accepted.

Source:   The Alchemy of Finance

Instead of drawing dichotomies between thinking and reality, we must recognize that thinking forms part of reality instead of being separate from it…In other words, reality always exceeds our capacity to understand it [like Gödel's theorem]

Source:   The Alchemy of Finance

In my investing career I operated on the assumption that all investment theses are flawed…The fact that a thesis is flawed does not mean that we should not invest in it as long as other people believe in it and there is a large group of people left to be convinced. The point was made by John Maynard Keynes when he compared the stock market to a beauty contest where the winner is not the most beautiful contestant but the one whom the greatest number of people consider beautiful.

Source:   The Alchemy of Finance

…the financial markets offer an excellent laboratory for the pursuit of truth. The reason is to be found not only in the quantitative and public character of the data but even more in the emotional reality of financial markets…Playing the markets is about as real as a game can get. There is, of course, a divergence between expectations and outcomes, but the outcome has an inexorable quality about it.

Source:   The Alchemy of Finance

Existing theories about the behavior of stock prices are remarkably inadequate. They are of so little value to the practitioner that I am not even fully familiar with them. The fact that I could get by without them speaks for itself. Generally theories fall into two categories: fundamentalist and technical. More recently, the random walk theory has come into vogue; this theory holds that the market fully discounts all future developments so that the individual participant's chances of over- or underperforming the market as a whole are even. This line of argument has served as the theoretical justification for the increasing number of institutions that invest their money in index funds. The theory is manifestly false - I have disproved it by consistently outperforming the averages over a period of twelve years. Institutions may be well advised to invest in index funds rather than making specific investment decisions, but the reason to be found is in their substandard performance, not in the impossibility of outperforming the averages.

Source:   The Alchemy of Finance

People participate in science with a variety of motivations. For present purposes we may distinguish between two main objectives: the pursuit of truth and the pursuit of what we may call "operational success". In natural science, the two objectives coincide: true statements work better than false ones. Not so in social sciences: false ideas may be effective because of their influence on people's behavior and, conversely, the fact that a theory or prediction works does not provide conclusive evidence of its validity. Marxism provides an outstanding example of the first kind of divergence...The divergence between truth and operational or experimental success undermines scientific method in more ways than one. On the one hand, it renders scientific theories to achieve operational success. What is worse, an alchemical theory can profit from assuming a scientific guise.

Source:   The Alchemy of Finance

...the intelligent investor should not buy common stocks simply because they are cheap but only if they give promise of major gain to him.

Source:   Common Stocks and Uncommon Profits

Most small investors cannot live on the return on their investment no matter how high a yield is obtained, since the total value of their holdings is not great enough. Therefore for the small investor the matter of current dividend return usually comes down to a choice between a few hundred dollars a year starting right now, or the chance of obtaining an income many times this few hundred dollars a year at a later date.

Source:   Common Stocks and Uncommon Profits

More money has probably been lost by investors holding a stock they really did not want until they could “at least come out even” than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous. Furthermore this dislike of taking a loss, even a small loss, is just as illogical as it is natural. If the real object of common stock investment is the making of a gain of a great many hundreds per cent over a period of years, the difference between, say, a 20 per cent loss or a 5 per cent profit becomes a comparatively insignificant matter. What matters is not whether a loss occasionally occurs. What does matter is whether worthwhile profits so often fail to materialize that the skill of the investor or his advisor in handling investments must be questioned.

Source:   Common Stocks and Uncommon Profits

...postponing an attractive purchase because of fear of what the general market might do will, over the years, prove very costly. This is because the investor is ignoring a powerful influence about which he has positive knowledge through fear of a less powerful force about which, in the present state of human knowledge, he and everyone else is largely guessing.

Source:   Common Stocks and Uncommon Profits

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

Source:   Common Stocks and Uncommon Profits

Don't follow the crowd.

Source:   Common Stocks and Uncommon Profits

...investment fads and misinterpretations of facts may run for several months or several years. In the long run, however, realities not only terminate them, but frequently, for a time, cause the affected stocks to go too far in the opposite direction. The ability to see through some majority opinions to find what facts are really there is a trait that can bring rich rewards in the field of common stocks. It is not easy to develop, however, for the composite opinion of those with whom we associate is a powerful influence upon the minds of us all.

Source:   Common Stocks and Uncommon Profits

One of the ablest investment men I have ever known told me many years ago that in the stock market a good nervous system is even more important than a good head.

Source:   Common Stocks and Uncommon Profits

Unfortunately, often there is so much confusion between acting conservatively and acting conventionally.

