two-day plunges

After "Liberation Day" (April 2), in which President Donald Trump unveiled tariff rates far higher than virtually all investors suspected, the S&P 500 (SNPINDEX: ^GSPC) experienced a whopping 10.5% plunge.

That's the fourth-worst two-day plunge in the past 75 years. Not only that, the April downdraft came after the market had already been on a downward trajectory since mid-February.

The good news for investors? History suggests that this is likely a great time for long-term-oriented investors to buy.

According to Stansberry Research, the April 3-4 tumble is the fourth-worst two-day stretch in the market since 1950. Looking at the other top 10 two-day plunges, all occurred at the outset of genuine crises -- the 1987 "Black Monday" plunge, the Great Financial Crisis of 2008, and the outbreak of COVID-19 in 2020:

As you can see, following these two-day plunges, stocks exhibited mixed performance one, three, and even six months later, with positive average returns but also with a very wide skew. In fact, even after the two-day plunge that ended on Oct. 7, 2008, the market was 17.2% lower six months later.

However, when one looks out a year beyond these 10 other instances, the average return is a whopping 27.2%, with every single instance in the green and the biggest one-year recovery at 59.2%. Look two years out, and the average return is 40.4%, with gains as high as 69.5%.

Warren Buffett is famous for the quip, "Be fearful when others are greedy and be greedy when others are fearful." Certainly, if the history of nauseating two-day drops is any guide, Buffett has historically been right on all counts.

But it's not just Buffett who has long touted the virtues of buying when others are selling and selling when everyone wants to buy. Buffett peer and Oaktree Capital founder Howard Marks, also a storied value investor, summed up the case nicely in his recent investment memo titled Nobody Knows (Yet Again).

In that memo, Marks notes how Oaktree went ahead and bought into both the 2008 financial crisis and the COVID-19 crisis, despite being highly uncertain about the future, unsure whether there would be further downside, and having no idea how or when the crises would end. All he knew was that financial assets were now heavily discounted.

The reason Marks takes a price-and-valuation-based approach and not one based on trying to game out future events is that:

We can't confidently predict the end of the world; we'd have no idea what to do if we knew the world would end; the things we'd do to gird for the end of the world would be disastrous if it didn't end; and most of the time the world doesn't end.

Buffett and Marks are, of course, not the first to espouse contrarian investing. After all, the phrase "Buy when there is blood in the streets" is attributed to 18th-century British nobleman Baron Rothschild, who coined the term after he bought into the panic following the Battle of Waterloo, which ultimately yielded him a fortune.

But there's also a case against buying today

Certainly, a lot of history suggests that buying into this market, while perhaps risky in the near term, is nearly certain to pay off in the long term. However, there are a couple of counter-narratives investors should be aware of that could make this time different.

First, the market is more expensive today than it was after those prior crashes. After the 1987 crash and the 2008 crash, the S&P 500 price-to-earnings (P/E) ratio was in the low- to mid-teens. In March 2020, the valuation was higher, in the low 20s. Today, the S&P 500 is around 26.9 times earnings.

While it's true that the average valuation of the market has been pushed up by the rise of the highly valued and heavily weighted "Magnificent Seven" stocks in recent years, the higher valuation on a historical basis means investors might not enjoy such historically robust post-drop returns from here.

Second, the implementation of tariffs, unlike these other instances, risks pushing up inflation, which may tie the hands of the Federal Reserve. Remember, the Fed responded to Black Monday, the 2008 Financial Crisis, and the COVID crisis by lowering interest rates. The Fed even went so far as to cut the Federal Funds rate to zero in 2008 and 2020 while also purchasing longer-term U.S. Treasuries, which kept rates low to stimulate the economy.

In recent days, various Fed officials have stated publicly that since tariff policies could drive up inflation, the Federal Reserve may be more limited in its ability to provide monetary stimulus this time. And whereas the Federal government in 2008 and 2020 was doing everything it could to help the situation, today the problem has actually been caused by the government, at least the Executive branch, which is still in the beginning of its four-year term.

But don't be paralyzed; stick with your plans

So, for all these reasons, it's quite possible that the market could experience further downside from here. On the other hand, the current administration also has more ability to rectify the situation than the administrations during those other market downturns, since it's also the entity that ignited this particular market crash in the first place.

All in all, if you do have investable dollars and engage in regular stock buys or 401(k) or IRA contributions, there's no reason not to invest today as long as it's within your financial plan and risk tolerance. As history has shown, times of great uncertainty are often the very best times to purchase stocks.

That said, the differences between the current crisis and 1987, 2008, and 2020 keep this investor somewhat cautious. Therefore, investors may want to think twice before committing heavily to stock-buying and/or using leverage to do so.

Investing is hard

Have you ever noticed the contradictions in our “wisest” investment slogans?

Is it…

“Let your winners run” or “Little pigs get big, but big pigs get slaughtered”?

“Cut your losers short” or “Time in the market beats timing the market”?

“Be greedy when others are fearful” or “Never catch a falling knife”?

“Stick to your investment plan” or “When the facts change, I change my mind”?

There will always be an investment maxim that, in hindsight, will have been the “wise” path you should have taken (usually quoted to you by a 23-year-old, wet-behind-the-ears recent hire at a brokerage firm).

You know that stock you sold when it fell 20%, triggering your stop-loss?

When it reverses and turns into a 300% winner, you should have known that…

“The stock market is designed to transfer money from the active to the patient,” as Warren Buffett once said.

But when you hold onto that other 20% loser in your portfolio – only for it to collapse 85% and never recover – you should have known that…

“Selling your winners and holding your losers is like cutting the flowers and watering the weeds,” as Warren Buffett once wrote.

(Technically, this comes from Peter Lynch, but Buffett liked the quote so much that he included it in one of his year-end reports to shareholders.)

Bottom line: Investing is hard.

[email from InvestorPlace Digest]

more from the same article...

About a decade ago, the research shop Longboard studied the total lifetime returns for individual U.S. stocks from 1983 through 2006.

They found that the worst-performing 6,000 stocks – which represented 75% of the stock-universe in the study – collectively had a total return of… 0%.

The best-performing 2,000 stocks – the remaining 25% – accounted for all the gains.

Here’s Longboard on the takeaway:

The conclusion is that if an investor was somehow unlucky enough to miss the 25% most profitable stocks and instead invested in the other 75% his/her total gain from 1983 to 2006 would have been 0%.

In other words, a minority of stocks are responsible for the majority of the market’s gains.

[then they go into their salespitch of course]

The Seven Virtues of Great Investors

I started reading Morgan Housel's Psychology of Money because it was recommended by my Kindle.  I can give no higher recommendation than that I am continuing to read it.  I borrowed it on Libby, but it's one of those books that I would actually buy!

Anyway, on the cover is a blurb by Jason Zweig, "one of the best and most original finance books in years".

Zweig is a columnist for the Wall Street Journal and I googled him.  Turns out he has a blog and one of the blog entries is The Seven Virtues of Great Investors.  I'm reading it and it sounds OK to me (but it's not as interesting as Housel's book).

