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HEY! DID YOU KNOW…

 

  • The median age in the U.S. is 36.8
  • The median income in the U.S. is $51,939
  • The average 401k match is $1 for $1 up to 6%

A 36.8 year old investing 10% of their $51,939 income with a $3,116.34 match:
With just average stock market returns of 10% would have $1,114,479.31 by retirement.

Join 7,200+ other readers who have learned how anyone, even beginners, can easily make this desire a reality. Download the free ebook: 7 Steps to Understanding the Stock Market.

IFB31: Millionaire Jobs: Interview with the Engineer Who Did it in 10 Years

millionaire jobs

Alright, folks well welcome to Investing for Beginners podcast I’m David Ahern, and we have Andrew Sather with us tonight we’re going to do a little something different off our normal beaten path.

We’re going to interview someone tonight; we have a guest with us tonight who has found success with finding freedom from money, and his name is Justin.

  • You can retire early if you plan and stick to your plan
  • You don’t need to make seven figures to retire early
  • The 4% rule and how it is your friend
  • Patience is a virtue in the stock market
  • Being frugal and enjoying the simple things can lead to lifelong happiness

We’re just going to go ahead and chat a little bit so without any further ado Justin could you give us a brief synopsis of your life up to this point tell us how you got where you are.

Justin: Yeah, sure thing, so I’m Justin I retired at 33 four years ago almost to the day. I used to work as an engineer here in Raleigh North Carolina about ten years right out of college. Started working and you know to save my money invested it bought a pretty basic house here in Raleigh and just did not upgrade the house didn’t upgrade the cars until after I retired. I married my wife is also retired now she just she retired in her 30s, and she’s just crossed another big milestone birthday. So I’m not going to say how old she is but probably best yeah she might if she listens to this but she probably will she’ll probably do some, so she’s 29 again. We also have three children age in12 and five, and as a few days from now, they will get all three in school all day, so it’s a big transition period for us to have some free time during the school week and yeah that’s that’s pretty much you know me in a nutshell.

Andrew: nice I love it. I’d like what your typical day sounds like because I a lot of us who are listening to the podcast. We see financial freedom as kind of the ultimate goal and that all mean different things, for different people. You know what’s there’s a lot of work a lot of discipline and a lot of saving and investing. And so you know why should we go through all that and what kind of things can we look forward to if we do finally achieve financial freedom.

Justin: yeah sure I guess the at the big picture level there’s sort of a bipolar lifestyle I’m living during the school year when our kids are in school from roughly September through the end of May early June about nine months per year they’re in school. And, so we’re here in Raleigh NorthCarolina I’ve taken an easy kind of slow pace of life lots of relaxation. Simple stuff around town and then the another part of our lifestyle personality is a big summer trip.

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IFB30: Quotes of Wisdom from Baupost Group’s Seth Klarman

Welcome to investing for Beginners podcast I’m David Ahern, and we have Andrew Sather here as well tonight. We’re going to do a review of an article that I came across from a blog that I read on a daily basis.

It’s called the Acquirers Multiple, and it is owned by a gentleman named Tobias Carlisle. He’s a very very amazing writer, and he’s written some great books. And he has this blog that he’s a member of that one of his authors that work for him writes some great articles.

The article that I came across I shared it with Andrew a couple of weeks ago, and we both liked it, and we thought this would be a great opportunity for us to talk a little bit about a gentleman named Seth Klarman.

We’ve talked about him a little bit in the past before, but this article that was written kind of outlines 13 tips on how to find bargains. Seth Klarman if you’re not familiar with him has written an amazing book on the margin of safety, and it’s unavailable more or less. You can buy an Amazon I believe for a cool thirteen hundred dollars a book if you wish.

Apparently, he did not release a lot of copies of the book and so it’s very very rare and hard to find I was fortunate enough to be able to find it. I read it through the professor of the local college had it, and the finance professor was kind enough to allow me to borrow it to read it. Andrew and I are going to kind of pick and choose through the tips that the gentleman shared in this article.

It’s a commentary from the collected wisdom of Seth Klarman, and it’s a compilation of quotes from the by Baupost Group founder Seth Klarman.

He writes an annual letter just as Warren Buffett does, but it’snot available to the public. It’s usually only available to his you know the people the insiders the people that invest in his fund.

What we will learn in today’s episode:

  • How to find a Margin of Safety
  • You need to do your research to find great companies
  • Be patient and wait for your pitch
  • Buy low and sell high, look for fear and greed in the market
  • Don’t try to time the market, look for your value and buy with a margin of safety

So I’m going to read a couple of the quotes and talk a few minutes about them and then Andrew is going to do the same. I also will link to the article in the show notes for this episode so that you will be able to find this article and read through them as you wish and find some things that you might like.

The first one that I came across that I liked was

“great investments don’t just knock on a door and say buy me.”

That is so true, and they do not just stand up and say hey here by me I’m cheap I’m going to make you tons and tons of money. It takes work to find great investments; there’s a lot of due diligence that you have to put into to be able to find a great investment.

You know Andrew, and I talked a lot about you know buying with a margin of safety, and this is a huge proponent of Seth Klarman’s investment philosophy, and there is a lot of effort that takes to go to find these bargains or these gems if you will. They’re not things that are readily available or that just kind of leap out at you.