Source:   Common Stocks and Uncommon Profits

If the huge price changes that occur in individual stocks are made solely because of changed appraisals by the financial community, with these appraisals sometimes completely at variance with what is going on in the real world of a company's affairs, what significance have the other three dimensions? Why bother with the expertise of business management, scientific technology, or accounting at all? Why not just depend on psychologists? The answer involves timing. Because of a financial-community appraisal that is at variance with the facts, a stock may sell for a considerable period for much more or much less than it is intrinsically worth. Furthermore, many segments of the financial community have the habit of playing “follow the leader,” particularly when that leader is one of the larger New York City banks. This sometimes means that when an unrealistic appraisal of a stock is already causing it to sell well above what a proper recognition of the facts would justify, the stock may stay at this too high level for a long period of time. Actually, from this already too high a price it may go even higher.

Source:   Common Stocks and Uncommon Profits

The largest profits in the investment field go to those who are capable of correctly zigging when the financial community is zagging...This matter of training oneself not to go with the crowd but to be able to zig when the crowd zags, in my opinion, is one of the most important fundamentals of investment success.

Source:   Common Stocks and Uncommon Profits

The Real Measure of Worth In that famous speech about Graham-and-Doddsville, Warren Buffett said many important things, none more profound than this: “When the price of a stock can be influenced by a ‘herd’ on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally. In fact, market prices are frequently nonsensical.”

Source:   The Warren Buffett Way

Warren Buffett once said he “wouldn’t care if the stock market closed for a year or two. After all, it closes on Saturday and Sunday and that hasn’t bothered me yet.” It is true that “an actively trading market is useful, since it periodically presents us with mouth-watering opportunities,” said Buffett. “But by no means is it essential.”

Source:   The Warren Buffett Way

“A prolonged suspension of trading in securities we hold would not bother us any more than does the lack of daily quotations for [Berkshire’s wholly owned subsidiaries]. Eventually our economic fate will be determined by the economic fate of the business we own, whether our ownership is partial [in the form of shares of stock] or total.” [says Buffett]

Source:   The Warren Buffett Way

...performance of a publicly traded company is no different. “Charlie and I let our marketable equities tell us by their operating results—not by their daily, or evenly yearly, price quotations—whether our investments are successful,” [Buffett] explains. “The market may ignore a business success for a while, but it eventually will confirm it.”

Source:   The Warren Buffett Way

Focus investing is necessarily a long-term approach to investing. If we were to ask Buffett what he considers an ideal holding period, he would answer, “Forever”—so long as the company continues to generate above-average economics and management allocates the earnings of the company in a rational manner. “Inactivity strikes us as an intelligent behavior,” he explains.

Source:   The Warren Buffett Way

The study of the psychology of misjudgment every bit as valuable to an investor as the analysis of a balance sheet and an income statement.

Source:   The Warren Buffett Way

In recent years we have seen what amounts to a revolution, a new way of looking at issues of finance through the framework of human behavior. This blending of economics and psychology is known as behavioral finance, and it has slowly moved down from the universities’ ivory towers to become part of the informed conversation among investment professionals . . . who, if they look over their shoulders, will find the shadow of a smiling Ben Graham.

Source:   The Warren Buffett Way

Developing an investor’s attitude, Graham said, is a matter of being prepared, both financially and psychologically, for the market’s inevitable ups and downs—not merely knowing intellectually that a downturn will happen, but having the emotional ballast needed to react appropriately when it does. In Graham’s view, an investor’s appropriate reaction to a downturn is the same as a business owner’s response when offered an unattractive price: ignore it. “The true investor,” says Graham, “scarcely ever is forced to sell his shares and at all other times is free to disregard the current price quotation.”

Source:   The Warren Buffett Way

Is this constant fixation on stock prices healthy for investors? Richard Thaler has a crisp answer. He lectures frequently at the Behavioral Conference sponsored by the National Bureau of Economic Research and the John F. Kennedy School of Government at Harvard University, and he always includes this advice: “Invest in equities and then don’t open the mail.” To which we might add, “And don’t check your computer or your phone or any other device every minute.”

Source:   The Warren Buffett Way

...loss aversion, and it is, in my opinion, the single most difficult hurdle that prevents most investors from successfully applying the Warren Buffett approach to investing.

Source:   The Warren Buffett Way

Tucked near the back, on page 424, is my favorite article—“Long-Term Investing.” It first appeared in the May–June 1976 issue of the Financial Analysts Journal. Treynor begins by talking about the ever-present puzzle of market efficiency. Is it true, he wondered, that no matter how hard we try we’ll never be able to find an idea that the market hasn’t already discounted? To address the question, Treynor asks us to distinguish between “two kinds of investment ideas: (a) those whose implications are straightforward and obvious, take relatively little special expertise to evaluate, and consequently travel quickly and (b) those that require reflection, judgment, and special expertise for their evaluation, and consequently travel slowly."“If the market is inefficient,” he concludes, “it will not be inefficient with respect to the first kind of idea, since by definition the first kind is unlikely to be misevaluated by the great mass of investors.” To say this another way, the simple ideas—price-to-earnings ratios, dividend yields, price-to-book ratios, P/E-to-growth ratios, 52-week-low lists, technical charts, and any other elementary ways we can think about a stock—are unlikely to provide easy profits. “If there is any market inefficiency, hence any investment opportunity,” says Treynor, “it will arise with the second kind of investment idea—the kind that travels slowly. The second kind of idea—rather than the obvious, hence quickly discounted insight relating to ‘long-term’ business developments—is the only meaningful basis for long-term investing.”

