Entries Tagged 'Philosophy' ↓

Quotes to Live By

Too much prosperity makes men greedy and their desires are never controlled sufficiently to stop at the point of attainment. Seneca

The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.” Bertrand Russell, philosopher, mathematician, author, Nobel laureate (1872-1970)

They are my two favourite quotes. Both are cornerstones of my life philosophy.

Another recent favourite is an Anthony Robbins quote, or at least a modern maxim attributed to Robbins.

Once you have mastered time, you will understand how true it is that most people overestimate what they can accomplish in a year - and underestimate what they can achieve in a decade!

How do these quotes fit in with investing? If you were wondering that, then maybe you should consider sticking to index funds. Continue reading →

I often see this confusion in fundamental investors, how can you call a bottom? The thing is you can’t. Technical investors know that and never proclaim they can. Fusion investors also know they can’t time market bottoms, but they also know they can increase their chances of getting close to the bottom by combining fundamental and technical analysis in a mixing bowl along with some behavioral finance. Fusion analysts know they don’t have to nail the bottom, to outperform they simply buy at prices lower than 50% of other market participants.

Buying low Continue reading →

Staying Ahead of the Curve

I finished reading Soros on Soros a couple weeks back. I enjoyed the book, though I admit to get bored towards the end and skipping pages.

”One should own stocks when they have successfully paused a difficult test, but one should avoid them during the test.” p50

If I had understood that timely advice prior to my recent investments in the financial sector I would be better off today. Fortunately, I had employed a dollar cost averaging or time based investment strategy. To remove fear and greed from the equation I planned to invest equal amounts over a ten month period in financial sector companies. I had stopped the averaging prior to reading Soros, as I realised that despite being a possible great opportunity, financials were not in my wheelhouse.

Soros wanted to write more than a finance investing book and succeeded in doing so. Whether that means the book is a success is a subjective matter and for me the answer is no. I immensely enjoyed the first third of the book and found much to think about. The rest of the book was of less interest and at times a struggle.

Other passages with resonance:

“To others, being wrong is a source of shame; to me, recognizing my mistakes is a source of pride. Once we realize that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes.

That our understanding of the world in which we live is inherently imperfect. There is always a discrepancy between the participant’s views and expectations and the actual state of affairs.

and my personal wealth had grown to roughly $25 million, I determined after some reflection that I had enough money. After a great deal of thinking, I came to the conclusion that what really mattered to me was the concept of an open society.

the main difference between me and other people who have amassed this kind of money is that I am primarily interested in ideas, and I don’t have much personal use for money. But I hate to think what would have happened if I hadn’t made money: My ideas would not have gotten much play.”

I was struck by the similarities between Soros and myself. I enjoyed the insights into his mind and the timeless investing wisdom he shares in an accessible interview style. It is good to know that those of us with passion for ideas and a disinterest in details can succeed in the financial marketplace.

This blog post about Your Money or Your Life by Mark Cancellieri at http://www.rationalwealth.net inspired me to write to Mark and he was kind enough to write back. Mark is a great writer and as his blog is new, you’ll probably get some of his best thoughts over the coming months. I don’t know Mark and have no reason to recommend him, except my belief that his thoughts will be worth reading.

In Mark’s email he asked about my references to Buffett. I hope to discuss Fusion Analysis and Investing more over the coming weeks and explain the watershed moment when I realised that labelling myself as a growth investor made little sense.

Right now I’d like to stay on topic and discuss your money or your life. I have not read the book, but I feel fortunate that at some point early in my life I internalised what appears to be one of the key messages in the book. From an early age I had the conviction I was not prepared to trade much time and energy for money. I am not sure what of value I can pass on to you, but I hope in the coming days and weeks that my recollections and reflections on my life so far will provide some insights. If you believe your time and happiness is important, then I hope I can help you have more of both.

It may seem bizarre that as a guy blogging about finance I am embarrassed talking about my accomplishments and financial success in life. I believe in modesty, I dislike displays of wealth and I abhor people bragging about their accomplishments. I hope I can share my experiences in a mater of fact way and more importantly as I’m writing this for readers, I hope you can take something meaningful away. I have not shared our successes with anyone, so what follows will be unrehearsed and perhaps raw.