A lot of times you have to look under a lot of rocks to try to find you know the one that you like and I think that’s a great quote and that struck me when I read the article that was one of the first things that kind of jumped out at me.

The next one that I liked was

“it’s easy to find middling opportunities but rare to find exceptional ones.”

Again this is a great quote that I think is very apropos for today with a market being at you know, of course, all-time highs seem like every single day. It’s hard to find great opportunities especially for value investors you know we’re always looking for great companies that we can find at a discount so that we can buy with a margin of safety with the emphasis on the safety. And trying to find exceptional companies that are on discount when the markets you know really at an all-time high.

It’s a challenge you know you have to screen and on a regular basis. You have to you know to use all the tools that you have available whether it’s the value trap blog or whether it’s you know the things that I try to do. You know there’s just so many avenues and ways that you can go to try to find opportunities. But finding something that’s exceptional, it’s not something you’re going to do every single day.

You think about the investors that Andrew and I talk a lot about that our you know mentors to us you know people like Seth Klarman, Warren Buffett, Charlie Munger, you know Peter Lynch.

Any of those guys you know they didn’t have you know their portfolios were not monstrously huge. You know we talked to a few weeks ago about Joel Greenblatt, and he did have a very large portfolio, but he’s more an exception to that to the rule than normal. You know Monish Pabrai, for example, I believe he has six or seven stocks in his portfolio right now.

Guy Spier, who another person I like he has you know maybe ten. You know Warren Buffett has a few, but he’s also been doing this for 50-plus years, so he’s had time to build up to a few of them. But the majority of his portfolio lies in a handful of stocks.

American Express, Wells Fargo among others so you know finding the great opportunities can be a challenge. And one of the things that Klarman talks a lot about in his book is when you find those exceptional ones is piling into them is going big on those because that where you’re going to make money. Is by finding the great ones and betting big on the ones that you know are going to be exceptional.

You know finding middling opportunities are going to make a couple more cents here, or there you know over the long term that’s not ideal. That’s not what we want to get because when you look at things that are involved in that such as fees. You know the time spent you know trying to find that opportunity and missing the other opportunity there’s an opportunity cost for those you know, so these two quotes that you know that I first read those are the first two that jumped out at me. Does Andrew you have a couple you wanted to share with us?

Andrew: I mean I guess if you’re going to twist my arm. I guess I could say something but you know I love those points obviously having tools like screener can be so crucial, and like you said it has to be something you seek out it’s not going to come, and this is this is one of those things it’s like entrepreneurship.

You know building wealth just in general it’s it’s like doing your fitness anything you want to try to improve on it’s something you have to seek out. You have to be proactive about, and you have to take the initiative and make things happen for yourself. And obviously, when you’re talking about opportunities that are you know especially on WallStreet and the stock market that undoubtedly is applicable.

This quote relates to that as well

“when buyers are numerous and sellers scarce opportunity is bound to be limited but when sellers are plentiful and highly motivated while potential buyers are reticent great investment opportunities tend to tend to surface.”

So it’s a fancy way and is a smart way of saying yeah you want to buy low and you want to sell high. You ‘re going to have a lot more opportunities when the market is pessimistic. You know when people are selling, and you know people are losing their jobs the economy’s not doing so well, and people just don’t want to be in the market.

That’s when you’re going to see the most opportunity, so I think it’s pretty obvious where Klarman stands when it comes to his investment philosophy. And it’s you see this theme parallel through a lot of the different fund managers that are now billionaires and have been able to amass such a huge net worth because of the way they have been able to buy securities for themselves and their shareholders. And it’s you got to be a contrarian you got to go against the grain you got to be able to stand up and understand that the crowds are not always going to be on your side.

You have to be not only okay with that table to see that and try to look for those kinds of opportunities and those kinds of situations so that you can get in and get the right kind of growth that you’re looking for from a performance perspective.

I liked that quote, and it’s again a very eloquent way of saying one of the most principle fundamentals of value investing is that you know like Buffett says you have to

“be greedy when people are fearful and be fearful when people are greedy.”

Dave: yeah that’s awesome that’s that’s one of my favorite Buffett quotes. I enjoy that yeah that that was a very fancy way of seeing buy low and sell high that perfect all right one of the ones that I liked as well.

“was you must buy on the way down there is far more volume on the way down then on the way back up and far competition among buyers it is almost always better to be too early than too late but you must be prepared for price markdowns on what you buy.”

You know one of the things that I liked about this quote that kind of struck me is you know investors tend to be a little bit more on the conservative side. I guess a good way of putting it and you know sometimes you get a little bit of the sky is falling.

Howard Marks who is one of my favorites, he releases memos every quarter. You know the last three or four memos that he’s released have all been fairly negative about the market and what not, and he’s been talking a lot about trying to get people to be prepared for a drawdown in the market.

You know when things go poorly, and people start selling, and you know this is when you can find great companies. And this is one of the things that you know value investors kind of look for when the market is getting hammered, and things are falling. That’s when you can find great opportunities and when a market is high like it is right now as we talked about before.

It can be difficult to find great opportunities, but when there’s, you know downturn in the market. That’s when you could find great opportunities, and you know Klarman was talking about it’s always better to be too early than too late.

