Rational Advisor

It’s always worth reading thsi again and again

Rudyard Kipling
If

If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or, being lied about, don’t deal in lies,
Or, being hated, don’t give way to hating,
And yet don’t look too good, nor talk too wise;

If you can dream - and not make dreams your master;
If you can think - and not make thoughts your aim;
If you can meet with triumph and disaster
And treat those two imposters just the same;
If you can bear to hear the truth you’ve spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to broken,
And stoop and build ‘em up with wornout tools;

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breath a word about your loss;

If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: “Hold on”;
If you can talk with crowds and keep your virtue,
Or walk with kings - nor lose the common touch;

If neither foes nor loving friends can hurt you;
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds’ worth of distance run -
Yours is the Earth and everything that’s in it,
And - which is more - you’ll be a Man my son!

A lot of focus has been on how miserable the 1929 depression was, and how this time it will be like that as well. But what is not considered is that some of the largest gains were also had in that period. So, before you start screaming woe is me, take a look at the opportunities.

From USA today

http://www.usatoday.com/money/perfi/columnist/krantz/2009-04-23-biggest-dow-gains_N.htm?csp=34

The biggest percentage gains in stocks? Try the 1930s

Q: What were the biggest gaining days in stock market history?
A: Now that 100-point swings by the Dow Jones industrial average are pretty common, it’s important to have a good historical perspective.

The first thing to understand about how important a swing is in the Dow, or any market measure, is that it’s usually best to look at the percentage gain or loss rather than the point change.

By paying attention to a percentage move, you can truly understand how significant a move is relative to its current value.

To put today’s rallies into perspective, you’ll need some historical data on the big percentage gains of the past. For this type of analysis, it can be useful to use the Dow, because it has such a long history.

You’ll see that the Dow’s biggest one-day percentage gain occurred March 15, 1933, when it rose 15.34% on an 8.26 point rise. The next biggest gain was 14.87% on Oct. 6, 1931. This century doesn’t show up until No. 5.

What I’ve noticed is that a lot of the propellor heads spout Knowledge. or Statistics, data etc.

We see it all the time on the idiot box. And for some reason, we believe these monkeys, in that answer is in the data. As if that’s solved any of the world problems. The secret is NOT in the numbers, if it was computers we woudln’t need humans, computers would do everything.

Apparently it was the data that told Bush that WMD were in Iraq - it was this fantastic knowledge of what Sadman Hussein was doing that led to the war.

And then it was the Knowledge of the two Nobel Prize winning economists Scholes and Merton that the best way to beat the markets was to use statistical arbitrage and other number and data stuff

for more details see

http://en.wikipedia.org/wiki/Long-Term_Capital_Management

It was also the data in July that CIBC had that told them that Oil was going up to $200, and the data that told the american banks that sub-prime was a great investment - very low correlation, great standard deviation etc.

So, you see I don’t have a real regard for just Knowledge, for the sake of knowledge, or for just numbers or data points etc

To me, the most important thign is wisdom, when you look at great investors, it’s not their knowledge that really separates them, it’s their wisdom.

Wisdom, to me, is timeless, universal and self-evident principles

Alfred North Whitehead, the great educator, differentiated knowledge from wisdom. He said “Knowledge shrinks as wisdom grows, for details are swallowed up in principles”.

“The details of knowledge which are important will be picked up ad hoc in each avocation of life. But the habit of the active utilization of well understood principles is the final possession of wisdom”

But, it’s not only important just to have wisdom, the real secret is when you apply that wisdom, and actually “DO” with it.

To learn and not do, is really not to learn
To know and not to do, is really not to know

Here are the common traits that I’ve seen in excellent investment managers

Humility – The Buffetts, Dremans, Marsicos, Watsa, Cooper-Keys, and others…they ooze humility. Buffett’s folksy quip of “When you see Ajit Jain, bow deeply” is cute but speaks to Buffett’s freely admitting the expertise of others. Also, a by-product of humility is constant seeking of knowledge. Realizing one’s limitations compels one to constantly seek to know more…reading and studying…becoming a constant learning machine.

Analytical Ability – The most often thought of application of analysis is related to numerical analysis of financial statements, but analysis also relates to understanding of how business work, physics, human psychology, etc. I would argue that, while financial numerical analysis is important, that it pales to the ability to analyze facts and figures and separate them into what is important and unimportant. This is key in that for every investment out there, someone can give you 10 reasons to NOT make the investment. Where the successful rational investor differs from the non-successful investor is that the former can separate the important from unimportant and assess the relative merits of an investment based on this analysis.

Emotional Control – Let’s be honest, taking a position and seeing it drop by 20-30-50% is worrying at best and scares the living hell out of you at worst. Emotional control has shown to pay significant dividends. Emotional control is what really drives the key behaviors of successful investors.

Confidence – This is the “table” which is supported by the three legs referenced above (Humility, Analytics and Emotional Control). If one has the first three, then more often than not there is a feeling of confidence. This confidence (not cockiness, but confidence) is key to maintaining the emotional control.

There is a small subset of individuals who posess all of these traits. That is not to say that those who do not are not intelligent or will not be successful. It’s a matter of having the total package which applies to the art and science of investing.