Source:   The Warren Buffett Way

“How did you get here? How did you become richer than God?” Buffett took a deep breath and began: “How I got here is pretty simple in my case. It is not IQ, I’m sure you will be glad to hear. The big thing is rationality. I always look at IQ and talent as representing the horsepower of the motor, but that the output—the efficiency with which the motor works—depends on rationality. A lot of people start out with 400 horsepower motors but only get 100 horsepower of output. It’s way better to have a 200 horsepower motor and get it all into output. “So why do smart people do things that interfere with getting the output they’re entitled to?” Buffett continued. “It gets into the habits and character and temperament, and behaving in a rational manner. Not getting in your own way. As I have said, everybody here has the ability absolutely to do anything I do and much beyond. Some of you will, and some of you won’t. For those who won’t, it will be because you get in your own way, not because the world doesn’t allow you.”

Source:   The Warren Buffett Way

When Buffett invests, he sees a business. Most investors see only a stock price. They spend far too much time and effort watching, predicting, and anticipating price changes and far too little time understanding the business they partly own. Elementary as this may be, it is the root of what distinguishes Buffett.

Source:   The Warren Buffett Way

Long-term thinking is both a requirement and an outcome of true ownership. Owners are different from tenants. I know of a couple who rented out their house, and the family who moved in nailed their Christmas tree to the hardwood floors instead of using a tree stand. Expedient, I suppose, and admittedly these were particularly bad tenants, but no owner would be so short-sighted. Similarly, many investors are effectively short-term tenants, turning their portfolios so quickly they are really just renting the stocks that they temporarily “own.”

Source:   Amazon Shareholder Letters

As I write this, our recent stock performance has been positive, but we constantly remind ourselves of an important point – as I frequently quote famed investor Benjamin Graham in our employee all-hands meetings – “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” We don’t celebrate a 10% increase in the stock price like we celebrate excellent customer experience. We aren’t 10% smarter when that happens and conversely aren’t 10% dumber when the stock goes the other way. We want to be weighed, and we’re always working to build a heavier company.

Source:   Amazon Shareholder Letters

Expert forecasters were, on balance, deeply unimpressive. But Tetlock found some were better than others. What separated the forecasters was how they thought. The experts who knew a little about a lot—the diverse thinkers—did better than the experts who knew one big thing.

Source:   More Than You Know

A quality investment philosophy is like a good diet: it only works if it is sensible over the long haul and you stick with it.

Source:   More Than You Know

Investment philosophy is really about temperament, not raw intelligence. In fact, a proper temperament will beat a high IQ all day. Once you’ve established a solid philosophical foundation, the rest is learning, hard work, focus, patience, and experience.

Source:   More Than You Know

First, in any probabilistic field—investing, handicapping, or gambling—you’re better off focusing on the decision-making process than on the short-term outcome.

Source:   More Than You Know

That leads to the second theme, the importance of taking a long-term perspective. You simply cannot judge results in a probabilistic system over the short term because there is way too much randomness.

Source:   More Than You Know

...investors often make the critical mistake of assuming that good outcomes are the result of a good process and that bad outcomes imply a bad process. In contrast, the best long-term performers in any probabilistic field—such as investing, sports-team management, and pari-mutuel betting—all emphasize process over outcome.

Source:   More Than You Know

Perhaps the single greatest error in the investment business is a failure to distinguish between the knowledge of a company’s fundamentals and the expectations implied by the market price.

Source:   More Than You Know

Four attributes generally set this group apart from the majority of active equity mutual fund managers: 1) [Low] Portfolio turnover. 2) [High] Portfolio Concentration. 3) Investment Style - [intrinsic-value investment approach]. 4) Geographical Location - [being away from money-centers like New York or Boston].

Source:   More Than You Know

In the real world there is no “easy way” to assure a financial profit. At least, it is gratifying to rationalize that we would rather lose intelligently than win ignorantly. —Richard A. Epstein, The Theory of Gambling and Statistical Logic.

Source:   More Than You Know

The frequency of correctness does not matter; it is the magnitude of correctness that matters.

Source:   More Than You Know

Constantly thinking in expected-value terms requires discipline and is somewhat unnatural. But the leading thinkers and practitioners from somewhat varied fields have converged on the same formula: focus not on the frequency of correctness but on the magnitude of correctness.