You can never time the market I think this is what he’s talking about with this, and again this is a very eloquent way of saying you can’t time the market and you shouldn’t worry about wait until you can find the bottom because you don’t know when the bottom is going to be.

We’ve talked a lot about in the past about dollar cost averaging, and this is one of the things you can do to help that strategy. As themes you know going down if you find a company that you think is good you know if your dollar is cost averaging into that that can help mitigate some of that downturn.

The additional downturn in the market and you know he talked about you must be prepared for price markdowns on what you buy even if you do buy. Let’s say a stock starts off at the let’s just using these number a hundred dollars a share and then there’s a downturn in the market and all of a sudden it’s down to I don’t know sixty-two dollars.

You decide okay well I’m going to get into the company and then maybe it drips down again to maybe fifty dollars. Well, you could also buy it at the $50 as well, and then maybe it goes down another four or five dollars, and you can decide whether you want to buy it at that time or not. But as it goes back up if it will as it will if it’s you know the good company, and it’s just it’s only being brought down because the rest of the market is following suit then that’s where you can make your money.

I think that’s one of the things that I like about value investing is it gives you a strategy that you can use when things are going well. It also uses it gives you a strategy and when things are going poorly as well.

Andrew: yeah I love it kind of backpacking off of what I said previously. There’s quote here talking about a bargain price is necessary but not sufficient for investing because sometimes secure these I seem superficially inexpensive aren’t

while at the same time you want to find these bargains, and obviously, that’s the whole point of all these tips and everything we’ve been talking about. Value investing up to this point he also cautions that you know there can be a reason why these stocks are cheap, and you have to be able to identify the difference between a stock that’s cheap because it’s an opportunity a stock that’s cheap because it’s actually in trouble.

This why we have such a big focus when, I talk about my value trap indicator, and I talk about my research with the bankruptcies the idea of a value trap in the way that it can negatively affect your portfolio. Is something that you cannot overlook so understand that these bargains are going to show up in the market and it’s not so much seeing a bargain and taking it but it’s more so taking that next level and being able to say okay I see a bargain now I’m able to foresee.

How do you do this you use analysis you use fundamental analysis you dig into the annual reports, and you look at the numbers, and you understand what the ratios and the metrics are telling you? And you figure out what’s the big picture here with this stock you do all those things, and then you’re able to look at the bargain and perceive if it’s a bargain because if it adds a bargain and your chances of success are great. Or is it a bargain that seems superficially inexpensive as Klarman put it and isn’t.

So find out why stocks inexpensive and use that as a judgment call whether to pull the trigger or not.

Dave: I love it that’s so apropos you know one of my favorite quotes from WarrenBuffett was he said I like to buy stocks the same way I like to buy my socks on a bargain and I thought that was that’s awesome.

One of my favorite quotes from this little list was

rather than buy from smart, informed sellers we want to buy from urgent distressed or emotional sellers.”

And this to me harkens back to the discussion that Andrew and I just had about unconventional investing principles, and we talked a little bit about your emotions in that episode and how they control your thoughts and how they control what you want to choose to invest in.

Your thought processes behind that and as we’ve-talked about in other episodes when you buy or sell stocks based on emotion. That’s never a good thing, and we look for people that are going to be upset and that are making emotional choices. Because of you know as we all know when you make emotional choices you don’t always make rational choices.

You know the fear and the greed that we were talking about in the market when there’s a lot of fear in the market that is when we can find deals. That’s when we can find bargains, that’s we can find companies that are going to be selling a discount which gives us an opportunity to make a great investment.

Also, helps us with a margin of safety so if we do make a boo-boo and make a poor choice or make a bad decision we’re not going to get burned too badly on it.

Baupost

Andrew: I think that was one quote that I liked and keeping on that theme of looking at the buy side of the equation looking at the price and the margin of safety here’s a quote here which says:

”typically we make money when we buy we count the profits later, but we know we have captured them when we buy the bargain.”

So this is obviously having confidence in the margin of safety or the intrinsic value you’ve calculated but the kind of key underlying idea here that he doesn’t say. But he implies is that not only are we going you know we talked about the principle dollar cost averaging, but here this is more like buying the whole type situation. So you have to look at investments over a long-term if you’re buying with an adequate margin of safety and you know that you’re getting a good deal you ‘re getting this bargain, and you’re buying it at less of what it’s worth.

Then even if the market doesn’t do, what you want it to do or that stock that you buy it doesn’t perform in the way you want you don’t take that to heart and you don’t see it as something negative and you don’t get discouraged and kind of sound just give up on the position.

Just because it isn’t going your way this is something you’re going to count the profits later you’re going to hold for a very long term and either you hold until it reaches that value that you know. It is, or you might even potentially and hopefully be holding it for even the longer timeframe.

You can be collecting dividends and seeing appreciate even past the intrinsic value that it was at before. So what Klarman is saying here is he has the confidence and the experience to understand that by buying with this margin of safety he’s already making that money and it’s just a matter of treating this investment just like all of his other investments. Understanding that the markets are going to go up and down, there’s going to be cycling of fear and greed, and now all you need to do is hold over the long term buy and hold your positions and things.

You will see the profits, but you do have to be patient you do have to stick it out, and you have to be intelligent and wise enough to understand this type of difference.