It never ceases to amaze me how many smart people and economists are always referring to the history as a justification for the future. I mean I believe that there are direct comparisons between the Great Depression, Japan and today. BUT, comparison is not proof. And it does not necessarily follow logically that if some event happened in the past in a particular way it will happen again in the same way.

I also believe History does not repeat, but it does rhyme, so the sentiments and the emotions are the same, but the events coming out maybe stronger or weaker.

I am a great fan of history, I don’t take it for the literal events and pass a straight line forward. But, I try to understand it, and learn from the mistakes

Someone once said

To know the future, to understand the present, you must know the past

A lot of people are penalizing the stock markets because of this last volatility, and the terribel year that 2008 was. But, it wouldn’t be wise to judge Tiger Woods by one bad tournament and it isn’t wise to measure good managers during a decline that has only happened a handful of times in 50-100 years. That’s my opinion at least.

From the G&M April 13 page B5

The Virtue of Simplicity

French aviator and writer Antoine de Saint-Exupery noted

“A designer knows he has achieved perfection, not when there is nothign left to add, but when there is nothing left to take away”

In an investment context, we are always trying to add other investmetns, other classes and think that is making things better - in reality, it seldom does.

The Simple stuff more often than not, turns out to be much better

A very good video to watch

CNBC’s Michelle Caruso-Cabrera takes a look at the wit and wisdom of billionaire investor Warren Buffett.

http://www.cnbc.com/id/15840232?video=668860686

(copy and paste to your address bar)

Brookfield Asset Management is one of the best run real estate firms

Here is the link to the video - well worth watching

http://whitman.syr.edu/Videoarchive/video.aspx?vid=d24baee9-40e0-4ee2-b6f3-593382be2c50

They have 8 key Investing Principles t

8. Buy great assets- pay more for great assets at great location with great fundamental characteristics. Rarely buy where land is cheap because it is easily replaceable.

7. Generally invest for the long term. Assume you will own it forever. Properly leveraged quality assets inherently appreciate faster than inflation. It also compounds your dollars tax-free.

6. Prudently finance your assets. Mis-financing the portfolio can lead to disaster. You might not be able to realize the full value of your assets if you can’t make it through a down market, liquidity crisis, etc. Even the best assets are absolutely worthless if you cannot hold them to see another day.

5. Never become too positive or too negative in the markets. In the longer term, assume asset appreciate will always revert to the mean.

4. Invest against the common trend. Significant opportunities arise when things are negative. This is where great value investments can be made. 99% of business transactions occur inside some band of reasonable valuation. 1% of business transactions occur outside of that band, and that’s what you should be looking for. In the 99% area, just try to avoid the mistakes.

3. Build with quality people. Business and life are about doing things you enjoy. If you don’t enjoy them, you likely won’t become successful. Finding good people, who are competent and willing to work in a team, is one of the most important organizational factors. Very important during the turbulent times.

2. Execution. Strategy is important, but without execution it is worthless.

1. Never deviate from the first 7 principles. It is very seductive to invest when everyone is making money. It is easier to buy low quality assets because they look like they are better starting off. But higher risk more than offsets it in the end.

I reread a book that I had read years ago, Dale Carnegie’s book How to Stop Worrying and Start Living. It’s a great read very informative and inspiring, and here’s some points from it that I found useful.

Formula for Solving Worry Situations:
I. Analyze the situation fearlessly and honestly and figure out the worst thing that can happen as a result of failure.
II. After figuring out the worst case scenario, reconcile yourself to accepting that possibility (if necessary).
III. Calmly devote your time and energy to trying to improve from that worst case scenario.

When approaching problems, try this:
1. What is the problem?
2. What is the cause of the problem?
3. What are all possible solutions to the problem?
4. What would you suggest?

To be objective:
1. Pretend you are collecting the information for someone else. That helps to take a cold, impartial view of the evidence.
2. Try to get all the facts against yourself.
3. State both sides of the issue clearly.

It’s the same thing with investing

It is all about understanding a worst case scenario - and truthfully it can be worst than the worst case scenario - these are called black Swan events. However, the solution is not to panic, but to understand it and have a battle plan in place.

A lot of what was said by Dale Carnegie was said by Sun Tzu in Art of War, another future re-read.

Warren Buffett at one of his town halls asked his audience to perform a simple exercise:

Imagine if you had to invest all your money today in a person, a friend. It would work similar to any investment, in that you would be getting a stake of his future income.

Who would that person be? And more importantly, which of their qualities make you willing to put such faith in them?

The point of the exercise is to get you thinking about qualities you admire, respect, and believe will lead to success.

I’ve tended to run through this exercise a number of times, and especially when selecting investments and associates.

I’ve found that the people I admire usually are:
Intelligent. thinkers, and debaters
Hard-working
Frugal
Just
adaptable
inovative
empathic
Long term outlook
Honest
Incrementalist
Compassionate

not emotional
Humorous
and most importantly Rational

Now, let’s reverse the questions.Which qualities do I dislike in others? That list of opposites would be something like:

Irrational
Lazy
Excessive
Greedy
Unfair
Entity Mentality - Egotistical
Dishonest
Stagnant
Cold
Unsympathetic

We have to realize that perfection is never achievable, so this list does require compromise (just ask my wife), However, this list helps immensely if you know what you are aiming for.

But, now that I have this list, it became simply a matter of acting like the first list and avoiding the second.