All Hail Munger

Warren Buffett’s great friend and business partner Charlie Munger recently died a little short of his 100th birthday. Buffett has said that Munger made him a better investor — via advice such as: “Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.” Here are more nuggets credited to Munger:

• On investing: “The world is full of foolish gamblers, and they will not do as well as the patient investor.” And: “Warren and I don’t focus on the froth of the market. We seek out good long-term investments and stubbornly hold them for a long time.”

• On risk: “When any guy offers you a chance to earn lots of money without risk, don’t listen to the rest of his sentence. Follow this, and you’ll save yourself a lot of misery.”

• On succeeding in life: “It’s so simple. You spend less than you earn. Invest shrewdly, and avoid toxic people and toxic activities, and try and keep learning all your life. … And do a lot of deferred gratification because you prefer life that way. And if you do all those things you are almost certain to succeed. And if you don’t, you’re gonna need a lot of luck.”

• On learning: “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero. You’d be amazed at how much Warren reads — and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”

• On thinking: “We all are learning, modifying or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.”

Search for “Charlie Munger” online, and you’ll find much more Munger wisdom that might make you a better investor — or person.

-- Star Advertiser, 1/1/24

Charlie Munger

NEW YORK, Nov 28 (Reuters) - Charles Munger, who died on Tuesday, went from working for Warren Buffett's grandfather for 20 cents an hour during the Great Depression to spending more than four decades as Buffett's second-in-command and foil atop Berkshire Hathaway Inc.

Munger's family had advised that he died peacefully on Tuesday morning at a California hospital, said Berkshire.

The union of Munger with Buffett is among the most successful in the history of business; they transformed Omaha, Nebraska-based Berkshire into a multi-billion dollar conglomerate with dozens of business units.

Yet the partnership that formally began when they teamed up in 1975 at Berkshire, where Buffett was chairman and Munger became vice chairman in 1978, thrived despite pronounced differences in style, and even investing.

Known almost universally as Charlie, Munger displayed a blunter form of musings, often in laconic one-liners, on investing, the economy, and the foibles of human nature.

He likened bankers to uncontrollable "heroin addicts," called the virtual currency Bitcoin "rat poison," and told CNBC that "gold is a great thing to sew into your garments if you're a Jewish family in Vienna in 1939 but I think civilized people don't buy gold. They invest in productive businesses."

Munger was no less pithy in talking about Berkshire, which made both he and Buffett billionaires and many early shareholders rich as well.

"I think part of the popularity of Berkshire Hathaway is that we look like people who have found a trick," Munger said in 2010. "It's not brilliance. It's just avoiding stupidity."

EXPANDING BUFFETT'S HORIZONS

Munger and Buffett did differ politically, with Munger being a Republican and Buffett a Democrat.

They also differed in personal interests.

For example Munger had a passion for architecture, designing buildings such as a huge proposed residence for the University of California, Santa Barbara known as "Dormzilla," while Buffett claimed not to know the color of his bedroom wallpaper.

Yet at Berkshire, the men became inseparable, finishing each other's ideas and according to Buffett never having an argument.

Indeed, when Munger and Buffett would field shareholder questions for five hours at Berkshire's annual meetings, Munger routinely deadpanned after Buffett finished an answer: "I have nothing to add."

More often, he did, prompting applause, laughter or both.

"I'm slightly less optimistic than Warren is," Munger said at the 2023 annual meeting, prompting laughter after Buffett expressed his familiar optimism for America's future. "I think the best road ahead to human happiness is to expect less."

Like Buffett, Munger was a fan of the famed economist Benjamin Graham.

Yet Buffett has credited Munger with pushing him to focus at Berkshire on buying wonderful companies at fair prices, rather than fair companies at wonderful prices.

"Charlie shoved me in the direction of not just buying bargains, as Ben Graham had taught me," Buffett has said. "It was the power of Charlie's mind. He expanded my horizons."

ORACLE OF PASADENA

Fans dubbed Buffett the "Oracle of Omaha," but Munger was held in equal esteem by his own followers, who branded him the "Oracle of Pasadena" after his adopted hometown in California.

Munger reserved many of his public comments for annual meetings of Berkshire; his investment vehicle Wesco Financial Corp, which Berkshire bought out in 2011; and Daily Journal Corp, a publishing company he chaired for 45 years.

To fans, Munger was as much the world-weary psychiatrist as a famed investor. Many of his observations were collected in a book, "Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger," with a foreword by Buffett.

"I was raised by people who thought it was a moral duty to be as rational as you could possibly make yourself," Munger told Daily Journal shareholders in 2020.

"That notion," he added, "has served me enormously well."

In 2009, during the worst U.S. recession since the Great Depression, he tried to put his followers at ease.

"If you wait until the economy is working properly to buy stocks, it's almost certainly too late," he said at Wesco's annual meeting.

After that gathering, Los Angeles Times columnist and Wesco investor Kathy Kristof wrote about Munger: "He gives us hope."

TETE-A-TETE

Born on Jan. 1, 1924, Munger as a boy once worked part-time at the Omaha grocery run by Buffett's grandfather Ernest.

Buffett also worked there though he and Munger, who was 6-1/2 years older, did not work together.

Munger later enrolled at the University of Michigan, but dropped out to work as a meteorologist in the U.S. Army Air Corps during World War II.

Despite never getting an undergraduate degree, Munger graduated from Harvard Law School in 1948.

He then practiced law in Los Angeles, co-founding the law firm now known as Munger, Tolles & Olson, before turning in the mid-1960s to managing investments in stocks and real estate.

Munger was a success, easily outperforming the broader market between 1962 and 1975 at his investment partnership Wheeler, Munger & Co.

According to Buffett biographer Alice Schroeder, Munger met Buffett in Omaha in 1959, where at a private room at the Omaha Club they "fell into a tete-a-tete" after being introduced.

More conversations followed, and they were soon talking by phone for hours on end.

"Why are you paying so much attention to him?" Munger's second wife Nancy reportedly asked her husband.

"You don't understand," Munger replied. "That is no ordinary human being."

KNOWING HIS MILIEU

The two shared the "value investing" philosophy espoused by Graham, looking for well-run companies with undervalued share prices.

Sometimes Munger and Buffett deemed those companies "cigar butts," meaning they were out of favor but had a few "puffs" of life left, but they often proved worth holding onto for decades.

Both generally shunned technology companies and other businesses they claimed not to understand, and they avoided getting burned after the late 1990s dot-com bubble went bust.

Instead, they oversaw purchases such as the BNSF railroad in 2010, and ketchup maker H.J. Heinz Co, which Berkshire and private equity firm 3G Capital bought in 2013. Berkshire and 3G later merged Heinz with Kraft Foods.

It was Munger who suggested that Buffett make one of Berkshire's few non-U.S. investments, in Chinese automobile and battery company BYD Co.