Source:   More Than You Know

Risk has an unknown outcome, but we know what the underlying outcome distribution looks like. Uncertainty also implies an unknown outcome, but we don’t know what the underlying distribution looks like.

Source:   More Than You Know

Changing the nature of the investors changes the nature of the market. If all investors were long-term oriented, the market would suffer a diversity breakdown and hence be less efficient than today’s market.

Source:   More Than You Know

Portfolio managers who underperform the market risk losing assets, and ultimately their jobs. So their natural reaction is to minimize tracking error versus a benchmark. Many portfolio managers won’t buy a controversial stock that they think will be attractive over a three-year horizon because they have no idea whether or not the stock will perform well over a three-month horizon. This may explain some of the overreaction we see in markets and shows why myopic loss aversion may be an important source of inefficiency.

Source:   More Than You Know

So an investor who has taken a position in a particular stock, recommended it publicly, or encouraged colleagues to participate, will feel the need to stick with the call. Related to this tendency is the confirmation trap: postdecision openness to confirming data coupled with disavowal or denial of disconfirming data. One useful technique to mitigate consistency is to think about the world in ranges of values with associated probabilities instead of as a series of single points. Acknowledging multiple scenarios provides psychological shelter to change views when appropriate.

Source:   More Than You Know

[For ants], imitation is hard-wired genetic behavior, not cultural. Investors, in contrast, have the ability to think independently. However, Charles MacKay’s famous words from over 150 years ago remind us that avoiding the imitation trap is an age-old problem: “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they recover their senses slowly, and one by one.”

Source:   More Than You Know

Ivo Welch shows that a buy or sell recommendation of a sell-side analyst has a significantly positive influence on the recommendations of the next two analysts. Analysts often look to the left and to the right before they make their recommendations.

Source:   More Than You Know

In markets, a symbiotic relationship between positive and negative feedback generally prevails. If all speculators destabilized prices, they would buy high and sell low, on average. The market would quickly eliminate such speculators. Further, arbitrage—speculation that stabilizes prices—unquestionably plays a prime role in markets. But the evidence shows that positive feedback can dominate prices, if only for a short time. Imitation can cause investors to deviate from their stated fundamental investment approach and likely provides important clues into our understanding of risk. Next time you buy or sell a stock, think of the guppies.

Source:   More Than You Know

Here’s my main point: markets can still be rational when investors are individually irrational. Sufficient investor diversity is the essential feature in efficient price formation. Provided the decision rules of investors are diverse—even if they are suboptimal—errors tend to cancel out and markets arrive at appropriate prices. Similarly, if these decision rules lose diversity, markets become fragile and susceptible to inefficiency. So the issue is not whether individuals are irrational (they are) but whether they are irrational in the same way at the same time.

Source:   More Than You Know

Given what we know about suboptimal human behavior, the critical question is whether investors are sufficiently diverse to generate efficiency. If you think across multiple dimensions, including information sources, investment approach (technical versus fundamental), investment style (value versus growth), and time horizon (short versus long term), you can see why diversity is generally sufficient for the stock market to function well.

Source:   More Than You Know

Because price-earnings ratios are likely nonstationary, investors should use them sparingly and cautiously, if at all. The attraction of a ratio, of course, is that it is often a useful rule of thumb. I argue, however, that investors who insist on using multiples will find them much more useful if they unpack the embedded assumptions.

Source:   More Than You Know

One of the best examples of a complex adaptive system—generically, a system that emerges from the interaction of lots of heterogeneous agents—is the stock market. Research suggests that when investors err independently, markets are functionally efficient. What’s more, defining the conditions under which markets are efficient provides us with a template to consider when markets are inefficient.

Source:   More Than You Know

Humans have a deep-seated desire to link cause and effect. Unfortunately, markets do not easily satisfy this desire. Unlike some mechanical systems, you can’t understand markets by looking at the parts. Reductionism doesn’t work.

Source:   More Than You Know

Is there a mechanism that can help explain these episodic lunges? I think so. As I have noted in other essays, markets tend to function well when a sufficient number of diverse investors interact. Conversely, markets tend to become fragile when this diversity breaks down and investors act in a similar way (this can also result from some investors withdrawing). A burgeoning literature on herding addresses this phenomenon. Herding is when many investors make the same choice based on the observations of others, independent of their own knowledge. Information cascades, another good illustration of a self-organized critical system, are closely linked to herding.

Source:   More Than You Know

Practitioners spanning the centuries have documented the role of sentiment in investing and speculation. Perhaps the best way to think about sentiment is Ben Graham’s Mr. Market metaphor. Graham suggested imagining market quotes coming from an accommodating fellow named Mr. Market, who never fails to show up and offer you a price to either buy or sell your interest in a business.

Source:   More Than You Know