Dave: that’s such an awesome quote, man this guy’s a smart dude isn’t he just

Andrew: this yeah yeah he’s no wonder he’s a billionaire

Dave: yeah exactly right well the next one that I liked was

“These causes of mispricing are deep rooted in human behavior, and market structure unlikely to it be extinguished anytime soon.”

And this falls right into the ballpark of the latticework of mental models. This you know the mispricing you know it is so deep-rooted in our human behavior we’re always looking for something that is better than it is. And we’re willing to buy you know things because it’s cool or because we think it’s you know a great company, or we fall in love with something, and we’ll out buy regardless of whatever we think the price is.

We think about when we think about value investing it’s all about finding you the value it’s looking for what we think the company is worth. or a pair of jeans, how many times do you hear people talking about that they have to buy this pair of jeans because they’re the coolest thing ever. It doesn’t matter that they’re the same as the pair right next to them on the shelf that’s only ten bucks but these are one hundred and twenty-two dollars.

It’s human behavior that drives so much of pricing in the world and what we think we should buy and what we think we should want. And it comes down to that whether it’s need or a want and you know all that kind of stuff.

When we’re investing we’re looking to try to be rational and looking at numbers, we’re thinking about the value of the company as opposed to the price that the company that stock market is dictating to us. What we think the company worth and you know we you think about some of the companies out there right now.

I’m going to give you a couple of examples of Andrew, and I have talked about many times Amazon, Tesla, Snapchat, you know which by the way is getting hammered in the market right now because it’s not worth anything. And it’s overpriced, but people got super excited about it, and they bought into it because of an IPO, and it was shiny. And you know is that it was the new shiny thing and they got into it bought it. As you know, human behavior drove that it had nothing to do with the actual value of the company.

Marketers know this they play into our thoughts and our emotions and they figure out ways to, I hate to be so blunt manipulate us to do the things we want. And the same thing happens to the stock market.

A company comes out there, and the people that made money on that IPO for Snapchat, what bank that site of do you know that they would take this on to create an IPO for Snapchat and they marketed it, and they profited hugely from that company going from the public.

It’s just; it comes down to we have to be rational we have to keep our emotions in control we have to think about the decisions that we make and why we make the decisions, and we have to be aware of what we’re doing when we’re investing. Because you know it’s it’s a dangerous place, and if you make a big mistake you can lose big. And so you know being conservative you are now investing with a margin of safety the emphasis on safety that is such a huge you advantage for you when you walk into the market, and you want to buy something. And I think keeping your emotions and your behavior under control is so crucial.

Andrew: Yeah and this next level this is really deep, and I’m glad you covered. I think it’s a great way to end and it’s something we should all be processing even if you’re just hearing as you know as this kind of advice is coming by. But if you can internalize it I think it can take your investing to the next level.

Now I like if you haven’t read the book if there’s a way you can pick up Seth Klarman margin of safety offset I think it’s a fantastic resource. He does mention how much of Wall Street nowadays is filled with marketers much more so than it is filled with finance guys. Or guys who are trying to do well for their clients know they’re trying to attract funds, and we’ve talked about that before as well. So I think those are all things that you want to understand that not only is the market driven by humans and humans emotions and the weaknesses and faults and biases that all come along with that.

But it’s also very much influenced and fueled by money and the personal intentions, and you know there’s just a lot of conflicts of interest when you look on Wall Street, and you look at the way some of these companies and firms and people how they make their money. So it’s definitely can be difficult to navigate but educate yourself is so key when it comes to these type of things and if you can not only educate yourself on Wall Street on the market on how stocks work on how to analyze stocks on how to become a value investor.

But if you can take that next step and educate yourself about your self and what type of biases and emotions you’re going to be prone to falling under. I think it can do some great things and I think maybe that’s one of the things that separates a guy like Seth Klarman or Charlie Munger from the average Joe who never accumulates that kind of wealth.

Dave: I agree, that’s you know very well put well folks I think that’s going to go ahead and wrap it up for tonight.

I hope you enjoyed our discussion on Seth Klarman and some of the 13 tips that he’s created to help us find some bargains. I had a lot of fun talking about this, and I know Andrew did as well there was a lot of wisdom that could be found out there in reading. Whether it’s books or blogs or listening to Andrew and I talk there’s just a lot of wisdom out there and you know there are a lot of resources to help you become a better investor.

We want you to go out there and invest with a margin of safety the emphasis on the safety, and if you’re enjoying what we’re doing, we’d love to hear your thoughts. Give us some reviews on iTunes we’d love to hear.

Without any further ado, I’m going to go ahead and sign us off, you guys have a great week, and I’ll talk to you next week.

IFB29: Betrayal by Recency Bias and Other Psychological Factors

recency bias

Welcome to the Investing for Beginner’s podcast I’m Dave Ahern, and we have Andrew Sather. Tonight we’re going to talk about investing with your brain we’re going to talk a little bit about how your thoughts can affect the decisions that you make when you invest.

Charlie Munger is one of my big heroes, and he has written many great articles, speeches, a few books about biases and tonight we’re going to talk about some of the more common biases and Andrews going to go ahead and start us off by talking about the recency bias.

Andrew: yeah so obviously we’re all human beings, and something I love to preach constantly is how the stock market is very emotional.