Munger was also responsible for introducing Buffett to Todd Combs, who along with Ted Weschler run parts of Berkshire's investment portfolio.

Unlike Buffett, who opened a Twitter account - seldom used - Munger resisted heading into social media.

"That's not my milieu. I don't like too many things going on at once," he once told Reuters.

But in many other ways, he was much like his business partner, especially in not chasing the latest trends.

"I am personally skeptical of some of the hype that has gone into artificial intelligence," Munger said at the 2023 annual meeting. "I think old-fashioned intelligence works pretty well."

Munger lived modestly and drove his own car, though he used a wheelchair in his final years.

He was also a generous philanthropist, pledging more than $100 million in 2013 to build housing at the University of Michigan.

Nancy Munger died in 2010. Charlie Munger had six children and two stepchildren from his marriages.

***

Yahoo Finance

Becky Quick looks back

Final CNBC interview

CNBC looking back

Whitney Tilson

5 pieces of financial advice from Warren Buffett

“I will tell you how to become rich. Be fearful when others are greedy. Be greedy when others are fearful.” Most people chase what’s hot. As euphoria builds money pours in. Until it collapses. Buffett does exactly the opposite. He buys when most people are selling. And waits when most are buying. Incredibly difficult to do. And incredibly rewarding.

“Price is what you pay. Value is what you get. I like buying quality merchandise when it’s marked down.” Most people chase price. The higher the price the more money flows in. Until the value can’t sustain the price. Buffett chases value. Looks for investments priced under their worth. Then buys and waits for others to discover their value.

“I don’t look to jump over seven foot bars. I look for one foot bars I can step over.” Most people try to hit home-runs. They speculate on the next big hit. And keep striking out. Buffett instead invests to build wealth steadily. Rare home-runs. Lots of singles that win games.

“Successful investing takes time, discipline and patience.” Most people want to get rich quick. So they continually take long bets that frequently blow up. Buffett takes a long term view. He’s happy to build wealth over a lifetime rather than a year or decade.

“What we learn from history is that most people don’t learn from history.” Most people whether euphoric or depressed refuse to learn from those who were successful. And they pay the price. Buffett always learned from others. And reaped the rewards.

-- Doug Armey via Quora

move over Buffett?

"Move Over, Warren Buffett: This Is the Star Investor You Should Be Following."

So read the headline on a year-end article from retail investing advice site Motley Fool touting the performance of fund manager Cathie Wood. Variations on the "Buffett is done" theme have been around since at least the tech bubble, while the cult of star mutual-fund managers goes back to the 1960s. Such commentators have eventually eaten their words.

Not that Ms. Wood's performance is anything to sneeze at. Her largest exchange-traded fund, the ARK Innovation ETF, surged by almost 160% last year, growing assets 10-fold -- unprecedented inflows for an active fund of that type. She made concentrated bets on hot stocks such as Tesla, Roku, Square and biotechs boosted by the Covid-19 pandemic. An ARK Invest spokesperson wouldn't elaborate, but Ms. Wood told an interviewer last month that she expects to nearly triple unit holders' money over the next five years.

That is unlikely. In fact, similar star managers' performance has tended not only to be mean-reverting but actually worse-than-average after their runs end. Bill Miller, who famously beat the S&P 500 from 1991 through 2005, drawing huge inflows into Legg Mason Value Trust, spent the next few years as one of the worst fund managers in the country.

Come-uppances are especially harsh when a manager has ridden a hot category as Ms. Wood's firm has done. The fate of mutual-fund firm Janus is instructive: Between the end of 1998 and the end of March 2000, it went from being the 20th largest mutual-fund firm to the fifth largest -- an incredibly rapid ascent. It bet big on tech highfliers such as Cisco Systems and AOL. As the bubble burst, some of its funds lost two-thirds or more of their value.

Fund managers are often compared with dart-throwing monkeys. That might be too flattering for those who get the most attention. Hot funds' performance is often worse than random on the downside. A regularly updated study on the persistence of investor performance from S&P Dow Jones Indices shows that just 0.18% of domestic equity funds in the top quartile of performance in 2015 maintained that through each of the next four years -- less than half what one would have expected by pure chance. And of course most actively managed funds lag behind the index to which they are benchmarked because of fees and taxes.

This explains the amazing rise of index funds. It is mainly the supposed existence of stars such as Ms. Wood that has staved off an even bigger exodus from actively managed funds. Studies have shown, though, that actual stock-picking skill is very rare and is only provable after decades -- the sort of record that Mr. Buffett has established.

An academic study by Jerry Parwada and Eric Tan that examined the Morningstar Fund Managers of the Year between 1995 and 2012 showed that winners got big inflows but that their future performance was unremarkable. Indeed, one fund manager who later stumbled blamed the difficulty of deploying the extra cash for his poor results.

That makes sense. If one looks at Mr. Buffett, his results when he ran a modest partnership in the 1960s were far better than those of his huge, diversified conglomerate recently. But, unlike a share of Berkshire Hathaway, the dollar-weighted returns of a growing fund are worse than the stated results because more people are around for the stumble than the ascent.

Hot funds can burn you.

Mohnish Pabrai

[12/14/20] Being an investor is a continual learning process. The only way one can keep up with the investment environment is to change with the times, learn about different subjects and adapt to the changing environment.

There are many examples of successful investors who've needed to make these changes to stay relevant. One is Mohnish Pabrai (Trades, Portfolio). In a recent speech to the UCLA Student Investment Fund on Nov. 5, Pabrai explained how his investment strategy has adapted over the past few years.

A changing style

Pabrai started off as a deep value investor. When he started his hedge fund around 20 years ago, he focused on finding deeply discounted securities, buying them at a fraction of their net worth and then holding the stocks until the discount between intrinsic value and the market price had narrowed. As the value investor explained in his recent speech:

"I was always looking -- for the last 20 years -- for discounted pies. I didn't really care whether the pie grew or not. My take was that if I bought a business for 40 cents or 50 cents on the dollar, and I've always implicitly assumed that market efficiency would kick in in two or three years. So if I'm correct that a business is worth a dollar and I'm buying it for 50 cents, and I sell it for 90 cents and that convergence takes place in two or three years, it's a very nice rate of return in the 20s."

This "very nice" rate of return, he explained, removed the need to find high-quality compounder style businesses.

However, as he went on to explain, there were two problems with this approach: the fact that "you've got to keep finding the next one and the next one" and "taxes."

A much better approach, he observed, would be to find high-quality businesses and sit on them for decades. But this was not the way "Mohnish is wired," the value investor explained to his audience.

"He is unable to pay up for great businesses," Pabrai added. Other investors are more willing to pay up, but "I know Mohnish and Mohnish is just not wired that way."

This is a remarkable statement because it shows the need to understand our own qualities as investors. Lots of different investment strategies achieve positive results, but there's no point in following a process if you're not comfortable with it. This realization won't occur overnight. It requires emotional intelligence and experience to know what you are comfortable with, and more importantly, what you're not comfortable with.