Here goes, I say with great trepidation.
I have always considered knowledge the key to life and have never stopped learning. I read a lot and try to learn from everyone I interact with. On top of my favourite topics I have read numerous self help, motivational and personal finance books. I’ve encourage people I know to read books by Anthony Robbins, Robert Kiyosaki, Richard Bach and many others. Each book I have read has given me so much in return that I am confused as to why others are so resistant to read them. I may discuss that another day.

Reading is definitely one of my keys to a successful and happy life. Interactions with friends and family and learning from others is another key. For me the third key has been thought. I think continuously. I used to feel I thought too much and often missed the moment. Fortunately I now have two kids and they insist on me being in the moment and enjoying it with them, the pleasure they give me is far greater than work or past vices ever did. I think it is sad that not many people take the time to enjoy and raise their children; even sadder is the reality that many people seem to have that choice anymore.

As I was saying I think all the time, I’m both introspective and forward focused. I like the big picture and I’m an optimist. I don’t think those attributes are essential, but at the minimum you need to know your attributes, what your really want, what is important to you. I posted some thoughts on life priorities here and will post specifically on that topic soon.

In summary you need to know yourself, what you want and your priorities. Or as my partner jokes, you at least need to hitch your wagon to someone who does. You need to seek knowledge, learn from others rather than just float along. Once you know yourself then you can find the best ways of working around your shortcomings. We are all imperfect, finding ways to work around or improve your shortcoming will not only improve your life it will give you a great sense of accomplishment.

Whether you believe life is a stage, a game or a river you’re floating on you are in control of your life. It is up to you to write your own script, to learn the rules and play hard or control your direction with oars.

I stopped working for a living at 36, six years before I had planned to. I am not an entrepreneur, I didn’t win the lottery. I simply knew what was important to me in life and devised a plan to make it happen. I hope to be able to tell you more in the coming weeks.

Cheers
Dean

As with everything I say, I describe what is right for me. It may not be right for you as there are many paths in life as there is in investing.

Alvarion, ALVR, an Israel based WiMax provider reported good earning yesterday.
Dave Mock at The Motley Fool penned some excellent perspectives so I see no need to cover the same ground.

Instead I’d like to discuss investing in this type of high tech company.
I own ALVR in my personal account and have invested and profited from long positions over the last few years. Now that I check I first bought ALVR in mid 2004.
I view the classic investing style of Long Term Buy to Hold or worse Long Term Buy and Hold, LTBH, as one of the most dangerous philosophies newbie investors can be exposed to. I know I am in the minority with my view, as LTBH is one of the first concepts foisted upon new investors. Before people flame me, let me say that I consider LTBH an excellent strategy when used appropriately. The problem is it is often sold as the be-all and end-all of investing, the only path to financial success. LTBH is a fine strategy for investors who realise that investing is about the long term accumulation of wealth. Using LTBH to invest in established companies with a history of long term growth and good prospects of future growth, when the company is selling near its long term value based lows, is an excellent strategy.
Unfortunately many new investors are chasing instant wealth, they are swinging for the fences and then striking out as they combine this with LTBH.

The LTBH dogma does not mix with investing in volatile young companies and it does not mix with investing in technology companies. Unfortunately they are the companies that many new investors are attracted to and that is why I say LTBH is a dangerous strategy for new investors.

Alvarion is a classic take your profits and run company. Some may call it speculation and that’s fine and perhaps even a handy differentiation for investors to realise they should not mix speculation with LTBH. Young emerging tech companies like Alvarion present short term opportunities as their share price is based on investor sentiment.

I invest or speculate in these companies and in doing so I’ve found scores of bags, easy bunts to take, but very few home runs so I take my bunts. David Gardner from The Motley Fool is as good as I’ve seen at picking the home runs and while he has a terrific long term record I prefer slightly better odds. I’m not David. I’m not as good at picking THE winner. So I take the bunts. For me knowing yourself and knowing what style of investing suits you is one of the keys to investing.