We got fear, we got greed, and it’s because it’s made up of all these people and there are some common psychological aspects that we as human beings all share that as investors that can affect the way we behave.

Many of times we’re not aware that this is things that are influencing our decisions. So, if we can kind of cut that off at the beginning before it can negatively affect it can help our performance recency bias this is the idea that something that just happened is more likely to happen.

An obvious example of this is when you see trend followers, and you know they see a 1-month chart and it just has the price going straight up.

The recency bias would say that you know as an investor you expect that stock to continue that trend or you may have the stock that’s been flat for like two years because you see that this price is moving. And the price has nothing to do with the value of the business what’s going on in the business. We’re not digging into the financials

and looking at how are the assets changing are the earnings changing strictly looking at the charts.

I remember particularly when I first started out I would often let the last two years or last five years or even six months of stock price data kind of influence how I perceived the future of the stock to be likely to happen. And it’s completely just a ridiculous thought there’s like it’s like a coin flip where you know if you start to see heads consecutively.

We have this idea where there are things like momentum and things like you know superstitions that certain streaks can continue some in some areas like sports.

You know this can happen when you have human beings, and they’re you know their confidence and things like that effect how their performance is going to go on. But when you have companies and things that you know things that are very mathematical in the sense that if the company gets great earnings, it’s going to.

It’s you know if a company sells X number of products it’s going to have this amount of earnings, and as the stock prices fluctuate through the years, the chances of a stock going up or down can be close to 50%.

You look over a very long period of the time I’ve seen the numbers, and I have looked at the sp500. And took all the daily changes in price and put them out on the big spreadsheet and looked and the percentages are very close to 50/50 slightly tilts towards the market going up.

While it does fall further when it does fall well more of the days go up and down, but so you have really like a problem a probability kind of like a game of chance kind of like a coin flip on whether a stock can well go up or down the following day.

It’s it’s not something that they’ve done Studies on this – don’t quote me particularly on the exact study but they have a study that says basically whatever a stock did the day before does not correlate whatsoever with how the stock will perform in the next day the next week.

Things of that nature so that is a big aspect of recency bias and it’s something that can kind of cloud the way that we look at stocks the market in general and if we start to make decisions particularly on price.

We know we talk about that all the time where you want to focus on value and not so much on just the price aspect of stock. You want to look for companies that are growing and not just stock prices that are growing. So I guess another way to look at recency bias mean that’s a big one when it comes to recency bias and I think it’s something that we should all be aware of and try to avoid it when we’re trying to purchase stocks.

Dave: I like what you were saying about the recency bias you know something that I was reading recently speaking of recency bias recently haha that’s you know the hot hand theory that you hear about in basketball.

You know the statistical likelihood of a player making another shot after he has the hot hand you know he comes down, and he makes two or three shots in a row and all sudden he’s got, and you start feeding them the ball.

they’ve done statistical analysis, and again you can quote me on the exact study because I don’t remember the exact details about it, but the one I do remember about the study was that there is no statistical proof the shows that they quote unquote have a hot hand.

It comes down to just the statistical anomalies of the guy happened to make a couple of shots in a row. They would bet that he would make another shot because he made the previous two and it does not correlate to the previous two shots, so that was a great way of illustrating to me what a recent bias was.

and a big reason why we’re talking about the biases tonight was that you know we as humans, you know our thoughts and makes such a huge impact on our on our actions, and we’re investing.

Warren Buffett has said many times that you know he his ability to turn off his emotions when reinvesting is what he feels like has made him a successful investor. That he you know doesn’t fall he’s aware of these biases. Charlie Munger is aware of them, a lot of the great investors are aware of these ideas, and if you’re aware of them, then it can help you control them.

Can you eliminate them? I don’t think so because we’re all humans, and we all have emotions, but if you have the idea of what some of these things are going on. It enters your head about it you can think about something like a recency bias or some of the other ones that we’re going to talk about tonight. That can help you manage those thoughts when you’re trying to decide whether you want to buy this or buy that or sell or whatever it is you want to do you. Now you can try to make a more rational decision based on the numbers and the facts as opposed to your emotions because when you buy an emotion that’s a lot of times when you’re going to make a big mistake.

Andrew: let me beat the dead horse a little bit- another example of recency bias, and I confess to falling for this. And this was very recently so something you can do kind of look at the way the market has been cycling and then because that’s what happened in the past you extrapolate into the future.

If you think about the last stock market crash we had that was 2008-2009 the bull market that ran you know the previous crash before that was 2000 2001. So we had about seven to eight years depending on where you want to start and stop at the bull market, and I know a lot of people as well as myself figured because-because we’re influenced by her bias we tended to think well what happened and just recently could probably happen now.

So I kind of thought that the end of the bull market would be about six to seven years after 2008-2009. So even though I didn’t know so, the good thing have I had a system in place I had my dollar cost averaging I had the $150 a month in the personal portfolio that I always talked about. I had that in place, so it didn’t matter what my brain was trying to trick me into thinking I was still going to dollar cost average and it wasn’t-going to affect me, but I still had this real big cautiousness, and I think you still see this in the market today.