Rather than pursuing an investment style he was not happy with, Pabrai took the best of both the quality and value methods and merged them into something he was happy with:

"So I am limited to a universe where a compounder is maybe not recognized, or it has hit a temporary hiccup or something where the valuation is really cheap, but there is a genuinely long runway for growth ahead. Instead of just getting off that train when it looks fully priced, which is what I did many times in the past, the idea is to stay on the train and only get off the train when it gets so egregious."

Pabrai explained that he had made this mistake several times in the past, which was part of the reason why his strategy changed. He had sold good companies too early and moved on to other businesses that have not been so successful. This was one of his main lessons of 2020, he told his audience. But with "20 to 35 years" of life left in him, he added, it was not too late to change course.

[12/10/14] Mohnish Pabrai’s long-only equity fund has returned a cumulative 517% net to investors vs. 43% for the S&P 500 Index since inception in 2000.  That’s outperformance of 474 percentage points or 1103 percent.

Pabrai is a classic value investor in the tradition of Warren Buffett, Charlie Munger, Seth Klarman and Joel Greenblat.

Like Buffett, Pabrai looks at a stock not as a piece of paper but as the ownership of a business.  He has no interest in a company that looks ten percent undervalued.  He is angling to make five times his money in a few years.  If he doesn’t think the opportunity is blindingly obvious, he passes.  This requires him to apply his X-Ray vision to the fundamentals, and weigh the downside risk (the margin of safety) vs. the upside potential (the moat) at a given price.  His mantra: Heads I win, tails I don’t lose much.

Next, Pabrai practices patience.  He takes Charlie Munger’s admonition to heart that money is made not in the buying or selling but in the waiting.  As far as I am aware, he has not made a single new investment in 2013.  He says that if he can find a couple of investment ideas a year, that’s plenty.  His current preference is to keep a cash store of between 10%-20%.  This seems like a tremendous drag for a fund posting numbers like his, but he is really biding his time for a distressed situation to come along when he can deploy this trove at the valuation he wants.  During the next crisis, when everyone is jamming the exits, he will go all in.

Once you start purchasing stocks, Pabrai says the next  step is to closely examine every trade that doesn’t work, and figure out what went wrong.  Let me pause right here, because this is key to his whole method.

There is nothing more tempting that to sweep mistakes under the rug.  Denial is one of our top defense mechanisms.  If you are lucky, these trades come to haunt your sleep like Marley’s ghost.  If you are unlucky, you repress them forever.

Due to his background in engineering, Pabrai does not gloss over mistakes.  Investing is a field where you can have a high error rate (buying something you shouldn’t have, selling something you shouldn’t have, not buying something you should have, not selling something you should have) and still be successful.  He takes as a given that mistakes are inevitable.  The point is to learn from them so they are not repeated.  A major portion of his annual meeting is devoted to publicly analyzing investments where he lost money for his partners.  Lately these errors are becoming harder to find, so he has been reduced to talking about investments that didn’t fare as well as expected.

[Looking at dataroma, Pabrai has 8 stocks in his portfolio with over 99% in 4 stocks: ZINC, BAC, C, PKX.  Hmm.  Maybe I should buy more C?]

[11/28/14] "Forbes: So summing up in terms of what do you think do you bring to value investing that others perhaps don’t, that give you a unique edge?

Pabrai: I think the biggest edge would be attitude. So you know, Charlie Munger likes to say that you don’t make money when you buy stocks. And you don’t make money when you sell stocks. You make money by waiting. And so the biggest, the single biggest advantage a value investor has is not IQ; it’s patience and waiting. Waiting for the right pitch and waiting for many years for the right pitch.

FROM: Forbes Transcript: Mohnish Pabrai (Trades, Portfolio) 04/12/2010

10 Golden Rules

Investing can often be broken down into a few simple rules that investors can follow to be successful. But success can be as much about what to do as it is what not to do. On top of that, our emotions throw a wrench into the whole process. While everyone knows you need to "buy low and sell high," our temperament often leads us to selling low and buying high.

So it's key to develop a set of "golden rules" to help guide you through the tough times. Anyone can make money when the market is rising. But when the market gets choppy, as it did in 2020, investors who succeed and thrive are those who have a long-term plan that works.

Here are 10 golden rules of investing to follow to make you a more successful - and hopefully wealthy - investor.

Rule No. 1 - Never lose money

Let's kick it off with some timeless advice from legendary investor Warren Buffett, who said "Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1." The Oracle of Omaha's advice stresses the importance of avoiding loss in your portfolio. When you have more money in your portfolio, you can make more money on it. So a loss hurts your future earning power.

Of course, it's easy to say not to lose money. What Buffett's rule essentially means is don't become enchanted with an investment's potential gains, but also look for its downsides. If you don't get enough upside for the risks you're taking, the investment may not be worth it. That's one reason many investors are avoiding long-term bonds now. Focus on the downside first, counsels Buffett.

Rule No. 2 - Think like an owner

"Think like an owner," says Chris Graff, co-chief investment officer at RMB Capital. "Remember that you are investing in businesses, not just stocks."

While many investors treat stocks like gambling, real businesses stand behind those stocks. Stocks are a fractional ownership interest in a business, and as the business performs well or poorly over time, the company's stock is likely to follow the direction of its profitability.

"Be aware of your motivation when investing," says Christopher Mizer, CEO of Vivaris Capital in La Jolla, California. "Are you investing or gambling? Investing involves an analysis of fundamentals, valuation, and an opinion about how the business will perform in the future."

"Make sure the management team is strong and aligned with the interests of shareholders, and that the company is in a strong financial and competitive position," says Graff.

Rule No. 3 - Stick to your process

"The best investors develop a process that is consistent and successful over many market cycles," says Sam Hendel, president of Levin Easterly Partners. "Don't deviate from the tried and true, even if there are short-term challenges that cause you to doubt yourself."

One of the best strategies for investors: a long-term buy-and-hold approach. You can buy stock funds regularly in a 401(k), for example, and then hold on for decades. But it can be easy when the market gets volatile - as it did in 2020 - to deviate from your plan because you're temporarily losing money. Don't do it.

Rule No. 4 - Buy when everyone is fearful

When the market is down, investors often sell or simply quit paying attention to it. But that's when the bargains are out in droves. It's true: the stock market is the only market where the goods go on sale and everyone is too afraid to buy. As Buffett has famously said, "Be fearful when others are greedy, and greedy when others are fearful."

The good news if you're a 401(k) investor is that once you set up your account you don't have to do anything else to continue buying in. This structure keeps your emotions out of the game.

Rule No. 5 - Keep your investing discipline

It's important that investors continue to save over time, in rough climates and good, even if they can put away only a little. By continuing to invest regularly, you'll get in the habit of living below your means even as you build up a nest egg of assets in your portfolio over time.

The 401(k) is an ideal vehicle for this discipline, because it takes money from your paycheck automatically without you having to decide to do so. It's also important to pick your investments skillfully - here's how to select your 401(k) investments.

