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Archive for the 'Columbia Business School Publishing' Category

Friday, February 19th, 2016

Moments in Investing History You’ve Never Heard Of

Investment: A History

This week, our featured book is Investment: A History, by Norton Reamer and Jesse Downing. Today, on the final day of the feature, we are happy to present a short series of Youtube videos produced by the Investment: A History team that take a closer look at turning points in the history of investing that may not be as well-known as they should be. You can see all these videos and more on the Investment: A History Youtube channel!

Don’t forget to enter our book giveaway for a chance to win a free copy of Investment: A History! You can also learn more about the book and its authors on the Investment: A History webpage!

When Social Security Almost Wasn’t

(more…)

Thursday, February 18th, 2016

Savvy Investors Look Back at the History of Investment for Lessons for 2016

Investment: A History

“The key is that successful investors throughout history have stuck to a few basic principles. As complex as investing can be, it is, at the same time, possible to avoid some obvious mistakes.” — Norton Reamer

This week, our featured book is Investment: A History, by Norton Reamer and Jesse Downing. As they explain in today’s post, Reamer and Downing wrote Investment: A History in part to provide investors with a historical perspective that could help them find smarter ways to invest.

Don’t forget to enter our book giveaway for a chance to win a free copy of Investment: A History! You can also learn more about the book and its authors on the Investment: A History webpage and Youtube channel!

New Year’s Resolution for Savvy Investors: Look Back at The History of Investment for Lessons for 2016

Thinking about how to improve your portfolio in 2016? Don’t forget the last three thousand.

A healthy understanding of investment history is a true bonus for investors – lay and professional alike – to avoid pitfalls and to be the best advocates for their own financial interests. Whether it’s running a personal retirement account or a university endowment, ancient history has lessons for portfolios today.

That’s according to Norton Reamer and Jesse Downing, co-authors of Investment: A History. Reamer is also the founder of United Asset Management and former CEO of Putnam Investments, and Downing is an investment professional in Boston. The book traces the history of investment, from the ancient world to the present day, and draws lessons for today’s investors at all levels.

Reamer and Downing note that for thousands of years, the only people who qualified as “investors” were wealthy and politically connected landowners. Yet in the blink of an eye, historically speaking, that world has been replaced by one full of investment opportunities for average people – stocks and bonds, mutual funds, life insurance, pensions and real estate.

“The key is that successful investors throughout history have stuck to a few basic principles,” says Reamer. “As complex as investing can be, it is, at the same time, possible to avoid some obvious mistakes.”

Reamer and Downing have identified four guideposts that can help investors in 2016:

1. Focus on what’s “real” – Don’t get distracted by the form of an investment (e.g., a stock certificate or a bond note). Make sure you understand the real asset behind the piece of paper, such as the company behind the stock you are buying, or the public works project issuing the bond. When buying a mutual fund or other packaged investment the same rule applies: make sure you understand the fund manager’s criteria for buying and selling securities in the portfolio. Focusing on what’s “real” should always be the priority.

2. Focus on fundamental “value” – In its simplest form, the value of an investment today is determined by the present value of its future cash generation – that is, the future cash that the investment will produce over its lifetime. Don’t be distracted by market gyrations. Take a long-term perspective and understand that markets go up and down, often for reasons other than fundamental value. Investors often forget this basic rule and allow emotion to guide their decisions – and make mistakes as a result.

3. Consider the intelligent use of leverage – Excessive leverage is dangerous, but most of the great fortunes in history were built using moderate and smart amounts of leverage. For example, a home mortgage is a sensible form of leverage for most families. On the other hand, taking out a second mortgage to fund a speculative investment is probably foolhardy.

4. Allocate your capital – Every investment is an “allocation” of capital. That is, it’s a choice between competing priorities and opportunities. Make informed, deliberate choices and tradeoffs as you decide where to put your money – especially when the choice is between saving, spending, and investing. Think through your needs. Do your best to be accountable to yourself. Set some objectives and stick to them.

