Rational Advisor

Let’s start off with the recent quotes and what they mean

Recent wise words (2008)

1. “A crisis always feels bottomless, and it usually isn’t,” - John Dorfman, US Value Manager - Bloomberg Oct, 2008

John Dorfman, here is saying that almost always crisis, when you are going through them feel like they have no end. “This sub-prime thing is going to end capitalism as we know it”, “Banks will fail and never come back”, “it’s the end of the US”. Almost through every crisis we get similar views, and yet the world tends to manage through it quite successfully. When you look at any chart of the markets, you’ll notice that the crisis are mere blips in the uptrend.. These blips look like major crevices, and scare the bee-jeezus out of investors. However every successful investor has taken advantage of these dips to add to their long term plans.

2. “Be fearful when others are greedy and be greedy when others are fearful.” - Warren Buffett, NYT Oct 2008

This is the crux of Warren Buffett’s investment program. And in this he’s really taking advantage of mass stupidity, and lemming like behaviour. Most people are not wealthy, and this is because they follow what “most” people do - which is read the paper and listen to the news on TV. The rich tend to do the opposite of the masses, this is why they are rich. if they did what the masses did, they would be like the masses. So, when the masses are fearful like now, this is when rational heads like Warren Buffett, David Dreman and others get into action. Yet, when the masses are excited like at the peaks is when these investors shy away.

3. “If you wait for the robins, spring will be over,” - Warren Buffett, NYT Oct 2008

Another great quote from Warren about not trying to time when the crisis is over. Too many times we look for some sort of magic signal, some green light that it’s okay to invest. there is no starting flag to say when the markets will recover. Its best to not try to time it.

4. “Bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.” - Warren Buffett, NYT Oct 2008

This is really point number 2, explained better. By taking advantage of people’s fears about certain companies and the investment arena, rational investors get to purchase those investments at a reduced price.

5. “The most common cause of low prices is pessimism – sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.”- Warren Buffett, 1990 Chairman’s Letter to Shareholders

Similar to points 2 and 4. But this was written in 1990, at the height of the S&L crisis. When investors thought it was the end of the banking world, when Orange Country in the US declared near bankruptcy. The point discusses that sometimes the pessimism is pervasive - everywhere, and almost everyo9ne is shouting doom, the end is nigh. And yet that’s the exact environment that allows attractive purchases. It’s Optimism by the masses that are the enemy of rational investors, not pessimism by the masses - that’s our friend.

Not so recent wise words (551 BC - 479 BC)

Confucius says -

1. Everything has its beauty but not everyone sees it.

Some people because of all the turmoil in the markets are not seeing the beauty in the attractive prices around us. They are not seeing the purchase of continuous revenue streams at cheaper prices. There are many businesses that even in these tougher times have continued to pay out their dividends, that have continued to increase their revenues - and we get to purchase these revenues at cheaper prices. And I’m glad that not everyone can see the beauty, because if they did, we would not get such attractive prices.

2. Our greatest glory is not in never falling, but in getting up every time we do.

We make a mistake if we don’t learn from our mistakes. We make a mistake when we refuse to do something just because we fell from it. We are bound to make mistakes, its human nature. And the most awful thing you can do is refuse to learn from it, and instead blame the whole system. The markets have come down, and many have panicked out of it, running to the safe harbor of cash. But, cash won’t help them retire at above inflation rate returns. Only businesses that grow their revenues and provided dividends at a greater than inflation rate can do that. So, pick yourself up, and return to the battle field.

3. The superior man, when resting in safety, does not forget that danger may come. When in a state of security he does not forget the possibility of ruin. When all is orderly, he does not forget that disorder may come. Thus his person is not endangered, and his States and all their clans are preserved.

It’s always wise to prepare for discomfort, when you feel the most comfort. What hurts is the surprises, and the fact that we did not realize it. this is what causes is to flee sound investments. In actuality, surprises will always happen, and sometimes the magnitude will be greater than what you expected. However, preparing for these and taking advantage fo them is probably our greatest tool to achieving financial success. Be prepared for disorder, and realize it is a normal and par for the course.

4. Study the past if you would define the future.

Probably the most important quote - it doesn’t mean look to past returns to predict future results. What it means is understand past risks. Past Risks have been very good predictors of future risks. So, when picking an investment get an idea of it’s volatility by studying its past volatility. Do not look at the past return as if it will predict the future return.

Rational

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