Rule No. 6 - Stay diversified

Keeping your portfolio diversified is important for reducing risk. Having your portfolio in only one or two stocks is unsafe, no matter how well they've performed for you. So experts advise spreading your investments around in a diversified portfolio.

"If I had to choose one strategy to keep in mind when investing, it would be diversification," says Mindy Yu, director of investments at Stash. "Diversification can help you better weather the stock market's ups and downs."

The good news: diversification can be easy to achieve. An investment in a Standard & Poor's 500 Index fund, which holds hundreds of investments in America's top companies, provides immediate diversification for a portfolio. If you want to diversify more, you can add a bond fund or other choices such as a real estate fund that may perform differently in various economic climates.

Rule No. 7 - Avoid timing the market

Experts routinely advise clients to avoid trying to time the market, that is, trying to buy or sell at the right time, as is popularized in TV and films. Rather they routinely reference the saying "Time in the market is more important than timing the market." The idea here is that you need to stay invested to get strong returns and avoid jumping in and out of the market.

And that's what Veronica Willis, an investment strategy analyst at Wells Fargo Investment Institute recommends: "The best and worst days are typically close together and occur when markets are at their most volatile, during a bear market or economic recession. An investor would need expert precision to be in the market one day, out of the market the next day and back in the following day."

Experts typically advise buying regularly to take advantage of dollar-cost averaging.

Rule No. 8 - Understand everything you invest in

"Don’t invest in a product you don’t understand and ensure the risks have been clearly disclosed to you before investing," says Chris Rawley, founder and CEO at Harvest Returns, a fintech marketplace for investing in agriculture.

Whatever you're investing in, you need to understand how it works. If you're buying a stock, you need to know why it makes sense to do so and when the stock is likely to profit. If you're buying a fund, you want to understand its track record and costs, among other things. If you're buying an annuity, it's vital to understand how the annuity works and what your rights are.

Rule No. 9 - Review your investing plan regularly

While it can be a good idea to set up a solid investing plan and then only tinker with it, it's advisable to review your plan regularly to see if it still fits your needs. You could do this whenever you check your accounts for tax purposes.

"Remember, though, your first financial plan won’t be your last," says Kevin Driscoll, vice president of advisory services at Navy Federal Financial Group in the Pensacola area. "You can take a look at your plan and should review it at least annually - particularly when you reach milestones like starting a family, moving, or changing jobs."

Rule No. 10 - Stay in the game, have an emergency fund

It's absolutely vital that you have an emergency fund, not only to tide you over during a tough time, but also so that you can stay invested long term.

"Keep 5 percent of your assets in cash, because challenges happen in life," says Craig Kirsner, president of retirement planning services at Stuart Estate Planning Wealth Advisors in Pompano Beach, Florida. He adds: "It makes sense to have at least six months of expenses in your savings account."

If you have to sell some of your investments during a rough spot, it's often likely to be when they are down. So with an emergency fund you're actually able to stay in the investing game longer. Money that you might need in the short term (less than three years) needs to stay in cash, ideally in an online savings account or perhaps in a CD, and shop around to get the best deal.

Bottom line

Investing well is about doing the right things as much as it is about avoiding the wrong things. And amid all of that, it's important to manage your temperament so that you're able to motivate yourself to do the right things even as they may feel risky or unsafe.

(successful) value investing

Value investing strategies can become unpopular during bull markets. Rising valuations and optimistic forecasts can cause some investors to switch to growth strategies that place less emphasis on buying stocks at low prices.

However, in my view, value investing is a logical long-term approach to use when allocating your capital. It can help you to avoid excessive risks and generate high returns through buying quality companies when they trade at low prices.

Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) chairman Warren Buffett (Trades, Portfolio)'s track record highlights the potential success of a value investing approach. His patient attitude and simple strategy could be key reasons for Berkshire's 20% compounded returns in the past 55 years.

Focusing on fundamentals

It is tempting to follow the lead of other investors in a bull market or in a bear market. For example, some investors may now find themselves becoming more optimistic about the prospects for stock prices after the market's 50% gain since March. Likewise, investors may become pessimistic about the S&P 500's prospects during a bear market because stock prices have experienced a decline.

However, avoiding bullish and bearish sentiment could be crucial for anyone seeking to become a successful value investor. Ignoring your emotions makes it easier to judge investment opportunities based on facts and figures, rather than the prevailing mood among your peers. This could improve the efficiency of your capital allocation and allow you to take a contrarian view when it is advantageous.

Buffett has sought to maintain an even temperament throughout his career. As he once said, "The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd."

Using a patient approach

Rising stock prices over recent months may mean there are fewer companies trading at a discount to their intrinsic values. It is tempting to buy stocks that are overvalued in this situation, rather than holding cash due to low interest rates. However, using a patient approach that waits for more attractive risk/reward opportunities to appear could be more effective.

In my opinion, the ability to turn down unattractive investment opportunities could be an important trait of successful value investors. A selective approach may mean that you sometimes miss out on stocks that go on to generate high returns. However, it will also help you to avoid unnecessary risks that may be present in the current bull market.

As Buffett once said, "The stock market is a no-called-strike game. You don't have to swing at everything - you can wait for your pitch."

Adopting a simple strategy

Value investing is a simple means of allocating capital. At its core, it is a long-term strategy that focuses on buying quality businesses when they trade at prices below their intrinsic values. They are then held until there are more attractive places that offer superior risk/reward opportunities available elsewhere.

Therefore, successful value investors do not need to use complicated formulas or complex methodologies when managing their portfolios. Complexity may be far less important than consistency and self-discipline when using the market's cycles to your advantage.

Despite being one of the wealthiest investors of all time, Buffett's approach to managing Berkshire's capital has always been very simple. As he once said, "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ."

-- Robert Stephens, CFA

Dave Portnoy and Robinhood traders

Amateur investors have been piling in money into different stocks and taking advantage of the market crash over recent weeks, but the billionaire investor Leon Cooperman has rebuked these gains and believes they will "end in tears."

Cooperman, who is the chairman and chief executive of Omega Advisors, told CNBC's "Half-Time Report" on Monday: "They are just doing stupid things, and in my opinion, this will end in tears."

The famed investor referred to the online trading platform Robinhood's surge in account openings, with more than 3 million new accounts created this year.

Robinhood has more than 13 million users, with an average user age of 31.

Cooperman said many new investors were replacing gambling and sports betting with trading, telling CNBC: "The gambling casinos are closed and the [Federal Reserve] is promising you free money for the next two years, so let them speculate."

He added: "Let them buy and trade. From my experience, this kind of stuff will end in tears."

Markets have largely rallied since touching lows on March 23, with many commentators highlighting that different day traders, also known as mom-and-pop traders, have contributed to this. Experts have been divided on whether to praise the surge in inexperienced investors or blame them for falsely inflating stock valuations.

A Monday note by Societe Generale said Robinhood traders displayed top-notch timing when they rushed to the market as it hit recent lows.