There are scores of other ways to play Alvarion. One bad that way comes to mind and that is to hold it when their technology starts to fade. If that happens and it IS the highest probable outcome then the price will go lower than right now. However, that should at least be two years out.
If ALVR doubles and is still undervalued I’ll hold, fairly valued then sell half. I like to at least a vague plan.

In emerging technology and biotechnology stuff happens way slower than you think. I’d pegged 2007 as the break out year for WiMax and though ALVR did close on a high finally hitting positive GAAP to go with their previous positive cash flow and normalised earnings, 2008 could soon be 2009, but baring a market collapse I like my risk/reward profile for profits in or slightly over the next year.

Alvarion’s technology is hot and they dominate the WiMax sector with Intel as one of their main partners. Investors have sold Alvarion off on fears unrelated to their core business and this good earnings and forecast should provide a catalyst for a reappraisal. However, there is no guarantee their current cutting edge technology will the technology of tomorrow. That is another reason why it makes sense to take profits when investor sentiment is riding high.

Putting this all together. Emerging high tech companies are priced based on sentiment. The easiest way to profit from then is to buy when the story hasn’t changed but investors have soured on the stock, then sell when the price approaches the upper end of what investors have been prepared to pay. The simplest measurement for this is using P/E ranges. If a company is not profitable then ranges based on cash flow or revenue can be used.

If you’ve read this far I hope you takeaway and consider the following thoughts:

• Know yourself and what style of investing is for you.
• Investing is about the long term accumulation of wealth. Swinging for the fences is likely to see you strike out.
• It is OK to speculate, but keep your speculation to a small percentage of your portfolio.
• If a young tech company becomes overvalued then consider taking your winnings and don’t let greed or dreams of a ten bagger be your reason for remaining invested.
• Consider a strategy based around a core holding and trading positions. This removes a lot of the psychological issues caused by trading.
• Keep your eye on earnings, when they falter be ready to sell.

Cheers
Dean

More on Alvarion
Alvarion is a Tel Aviv company founded in 1992 with a market cap of $490M. They are focused on wireless high-speed network connections and are well positioned in the bourgeoning WiMAX equipment space. WiMAX is like WiFi on steroids, it’s faster and has a much longer range. Their products include cool features like orthogonal frequency division multiplexing-based technology. Lost yet? I know I am. In simple term they sell boxes to allow people in neighbourhoods, remote locations or buildings that are too expensive to rewire, to connect to the internet and talk to others. They do the last mile.

Never heard of them? Well, Alvarion have over 2 million units deployed in 130 countries. They rightfully claim to be the worldwide leader in wireless broadband with over a decade of standards leadership and the industry’s most extensive product portfolio.

Their customers are telephone companies, internet service providers and companies installing private networks.. I now see they have close partnerships with worldwide OEMs such as Alcatel, Lucent, Siemens, and Nera.

Courtesy Bigchart.com

I read with interest the thoughts expressed in this thread on accumulated wealth. I also learnt a couple new words and can’t wait to drop sophistry into a conversation.

Here are some related thoughts on wealth and happiness.
I started re-reading “Awaken The Giant Within” by Anthony Robbins on the weekend to see if it would make a good addition to a nephew’s 21st present. On page 27 this sentence clearly articulated by belief on wealth.
“The key is not the mere pursuit of wealth, but changing your beliefs and attitudes about it so you see it as a means for contribution, not the end-all and be-all for happiness.”

Buffett clearly understands that wealth is a means for contribution. I think that is one of the important lessons he has taught. Of course Buffett benefits from his contribution as the happiness derived from such a contribution is of far greater value than any sum of money.

My nephew’s present is currently a copy of 1001 Albums You Must Hear Before You Die, a Georg Jensen elephant bottle opener and the aforementioned Tony Robbins book.