There was an article I read that talks about how Millennials we are we are sounder invested as Millennials. That the percentage of millennial investors is a lower percentage than even pre depression days. I mean I guess like you compare age groups and those type of things, so we have a lot of millennials that aren’t even participating in the market because you burned them know either maybe they weren’t personally burned, but they saw like just a lot of carnage in the stock market.

You also have a lot of you know obviously we’ve had a bull market we’re recording this August 2017, and it’s still pretty strong. I mean the last couple days have been rough, but for the most part, we’ve pretty much smooth sailing. And yet even though we’ve been going on for six-seven years didn’t see that crash that the2008/2009 saw the same kind of period, I don’t want to say like the exact the same price to earnings valuations

We didn’t see that crash that the 2008/2009 saw the same kind of period. I don’t want to say for the same price to earnings valuations but higher than average price to earnings valuations across the entire market, but you know this bull markets different.

What that article was saying is that you know you don’t have the irrational exuberance that you saw, for example during the dot-com bubble. Where people were just jumping in, and you know just throwing money and forgetting about any rational conservative basic logical kind of reasoning when it came to putting money into the stock market.

So I guess in a sense that helps investors because we were burned so bad in2008 and 2009. A lot of investors are

more conservative when it comes to you know not getting too crazy about the market not just blindly jumping in, but at the same time if you’ve been listening to us for any time at all you do know that we see pockets of the market where there are big time bubbles, and valuations are getting really high.

all that to say be cautious of recency bias there are a lot of different ways it can affect you and don’t think that because something happened in the past especially recently don’t

let that effect how you think the future will be because you can’t you really can’t predict the future at all.

And to think that what happened just recently will happen again and that’s just setting you up for failure.

Dave: you’re right on that all right, so the next one we ‘re going to talk about is hindsight bias and this one’s pretty self-explanatory. You know they say that hindsight is20/20 that you could look back at the past and you can predict what would have happened in the past.

Well duh I mean everybody can see that, and you know with

Investing you can fall into this trap as well. You know there are a lot of people out there that you know will look at things that happened in the past and then they can use the data and they’ll go back and predict that they would have been able to buy Google when it first went public, or Amazon when I first went public.

Well you know of course they can say that because hindsight is 20/20, they would have been able to see that. Well, how would you how could you possibly even know that and think about you know the crash that just recently happened you know not a lot of people were able to predict that, and it came out of nowhere.

You know not to the people that were aware of what was going on but you know it was it was a pretty devastating blow to people’s 401ks their pension plans and everything. But if everybody had known it was going to happen then they obviously would have been able to you know to get out or protect themselves better than would have. Then what would have happened to them, so you know this one to me is a pretty self-explanatory bias. And it’s you know you have to protect, i.e., I guess the best thing that I would think of with the hindsight bias is you just need to be aware that when you look back at the history of things that have happened.

You know you have to learn from those mistakes, and you have to see what happened and try to project that forward so that you can see you know the types of things that could happen. And you know a great way to do that is you know Andrews book that we’ve talked about from time to time.

The value trap indicator you know he’s looked back at all the bankruptcies that have happened over the last period, and you know by using you know statistics he’sable to not predict every single one but pretty darn close.

And you know using that information he can project forward when he’s looking at a company that is going to invest in by using what’s

happened in the past. He can use that to help him avoid you know something that could happen to him in the future, and I think to me that’s where having an awareness of a hindsight bias can help you in the long run.

Andrew: Are you reading my mind because I was about to bring up hahaha maybe I think we’ve been doing this too long together so real quick like hindsight bias. It’s really easy to think that that you could be the one to sell right before a crash and buy right before a bottom.

Everybody has this sense that like all you know I would have been able to do it. But what I did in the book to illustrate this example was I took five random stock charts and my kind of basically I just put those on the page, and I said okay here’s what the stock price looked like for the past two-three months. Here here’s another one here’s another one here’s another would you buy here would you sell here would you sell here would you sell here.

And so I took you know to grab the type of charts you tend to see when it makes you feel bullish like you know if you see that nice chart where it goes from bottom left to upper right, and it’s just kind of like a straight line up. People like to see that and usually that they you know if they make it like the bullish case because I’ll look how strong it’s been lately.

And you know that goes into the recency bias, and then some people think that oh well it’s obvious that right at the top I should have sold here because it was going to be a crash afterward and then some other people say no well you should have you should have rolled it up indefinitely right.

So I took all those different charts, and it turned out you know I I explained that after the fact that look what the chart did beforehand had absolutely no relevance on what actually happened and to think that just from is looking at the chart that you can figure out when to get in it or out of the stock. It’s completely foolish, and it’s just it’s just completely random, and it’s not something that

you can you know your mind can think that you have this ability to be able to kind of time the market in away. And you know you might think in the future like oh you know I might have made a mistake that time, but I’ll get it right this time no that’s just hindsight bias really clouding your judgment.

And so I think that’s a real big reason why you need to have like I said for the first bias you want to have a system in place where your dollar cost averaging to combat this hindsight bias. I think you need to have a strategy where you have a specific sell strategy, and we’ve talked about this before episode 3 we talked about having a stop loss.

And we talked about how you know you can have parts of your portfolio with a stop loss and parts of your portfolio that hold stocks forever. And I went into that in detail in episode 3.