"For all the mocking of Robinhood investors, their timing back into the market looks impeccable, with a significant pick-up in holdings as equity markets bottomed in mid-March," Andrew Lapthorne of Societe Generale wrote.

But Peter Cecchini, the former global chief market strategist at Cantor Fitzgerald, said the actions of Dave Portnoy, the founder of Barstool Sports, a punter turned investor, were symptomatic of the dislocation between stock prices and economic reality.

"His attention-getting, wild style is emblematic of just how emotional and extreme equity markets are now," Cecchini said in a LinkedIn post on Friday. "It's both impulsive and compulsive. His behavior really just explains everything."

On Tuesday, Portnoy uploaded a video in which he said he "killed" the legendary investor Warren Buffett with his recent day-trading success.

Many amateur traders have been betting against the likes of Buffett, with the airline exchange-traded fund JETS seeing assets surge nearly 3,000% in three months, boosted by millennial day traders.

Day traders are piling into Hertz, JCPenney, and other bankrupt companies despite the overwhelming odds that shareholders will be wiped out during bankruptcy proceedings.

Before Hertz's bankruptcy filing on May 22, about 43,000 Robinhood accounts owned shares of Hertz. That number nearly doubled to 73,000 in the first week of June.

market panics in hindsight

Do you remember where you were on Oct. 27, 1997?

Probably not. I don’t either. But on that day, the Dow plunged 550 points, which was roughly the same amount in percentage terms (7%) as today’s 2,000-point drop. In the late 1990s, the Asian financial crisis was the reason for that panic. But like many panics, as time passes, they seem to be much less meaningful in the rear view mirror.

Of course, this isn’t true for all panics. We will never forget events such as the 9/11 tragedy, or Sept. 15, 2008, when Lehman Brothers filed for bankruptcy, precipitating a swift run on the financial system and a severe economic contraction that the country hadn’t seen since the Great Depression. There was the Panic of 1893, which led to a depression that was arguably as severe as the Great Depression (and, in fact, was called just that until the Depression of the 1930s arrived). And, of course, there was the Great Depression itself.

But for each of these great panics, there are scores of smaller panics that seemed very significant at the time, but in hindsight look like nothing more than a blip on the radar.

The forgotten "panics"

Examples of such “mini-panics” that felt like full-blown panics at the time include the 1998 Russian debt crisis, where Moscow shocked the world by defaulting on their own ruble debt. The chaotic price movements in the markets crushed a hugely leveraged hedge fund called Long-Term Capital, which nearly drowned the banking system with its massive trading liabilities. The fund was bailed out by its own lenders (thanks to some strong-arming by the New York Fed) and this prevented the fund’s immediate liquidation, which stopped the panic.

Another panic occurred in 2011, where fears of a “double-dip” recession (remember that term?) coincided with political gridlock and a debt ceiling standoff that led to the first ever downgrade of the credit of the U.S. government. This seemed like a big deal at the time, and the market plunged roughly 17% from peak to trough, with many bank stocks and other cyclicals down 40% or more.

There was the Panic of 1907, where the failure of a major New York financial institution led to a city-wide run on the banking system, which drained liquidity from the economy and caused a sharp contraction as merchants couldn’t fund their inventory and corporations couldn’t make payroll. This crisis was historic because it eventually led to the creation of the Federal Reserve, but in fact the panic and subsequent downturn turned out to be very short-lived (I’ve written about this fascinating situation here and here).

And in the aforementioned 1997 panic, fast-growing Southeast Asian export nations (“Asian Tigers”) relied on foreign investment to finance their economic growth, but they went bust when rising U.S. interest rates made it harder to compete for foreign capital and a stronger dollar made exports less competitive for these dollar-pegged nations. The Tigers allowed money to freely flow into their countries in good times. But where money can easily enter, it can also quickly exit, and in 1997 an effective run-on-the-bank occurred in these nations, resulting in painful devaluations and economic collapses. This led to a major selloff across the world, and in fact was the last time (until today) that the U.S. stock market used its “circuit breaker” to shut down trading after markets plummeted.

There were even smaller scares such as the bond market debacle of 1994, the SARS outbreak in 2003, the “Flash Crash” in 2010 (also accompanied by the dreaded double-dip recession fear), the OPEC-fueled oil price rout (sound familiar?) that led to the worst start to the year in stock market history in 2016 and most recently, the trade war that caused a peak to trough drawdown of nearly 20% in the S&P 500 in the fourth quarter of 2018.

These mini-panics are only a small sample. There are countless examples that you can find when reading about the Go-Go years of the 1960s, the stagflation years of the 1970s and the junk bond years of the 1980s.

There are a number of lessons that can be learned by studying these past events, including the pattern of behavior that is so eerily similar in each of these panics, but there are two other takeaways I’ll mention here:

1. Notice the number of Dow points that a 7% drop was in 1997.
2. Notice how little you care about (or even remember) the vast majority of these mini-panics.

550 points used to be scary

Referencing Dow points is usually a useless exercise, but I use it to show how far the market has come from the days when a 550-point decline was a panic that required a temporary closure of the market.

My point is the stock market rewards investors who are long-term-oriented and patient. Investing isn’t easy, but it is simple. Owning a stake in a broad swath of American companies and ignoring the inevitable ups and downs is a surefire way to achieve success over time.

A quarter century from now, a 2000 point decline will likely be a much more normal 1% to 2% drop, just like a 550-point drop is today.

Stocks appreciate over time, and long-term investors get rewarded.

Time heals all wounds

Three years from now, we’ll all be looking back at this time as a great buying opportunity. It’s an extreme likelihood. I don’t know if this panic is going to get worse, and I never know in real time whether the panic is going to be the once-in-a-generation kind, but I do know that it is extremely unlikely. Nearly all panics wind up being “mini-panics” in hindsight, and they also turn out to be fabulous buying opportunities.

They are also viewed with relative indifference after a few years pass. Many people allow their memories of the fear to fade as time passes. Events that seemed important then are relatively meaningless now when filtered through the prism of time.

But they all seemed scary at the time.

And they were all great opportunities to buy stocks.

The time arbitrage loophole

I don’t know if this current coronavirus panic accelerates before it subsides, but I do know it will subside. And at some point, when enough time passes (often not much time is required), we’ll all agree that this was a great time to buy stocks.

What creates opportunity in markets is that in the current moment, we don’t all agree. Some view this as a buying opportunity, others think it’s a great time to sell stocks, or that it’s prudent to wait for “more clarity.” This disparity of interpretation is why stocks get mispriced. I’ve talked often about how Saber’s investment approach relies on time horizon edge, and this is a perfect example of why this approach can be successful over time. Stocks of great companies are getting sold because the earnings outlook looks bad this year, even when there is little debate about the long-term prospects for the business.

Some investors are in fact panic selling out of fear, others are more rationally selling because they don’t want to own a business that will have a bad year. And this creates opportunities for those who want to buy a stake in companies as a long-term part-owner.

Steve Jobs used to tell people to go for a walk and “zoom out”, to change your perspective and to look at the big picture. Sometimes it helps to zoom out and detach yourself from the current situation.