I read the following on Saturday by Mirko Bagaric which also perfectly expressed another thought I have on money.
“There are two main forms of personal spending: necessities and discretionary items. The only items in the necessity basket are shelter, food and energy to keep us warm or cool. But apart from the “true” essentials, everything is up for grabs. Discretionary items come in two basic forms: stuff and experiences. Stuff is what we wear, drive, sit on and own for a long period.
Experiences are things we participate in. They require some degree of exertion. Often they involve money, as in the case of eating out, travelling, playing tennis and golf.
In tough economic times, the tendency is to cut back on the experiences and maintain, as far as possible, the stuff.
This mainly stems from an innate desire for status and conformity. People want to be liked, and we think that owning nice cars, clothes and TVs will so impress others that they will think well of us and treat us well.
But studies into the human condition have established that the keys to happiness are health, self-esteem, good relationships, a sense of control, challenging work and active leisure. Stuff doesn’t matter. In fact, once people are beyond the average level of income, money also doesn’t enhance wellbeing.”
You can read the rest at The Age.

Then while at a dinner party on Saturday night a fund manager at Goldman Sachs JBWere said she was planning on selling her family home, investing the proceeds and moving her family of four into a rental property as she believed housing prices were inflated while the Australian stock market presented good value. When house prices were once again good value she would sell her investments and buy a house. Her view was that as rents were less expensive than mortgages that. for the same cash flow she could live in a better house and be instantly better off. I don’t know her, nor her me and I decided not to comment. Unfortunately, the host knowing that I am an investor asked what I thought about that. That was a tough question for a guy whose opinions sometimes seem offensive. I decided it best to start by asking questions or at least probing statements.

I began by saying, it all depends on what your priorities are in life.
I was gob smacked that not one of the accomplished professionals at the table could clearly state their priorities. Most had never thought about it. So I asked, without knowing your priorities how could you sensibly make such a monumental decision in life?

I had dozens of other questions to ask, like do you think of your primary residence as a home or an investment, do you like your house/home, your neighbours and your neighbourhood? Are you close to your kids school, do they have many friends close by? Did they realise that moving house in commonly considered one of the most stressful events in life. Had they considered the psychological differences between home ownership and renting? However, the host was not happy with me turning a financial question in to a psychological one and so she cut the priorities conversation short saying “BS aside did I think it was a good financial move”.

I bit my tongue and tried to provide an answer. If you think timing markets is possible and further that you think you can accurately time not one but two markets simultaneously on not one but two occasions then it may be a good financial move. Further that Australian housing pricing were clearly above their long term trend lines; however, when viewed as a multiple of disposable income prices could be justified.

That either bored or stunned everyone as no-one spoke, so I kept going.
I said I doubted anyone could accurately make the four calls required. Especially when coupled with the stresses associated with uprooting a family and moving house. Even if they did make the four calls accurately, the financial benefit would not increase their happiness and the resulting stress could lead to health problems, divorce and myriad other unconsidered results.
From the ensuing shitstorm you’d have thought I’d spat in the host’s face and said her friend was a moronic she-devil who worshipped false idols.

Needless to say I don’t think I’ll be consulted on financial matters anytime soon and perhaps I need to re-read Relationship Mastery. I think I failed to clearly communicate my view that happiness should always take priority to wealth and for those with the necessities more than covered making decisions based solely on financial considerations is ill-considered.

I hope you all find happiness.

Dean

One of my favourite investing topics is behavioural finance. It is the area which I believe has the largest effect on the returns of most investors. I consider getting to know yourself a very valuable endeavour and should be a priority for all investors. Many investing newsletter writers and analysts have already mastered stock picking and will sell you their ideas for a relatively inexpensive price. The place most investor can add real value to their portfolio is in understanding themselves and conquering their biases. But then again I would say that as my first degree many moons ago was in psychology, so I probably have a psychology bias.

Cognitive Biases
When does the virtue of patience become the failing of commitment bias? I believe it was Whitney Tilson who said that when you change your investment thesis to remain invested in a company then you have commitment bias. If your original investment thesis has not worked out then it is time to sell, if you find other reasons to hold then maybe you have commitment bias.

Here is an archive of Whitney Tilson’s posts on the Motley Fool. Others may be found here at Tilson Funds.

List of cognitive biases from Wikipedia.