But you regardless of what you choose to personally do you need to have a specific sell situation that you know in your head that you’re not going to let your biases affect your emotions. Your brain and your perception and you know all these kinds of things that the mind can do make sure you have a system in place to counter that way you’re not compromising your performance. Because you’re tricking yourself into thinking that you can be the exception to the rule and be able to time the market

 

Dave: that is a great point and you know I think that you know timing in the market we’ve-talked about that before it’s a

fool’s game and it’s not practiced you want to get into.

recency bias

The next one we’re going to talk about is the confirmation bias, and I don’t know about you, but I have fallen into this one before. This is a bias that we do we seek out information that we believe true, and we use this as kind of evidence or facts to confirm our opinion and I’ll give you an example of something that’s happened to me with this many times I find a stock that I quote-unquote fall in love with and for whatever reason I read something about it that makes me intrigued by it and I think all this would be a great company to get into because I’m excited about the product that they sell or the management or something that just really gets me juiced about the company and then what I’ll do is you know as I start to analyze it.

I’ll start to discover things that are confirming what already think about the company and you know when I first started getting into investing I fell into this a couple of times, and I bought some stocks that I shouldn’t have bought.

And in hindsight you know again 20 20 you know I looked at you know what I did in my decisions and they were they were based on I was I was confirming what I always already thought I wanted to like the company and wanted to buy it.

And so I was looking for information I was going to confirm what I was already looking for and this could be a very very dangerous game to play.

You know Charlie Munger has written several times in several articles that he’s written that he talks a lot about destroying an idea. He doesn’t feel like he’s successful unless he destroys any of his ideas. And what he means by that is he’s going back, and he’s looking at so if he if he looks at stock a that he wants to buy he tries to figure out a way to tear it down.

And he figures that if he could tear it down, he’s tearing apart this confirmation bias because now he is looking at the company for what it is as opposed to having a preconceived idea.

About buying you know coca-cola not maybe not Coca Cola’s the best idea but you know it you get whereI’m coming from it’s it’s you know he’s helping destroy an idea and if he feels like he’s destroying that idea. It still comes out as a good idea that it’s a great investment. But you know if he’s able to you know not destroy it then it’s not a good idea because you know it’she’s just reinforcing what he’s what he wanted to do previously.

And to me, I think this is such a dangerous bias to fall into and it’s so easy to do it, and it’s it’s so easy to do with just about anything. You know if you think the weather is going to be bad, and you go in weather channel, and you see that the weather is going to be bad you’re just confirming what you think the weather’s going to be bad.

But then you go out, and it’s fantastic day so you know it’s just you know it’s it could be such a dangerous bias, and it’s something that we have to be aware of when we’reinvesting it’s almost like you put blinders on right

Andrew: yeah exactly you look at information, and you just see you see what you want to see exactly. It’s like this rose-colored kind of filter in there you know I think the big way to counteract this is to have a similar approach for every stock you’re looking at. So whereas you know with a confirmation bias you can kind of cherry-pick, and you know whoa okay well you know I like this ratio this month, and I like this ratio next month. Yeah, I think it is okay to have some variation, but at the end of the day, you want to have an approach that every consistent and if you’re analyzing stocks in a very similar way in January February March April May June I think that’s the best way to kind of combat this confirmation bias.

Because you ‘re still staying consistent and so when you have enough numbers, and obviously I love to be numbers based, you have enough of these numbers that are giving you the buy signals. Then you’re not going to have you know your chances of looking at the data and coming up with a different conclusion and having that conclusion be wrong.

Those chances are diminished when you’re consistent, and you stay with an approach that’s numerical and is based on fundamentals and principles that have been proven and that you’ll continue to use over time.

Dave: Exactly that’s that’s very very good point is being consistent in your you know analysis and your you know picking of the stocks and laying out how you want to have a process and you’re having a checklist and having you know you know a numerical system like Andrew has is just it’s a fantastic way to help avoid this bias I totally agree the next one we’re going to talk about is survivorship bias I ‘m going to have Andrew take a stab at that one first

Andrew: Yeah I did write an email about this one recently so this is more of an advanced thing when you start to become an investor who likes to look back at the past and try to take lessons from that and in the past so keep in mind with all these biases you know we talked about how looking in the past can really hurt you. It can’t you know so be aware of where it can hurt you.

But it can also be very beneficial obviously that’s how we get all of our lessons today and how we can build on the shoulders of giants by learning from what’s happened in the past. So what can happen and what a lot of investors do when they want to try to figure out you know where can I get an investing edge or how did a certain ratio perform or equation

They will use of back tests, and so well the back test does if anybody usually saw this not aware you take a group of stocks. You usually use some metrics kind of like a screener where you’re putting this criterion if stock fell in that criteria let’s say 10years ago now you track all the stocks that were in that particular criteria and you look ten years later to see how they performed.

the problem with doing aback test like that depends on where you get your data a lot of the companies that you know this might change in the future by the way, but as far as today 2017 a lot of these companies I provide this data do not keep the data of stocks that have already gone bankrupt.

And you know there think there is a service I wrote in my email, but it’s it’s extremely expensive, and it’s not practical for the average investor. So like if you are trying to do a back test with only stocks of survived, you’re not getting the whole picture you do not see the stock set you might have gone bankrupt or gone private and lost shareholders a lot of money.

so it might tilt these back tests up and make the results look better than they were.