I don’t know what happens tomorrow or next week, or next month, or next year. But I am confident that we’ll look back in a few years and identify this as one of those times where it was great to be a buyer of stocks.

-- John Huber is the founder of Saber Capital Management, LLC. Saber is the general partner and manager of an investment fund modeled after the original Buffett partnerships. Saber’s strategy is to make very carefully selected investments in undervalued stocks of great businesses.

lessons from Buffett 1996

Warren Buffett (Trades, Portfolio)’s annual Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) shareholder letters are filled with precious wisdom on investing, finance and business at large.

Below, we highlight a couple of takeaways that we feel are significantly meaningful even after decades, but rather underleveraged among today’s investing community.

Low-frequency wins

“Inactivity strikes us as intelligent behavior. Neither we nor most business managers would dream of feverishly trading highly-profitable subsidiaries because a small move in the Federal Reserve's discount rate was predicted or because some Wall Street pundit had reversed his views on the market. Why, then, should we behave differently with our minority positions in wonderful businesses? The art of investing in public companies successfully is little different from the art of successfully acquiring subsidiaries. In each case you simply want to acquire, at a sensible price, a business with excellent economics and able, honest management. Thereafter, you need only monitor whether these qualities are being preserved.”

Look for things that seldom change

“In studying the investments we have made in both subsidiary companies and common stocks, you will see that we favor businesses and industries unlikely to experience major change. The reason for that is simple: Making either type of purchase, we are searching for operations that we believe are virtually certain to possess enormous competitive strength ten or twenty years from now. A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek.

Know your boundaries

“Should you choose, however, to construct your own portfolio, there are a few thoughts worth remembering. Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses.

Note that word 'selected': You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.

…

Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value.”

5 signs you're a value investor

1.  You are obsessed with Warren Buffett

Do you watch every interview on CNBC that Buffett does?

Do you read every one of Berkshire’s shareholder letters, attend the annual meetings because you’re a shareholder, or quote Buffett on social media?

An obsession with Mr. Buffett is one big sign that you’re probably a value investor yourself.

2.  You love stocks trading at 52-week lows

Benjamin Graham, the father of value investing, has told investors to look for stocks trading on new 52-week lows.

If you enjoy looking at those stocks because you’re thinking you’re getting a bargain, you could be a value investor.

3.  You buy and hold your stocks

Buffett has owned some of his stocks for decades. Have you? If so, you may also be a value investor.

4.  You love “boring” companies

Buffett has gotten rich owning some of the more “boring” types of companies including industrials, railroads, energy and, famously, insurance.

5.  You never buy companies with negative earnings

If you don’t understand what all the fuss is about with Uber or Lyft, both of which don’t have positive earnings, you may be a value investor.

The Buffett Yardstick

Warren Buffett of Berkshire Hathaway (BRK) says it’s “probably the best single measure of where valuations stand at any given moment.”

The “Buffett Yardstick,” as longtime money manager Jesse Felder of the Felder Report calls it, plots the total value of the stock market against the overall size of the economy. What makes it so valuable, he says, is that it’s good at telling investors what to expect from equities going forward.

So what’s it telling them now?

Felder put the “Yardstick” (inverted) up against forward 10-year returns in the stock market in the chart below to create what he describes as the best representation of one of his favorite Buffett quotes: “The price you pay determines your rate of return.”

According to this measure, Felder says investors are paying such a high price for stocks that they are likely to receive basically nothing in return in the coming decade, and that includes dividends.

“At the same time that potential returns look so poor, the potential for risk may be greater than it has been in generations,” he wrote, pointing out that investors have been piling on margin debt lately to increase their exposure to an overheated market.

MacKenzie Bezos signs The Giving Pledge

5/29/19 - Bezos, whose fortune is now worth an estimated $36.6 billion, signed the Giving Pledge, which encourages the world's wealthiest people to dedicate a majority of their wealth to charitable causes.

Howard Marks - books summary

“I didn’t set out to write a manual for investing. Rather, this book is a statement of my investment philosophy. I consider it my creed, and in the course of my investing career it has served like a religion.”

Howard Marks (Trades, Portfolio) wrote those words in the introduction to his 2013 book, “The Most  Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor.” It is based on his occasional memos to clients at the Trust Company of the West and then at Oaktree Capital, the company he cofounded in 1995.

The title originated with a client meeting in which Marks explained the most important thing about investment success, only to find himself trotting out a series of most important things—18 of them in total.

Chapter 1 - Second-level thinking
Chapter 2 - Market efficiency
Chapter 3 - The concepts of value
Chapter 4 - Price and Value
Chapter 5 - Understanding risk
Chapter 6 - Recognizing of risk
Chapter 7 - Controlling risk
Chapter 8 - Cycles present opportunities
Chapter 9 - Following the pendulum
Chapter 10 - Bad decisions
Chapter 11 - Catching falling knives
Chapter 12 - Looking for bargains
Chapter 13 - Patient opportunism
Chapter 14 - The hazard of forecasting
Chapter 15 - The Cycle
Chapter 16 - Luck and value investing
Chapter 17 - making money and/or avoiding losses
Chapter 18 - investing pitfalls
Chapter 19 - Second level thinking
Chapter 20 - what returns are reasonable?

Buffett: 50% a year

“If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

 -- Warren Buffett

Berkshire Hathaway track record

Warren Buffett has built a fantastic track record at Berkshire Hathaway, achieving a 20.9% return per year in 53 years, or a 2,404.748% total accumulated return. He did this buying great businesses at reasonable prices. He used insurance leverage, he took advantage of fiscal efficiency and he never paid a dividend.

His strategy evolved over time, as assets grew and he listened more to his partner, Charlie Munger (Trades, Portfolio). He focused on buying great businesses at reasonable prices. He did that investing in publicly traded equities but also in taking over businesses and bringing them under the Berkshire umbrella.

The 50% remark

But when Buffett made the “I think I could make you 50% a year” remark, he was not talking about managing a portfolio of many billions of dollars. He was talking about managing a few million dollars and having the “privilege” of investing in small and illiquid companies.

Buffett invested in this arena when he started his career in the 1950s. In 13 years, he did not achieve a record of 50% per a year (that could probably demand extreme portfolio concentration), but he managed to get close to a remarkable 30% a year. But more than just that, he achieved those returns with a portfolio management structure that maximized returns while controlling risks.

Clues to this type of portfolio management can be found in the master’s published Partnership Letters. These contain valuable insights into implementing investment strategies, identifying individual opportunities and actively managing portfolios.

The Partnerships' track record

Between 1957 and 1969, the Buffett Partnerships achieved an annual compound return of 24.5% net of fees (29.5% before fees). The annual return of the Dow over the same time with dividends was 7.4%. The Partnerships charged no management fee, took 25% of any gains beyond a cumulative 6% and agreed to absorb a percentage of any losses.