And some more biases

Investor Psychology

• Here is one of the many articles Tilson has written on investor psychology.
  And another one I can’t find a “Putting Someone on a Pedestal” bias, but I am sure it should be there somewhere as it is surely one of the biggest biases in investing
• Cognitive Dissonance. This NY Times article on the Monty Hall Problem has some great insights into cognitive dissonance.
• What is Behavioral Finance? An interview with Meir Statman.
  Another interesting paper by Statman is this on the rules of diversification in behavioral portfolio theory. I don’t agree with many of the ideas put forward, but nonetheless the paper is worth reading.
• So You Want To Be The Next Warren Buffett? How’s Your Writing? By Mark Sellers
  This speech that Sellers gave to a Harvard MBA class is a must read for all investors. It resonated strongly with me as I have always believed it is ones psychological make-up that is the largest factor in your investing success. Read this to realise that 20% annual compounded gains is a delusional aspiration for most people. Investing is not a get rich quick scheme it is a life passion and even then you’ll be doing well to beat the indexes my a few percentage points.
  I always found Sellers discussion on psychology the most interesting part, though he also provides interesting insights into economic moats and prompts the reader to consider their own investing moat.
  I believe his speech would have been more useful if he provided some tools to improve the traits which he mentioned, but he seems to be of the opinion that they are hardwired and can’t be overcome.

  Sellers seven traits are:
  1. Ability to buy fear sell greed.
  2. Obsessive about investing.
  3. Willingness to learn from past mistakes.
  4. Inherent sense of risk based on common sense.
  5. Confidence in convictions.
  6. Both sides of your brain working.
  7. Remain true and thoughtful in a volatile environment.

  My favourite psychology professor devoted a lecture to ways to improve the connection between your brain’s hemispheres. I’m sure Google can provide some good ideas. My favourite has always been juggling. It is one of the few activities that simultaneously engages both hemispheres and strengthens the link between the two. I recommend you add juggling to your daily routine, if you don’t already do it. For parents out there, kids love it and it fun for all the family.

  A quick primer on the brains hemispheres.

• Inertia and indecision.
  From the MMC March 2008 Update.
  In the recent edition of the Outstanding Investors Digest, a highly regarded US value manager Seth Klarman from the Baupost Group neatly summed up the impact of fear on an investor:”If a loss freezes you from taking full advantage of a great opportunity, or pressures you to make it a smaller position than it should or would otherwise be, then the cost of a loss may be far greater than the initial loss itself.”

Thanks for reading and feel free to leave me a comment

Dean Morel

The following was first posted on the Motley Fool Stock Advisor board Becoming an Investing Master on 5th Feb 2007.

Like you I am an investor, though perhaps a few pages ahead. The following is a quick brain dump which I hope will be of some benefit.
I have been investing for 20 years, though only started concentrated on it about three years ago. If I was to start over I’d do the following:

1) Sit down and think very hard about what sort of person I am. What is my outlook and philosophy? What sort of investor do I think I’d like to be? What do I want to get out of investing? What is my risk tolerance and what sort of reward do I want?

2) Start reading those books. Each one will present a different investing style and each one will seem compelling and perhaps the way to go. This is because there are many paths to investing success. This is why step one is important as you want to know which style is good for you.

3) Today I would recommend having your money sitting in a money market account, rather than putting it in an index fund or investing it straight away. If the markets were hitting new lows or greatly undervalued I’d recommend investing in an index fund while waiting to make your selections.

4) Start slowly. I think you are subscribing to too many newsletters at the moment as you may get swamped by all the ideas. SA has a good blend of recommendations. Just like the books these stock ideas will seem compelling. Patience is my number one tip. There is no need to rush. There are always other opportunities. Buy what you are comfortable with and perhaps initially try to keep your portfolio very focused. You may decide later you’d prefer a Lynch style portfolios with lots of companies, but initially it is good to get to understand a few companies well. Spread you purchases over time, there is no need to get fully invested in any kind of timeframe. This is a long game so don’t take your time,

5) Long Term Buy Hold (LTBH) vs Trading. The two main points against trading have always been the trading costs and the taxes. If you are investing in a tax free account then taxes don’t really concern you and trading costs are low these days so that is not a big issue either. By trading I mean a style like discussed on the BMW Method board, where they buy a company when historically undervalued and sell when historically average or above. So trading as in holding for a year or more. If you are not in a tax tree account then tax can be a real killer. People sometimes argue that it is better to pay taxes along the way than have a big tax hit later on. This overlooks the power of compounding. So if you can find good companies to own for a long time then you’ll be well placed.