Because basically though the way the description is it’s called survivorship bias, and you want to keep that in mind anytime, you see especially you know if you’re looking at media. Where it’s kind of like I don’t know like a mainstream media where the person you’re listening to might not be credible you know or might not be that experienced where they don understand back tests and the effect of survivorship bias on back tests.

Keep that you know any studies or data are the colds that are based on back tests. Make sure you look and see if they have accounted for survivorship bias because if they haven’t the data is likely. Useless it’s going to be incorrect data because it’s not accounting for the companies that didn’t-survive. And that has such a big impact on a decision you make because like you are saying excuse the numbers you know if there’s not you know something in there that could be so obviously negative and have an impact on you know the return of that particular sector or that particular company or even that particular you know the market.

You know that has a big impact on it especially if there’s a period where there were a lot of companies going bankrupt at that time I can have such a big impact. I know you wrote about that in your book and it seems like you know if I remember correctly there were a lot of those companies that went bankrupt were all kind of in a condensed period and if you look at a backtest during that period and those companies are not involved in that then that could really skew that period and make you make a and a judgement based on faulty information I guess is the best way of putting it

all right folks will that is going to wrap it up for us for tonight. I hope you enjoyed our discussion on biases and how they can affect our investing decisions.

You know the way we think there are some aspects of it that we actually can control and having an awareness of what some of these things are happening while they’re happening can help us control some of those thoughts. And help us make better decisions and that’s what we’re here to do is to talk to you about trying to make better decisions. And that was the what our discussion tonight was all about was trying to make better decisions and being aware of how our thoughts can affect us.

And if you want to learn more about I’m going to enter wrote a great article about some of these biases I’m going to link to that article also there is a great book that I would HIGHLY highly recommend it’s called Poor Charlie’s Almanac, and it was a compilation of Charlie Munger’s greatest thoughts she’s given some great speeches through the years. He also has some great articles, and they also have you know all kinds of great Munger isms, and it’s just a wealth of knowledge, and there are just so many great things and he’s very much expert in this field of you know the mental aspect of investing so I ‘d highly recommend you take it to check that out so without any further ado why don’t you guys go out there and find some good intrinsic value and best with a margin of safety emphasis on safety and have a great week, and we’ll see you guys next week

IFB28: To Pay or Not to Pay, for Investment Services?

 

investment services

Welcome to episode 28 of the Investing for Beginners podcast. In today’s show, we will discuss Andrew’s eLetter and whether or not you should pay for investment advice.

To pay or not to pay for investment services, is the title of our show tonight. Andrew recently had an email subscriber write him a note asking him questions about his service and how it would be of benefit to him.

The format tonight will be Andrew answering the questions on air, and we will have a short discussion about them.

  • We are all consumers of online products
  • When we find value, the price becomes less of an issue
  • Sometimes it is great to have a mentor to help guide
  • Value investing has been proven it’s the way to go
  • Paying for financial services, when you receive value for it can be beneficial.

So, I am going to read the letter, and then Andrew will offer his responses.

Dave: The letter starts “At $29 a month, that’s just under $14,000 per subscriber for you, you and Dave discussed how much needs to happen to overcome a transaction fee with a stock purchase and focus a lot on percentages.

But you seem to have a reverse opinion on the subscription. If someone follows you for 40 years, at $150 a month with a goal of one million dollars, they will be $14,000 short after the subscription. That would equate to 2812 transactions.

What’s the plan to overcome that? I love your guy’s show but find my mind contemplating things like this. And I in no way intend to think that you shouldn’t charge for your services. After all, you’re a professional, but wouldn’t it be more prudent to charge a percentage of growth or somehow correlate it to the actual value earned?

It’s the biggest problem I have with anyone in this industry. They all want to help, but they want money up front and require blind faith.

Brian.

All right Andrew, what are your thoughts on that?

Andrew: Yeah, I love the question, if one person is taking the time to write this out. You know at least ten people or more probably have this question in their mind. I think it is a great thing to ponder.

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IFB27: 6 Unconventional Investing Principles for Beginners

 

investing principles

Welcome to episode 27 of the Investing for Beginners podcast. In today’s show, we will be discussing six unconventional investing principles. These are ideas that Andrew has come up with that help you with some of the more difficult emotions related to investing.

These ideas are sometimes hard to implement, but when you are aware of them, it does make it easier to make a conscious effort to be more diligent about correcting our thinking.

  • Let go of the results
  • Don’t sign up for deals stacked against you
  • Always build your power
  • Don’t rely on one stock
  • Don’t take pessimism too seriously
  • Lose the ego

Andrew: Again I am going to talk about some principles today, and there is some good mindset stuff in here, and it’s not anything I’ve seen talked about in books or online. It’s just some stuff that came to me, trying to look from a mastery perspective and how some things and some experiences I’ve seen.

How can we kind of draw that in together and organize into useful tips?

For number one:

Let go of the results.

I think this is a mindset trap, where you see a lot of beginners particularly get into this. Everybody is, so results-focused and wanted to buy a stock and have it double it in a year. They want to get in on the next AMD, Amazon; they want just to have money and make that money grow very quickly and be able to realize those profits very quickly.

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