Generally, fund managers look to properly diversify their portfolios among sectors and geographies. And more often than not, they tend to stick to one process of investment selection. The problem is that over time, certain investment methods tend to be favored and others neglected.

Having a portfolio structure composed of three different investment strategies allowed Buffett to consistently approach the set of market opportunities with different lenses and choose the most convenient for long-term profit maximization and risk-exposure control.

Three investment strategies

Buffett’s system for managing the Partnerships was composed of three strategies, and each investment in the portfolios was cataloged with one strategy label. The strategies he pursued were: generals, workouts and controls.

They all had in common the fact that Buffett was looking for extreme cheapness and that he was looking mostly in the camp of small or micro caps. But each strategy accomplished one objective, and he masterfully managed the weight in each one according to where the opportunities appeared.

The "generals” category referred to undervalued stocks, the "workouts" category were the investments in special situation events and "controls," although rare, were the investments where the Partnership assumed, over time, an activist position, trying to get management to make moves that would maximize the value of the stock.

Over the next few articles, I will dissect each of these strategies and provide an overview of their adaptation to today’s investment scene.

Bezos no. 2 / make that no. 1

[7/22/18] Just as Prime Day is kicking off, Amazon CEO Jeff Bezos on Monday reportedly became the richest man in modern history.

According to the Bloomberg Billionaires Index, which tracks the net worth of the 500 richest people in the world , Bezos is now worth $150 billion. The staggering number is more than Bill Gates was ever worth, even during the height of the dot-com boom, Bloomberg reported. 

After adjusting for inflation, Microsoft cofounder Bill Gates was worth $149 billion in 1999. 

Bezos and Gates have been duking it out to be the world's richest person for the last few years, but it's worth noting that Gates has donated a sizable part of his fortune to charity — primarily to the Bill and Melinda Gates Foundation. Right now, Gates has a net worth of $95.5 billion, almost $50 billion less than Bezos.

[1/9/18] Bezos made $6.1 billion in five trading days in 2018.  Now worth more than Bill Gates was ever worth.

[7/27/17] Bezos passes Gates this morning to become the richest man in the world.  Asking for ideas on philanthropy.

[7/24/17] For the 30 years FORBES has been tracking global wealth, only five people have ranked on our annual compendium of wealth as the richest person on the planet. At least one other person held the title, but so briefly (just two days), that he never appeared at that rank on FORBES’ annual list of World’s Billionaires.

Now, Amazon CEO Jeff Bezos is poised to join this exclusive single digit club, as Amazon stock continues to soar. The online retailer’s shares climbed 1.3% on Monday, adding $1.1 billion to Bezos’ net worth. Bezos is now a mere $2 billion from assuming the No. 1 spot on FORBES Real-Time Billionaires List, which would put him in the company of an exclusive group of billionaires who have held the title. Bezos has a net worth FORBES estimates at $88.2 billion as of the close of markets on Monday, while Microsoft founder Bill Gates holds the top spot on the list with a $90.1 billion fortune.

[3/30/17] Jeff Bezos has leapt past Amancio Ortega and Warren Buffett to become the world’s second-richest person.

Bezos, 53, added $1.5 billion to his fortune as Amazon.com Inc. rose $18.32 on Wednesday, the day after the e-commerce giant said it plans to buy Dubai-based online retailer Souq.com. Bezos has a net worth of $75.6 billion on the Bloomberg Billionaires Index, $700 million more than Berkshire Hathaway Inc.’s Buffett and $1.3 billion above Ortega, the founder of Inditex S.A. and Europe’s richest person.

Amazon’s founder has added $10.2 billion this year to his wealth and $7 billion since the global equities rally began following the election of Donald Trump as U.S. president on Nov. 8. The rise is the third biggest on the Bloomberg index in 2017, after Chinese parcel-delivery billionaire Wang Wei’s $18.4 billion gain and an $11.4 billion rise for Facebook Inc. founder Mark Zuckerberg.

Buffett, who’s added $1.7 billion in 2017, has shed $4.7 billion since his fortune peaked at $79.6 billion on March 1. Ortega is up $2.1 billion year-to-date. Bezos remains $10.4 billion behind Microsoft co-founder Bill Gates, the world’s richest person with $86 billion.

*** 5/15/17 ***

Jeff Bezos, founder and CEO of Amazon, is one of the most powerful figures in tech, with a net worth of roughly $82 billion.

Today, his "Everything Store" sells more than $136 billion worth of goods a year.

Here's how the former hedge funder got his start and became one of the world's richest people.

predicting the market

There are two popular schools of thought re market timing. One is that it is impossible to time the market effectively and a waste of effort to try. The other is that knowing when crashes are coming is so valuable that you just have to give the objective of predicting them your best possible shot.

I hold a third view, a view which I believe is strongly supported by the research of Yale University Economics Professor Robert Shiller and research (including one paper that I did most of the work on myself!) done over the past 32 years (and largely ignored so far!). That view holds that short-term timing (predicting when crashes will come with precision) really is impossible but that predicting in a general way when they will come (long-term timing) is highly doable and absolutely required for those seeking to hold any realistic hope of long-term investing success.

Shiller's model uses valuations to make long-term predictions. Once prices go insanely high, we ALWAYS experience a wipe-out. There has never in 140 years of stock market history ever been an exception. But we CANNOT say with precision when the wipeout will come, only that it is on its way.

There is a wipe-out on its way today, according to the Shiller model. Thus, I think it makes sense to go with a low stock allocation today.

Now --

We may see stock prices double over the next year. If we see that, there are people who will complain that I was "wrong" in my advice.

I don't see it that way. The way I look at it is that the RISK of a crash is high this year. Thus, we all should be going with low stock allocations. It doesn't matter whether stocks actually crash this year or not. The risk is there. That's what matters.

Those who stay in stocks and enjoy another run-up in prices will NOT get to keep the money. They will lose all those gains plus a lot more in the crash that will follow next year or the year after that. So what good do those gains do them? I invest for the long-term. I want gains I can keep. Investors have never earned permanent gains from stock purchases made when stock were selling at the sort of prices at which they are selling today.

The losses you will see if stocks continue to perform in the future anything at all as they have always performed in the past will be devastating. It is hard for people to get their heads around how much one wipeout in a lifetime can hold you back. You lose not only the dollar value taken from your portfolio, you also lose decades of compounding returns on those dollars. Stay heavily in stocks at a time like today and you could easily set your retirement back 10 years, according to the last 30 years of academic research.

The "experts" won't tell you this. Most of the "experts" in this field make money only when people buy stocks. So they are compromised. You need to become personally familiar with what the academic research really says, not just what the people quoted as experts in this field SAY that it says. These are very, very, very different things, in my experience. The conventional wisdom in this field is dangerous stuff.

Rob Bennett, Created The Stock-Return Predictor
Answered May 9, 2013

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This answer showed up in my quora feed last night, but was posted on 5/9/13.  The Dow closed at 15,082.62 on that day.  Today it closed at 23,434.19.  Yes, one day/week/month, the market will crash again.  Here's how Buffett prepares.