6) When you make a new purchase compare it to what you already own.

Gotta go
Hope that is of some help.
Dean Morel

This was originally posted on the Motley Fool Liquid Lounge and subsequently selected as a Post of The Day. http://www.fool.com/community/pod/2008/080418.htm

Last night just when I wanted to close my eyes and go to sleep my wife asked me how risky our investments are. As my dearest almost never asks about our investments I found this particular question and its timing quite bewildering. Bloody mass media and credit crunch. When it comes to our finances my clever, widely read, successful, gorgeous wife wants things explained in very simple terms. Most of the time she wants answers in a single word, one sentence at most. I know she wanted to hear “not risky” and despite that being my belief I could not give her that answer.

So what was my problem with telling her what I believe to be true and what I know she wanted to hear? My problem was I know she has a completely different view of risk than I do.

So today I spent all of ten minutes researching risk in the hope of crystallizing my thinking. Google eagerly pointed me to the seminal paper on risk by the father of modern portfolio theory, Harry M. Markowitz’s Portfolio Selection. I tracked down a copy here.
Instinctually I had always assigned MPT and the association of volatility with risk as academic folly. In recent years I felt encouraged reading Buffett, among others, articulately illustrate the folly of volatility as a measure of risk. Before reading Portfolio Selection I thought I’d take a couple risk assessment tests, like this one from Westpac.

Taking this test made me realize why I couldn’t tell my wife that our investments were not risky. Each test I took told me I was a “very high-risk investor”, while I believe I am a medium risk investor. Looking at the questions I realized they are framed with volatility and not value foremost in mind. It was then I realized that is the difference between my wife’s and my perception of risk. The classic opposing views of volatility and value.

I’m not sure if my loved one slept soundly or not after I closed our discussion by saying I’d welcome a massive market sell-off even if it meant our liquid net worth was halved.

For now I’ve decided to engage in some confirmation basis and re-read Buffett’s 1993 Shareholders letter prior to reading Markowitz’s Portfolio Selection.

After that I plan on determining my overall beta and applying anything I learn in Portfolio Selection. Then I’ll compare that with my combined margin of safety score that I regularly maintain. I doubt that will tell me much, but if I find I have a high beta then maybe I’ll look for more confirmation that it’s margin of safety that counts when thinking about risk. The last thing I want is to have years of positive market beating performance dissed as mere beta. Actually the last thing I want is another colonoscopy, but both remind me of the same thing.

An Australian fund which I invest in recently published their quarterly review. http://www.opis.com.au/downloads/quarterly_reviews/2008q1QIR.pdf

I found the following lessons learned by Dean Fergie, the fund manager, of interest. (highlighting added)

“The simple answer is that we will be far more proactive in selling investments over which there are question marks. Company contact and building a strong relationship with the management of companies in which we invest will remain a core investment tenet at OPIS. We believe that it is necessary to properly understand the functions of a business and its key drivers going forward. No doubt we will be misled in the future; this happens to all investors at some point or another. However we will not be willing to simply reduce our exposure and give management the “benefit of the doubt” when confronted with potential issues. Instead we will exit our positions fully and reinvest back into these stocks only when we are confident that the purported issue is a “non issue” or once it has been fully resolved.”

This statement reminds me of the Lynch adage that it is only what we own that can hurt us.

I prefer to exit a position if there is an unresolved issue with either the company or my evaluation. Money can always find a home somewhere else. I am sure this is not a new concept to many readers, but in these troubled times I was glad to have a mental refresher on this concept.

Dean Morel
9 April 2008