“Investment is one of humanity’s most fundamental activities, and in the modern world it’s open to more people than ever before,” adds Downing. “We encourage everyone to learn some basic investment principles and take full advantage of this unprecedented opportunity.”

Thursday, February 18th, 2016

Five Archetypal Investing Mistakes That Have Bedeviled Investors Through the Ages

Investment: A History

“Decade after decade, we see markets collapse and fortunes vanish for the same basic reasons. Most of the time the root cause is not some complex technical error. It’s just some new flavor of poor judgment.” — Norton Reamer

This week, our featured book is Investment: A History, by Norton Reamer and Jesse Downing. In today’s post, Reamer and Downing break down the five investing mistakes that they see repeated again and again throughout the history of investing.

Don’t forget to enter our book giveaway for a chance to win a free copy of Investment: A History! You can also learn more about the book and its authors on the Investment: A History webpage and Youtube channel!

Five Archetypal Investing Mistakes Have Bedeviled Investors Through the Ages

For thousands of years, investors have been making the same mistakes over and over. So true financial literacy should include not just understanding the history of investment successes, but also investing failures. Unfortunately, the recent history of the financial crisis and Great Recession indicate that many investors—even professionals—have not learned those lessons.

“Decade after decade, we see markets collapse and fortunes vanish for the same basic reasons,” says Norton Reamer, co-author of the new book, Investment: A History (Columbia Business School Publishing, February 2016). “Most of the time the root cause is not some complex technical error. It’s just some new flavor of poor judgment.” Reamer is the founder of United Asset Management and Asset Management Finance, and he is the former CEO of Putnam Investments. His co-author, Jesse Downing, is an investment professional in Boston.

Mistake #1: Not diversifying enough

“In plain language, diversification means not putting all your eggs in one basket,” says Reamer. “One of the biggest advancements of the last few hundred years has been the ability to truly diversify one’s investments. Diversification is what makes modern investment portfolios tick.”

As a historical reference point, Reamer points to 14th-century Italy, before there was such a concept as “too big to fail.” Two major Florentine banking houses, the Bardi and the Peruzzi, poured a great deal of their capital into the wartime exploits of England’s King Edward III. When Edward defaulted, both banks failed.

According to Reamer, the goal of diversification is to ensure that even if one asset in the portfolio is underperforming, other assets are still potentially delivering gains. Both the Bible and Shakespeare reference diversification, and despite how ancient the wisdom may be, it can be hard to follow. Many homeowners have a significant portion of their wealth tied up in a single asset, such as a home, company-granted stock, or even a single asset class. To weather the inevitable vagaries of the market, one must diversify. (more…)

Wednesday, February 17th, 2016

The Investment Challenge

Investment: A History

“This book is not about how to manage investments; rather, as a history of investment and the activities related to it over the centuries, it adds vital perspective to issues in investment management. It traces the development of investment from the earliest civilizations where agricultural land, lending, and trade activities were the economic foundation; to the creation of basic financial, collective, and charitable investment forms; and through the innovation of a vast array of specialized vehicles and funds extending into the twenty-first century.” — Norton Reamer and Jesse Downing

This week, our featured book is Investment: A History, by Norton Reamer and Jesse Downing. Today, we are happy to present an excerpt from “The Investment Challenge,” Reamer and Downing’s Introduction to Investment: A History.

Don’t forget to enter our book giveaway for a chance to win a free copy of Investment: A History! You can also learn more about the book and its authors on the Investment: A History webpage and Youtube channel!

Tuesday, February 16th, 2016

A conversation with Norton Reamer and Jesse Downing, authors of “Investment: A History”

Investment: A History

“[T]he basic principles of investing are timeless, even as the economic and social stakes grow higher. The challenge will be to harness all that increasing sophistication to further push the democratization of investment, and in that regard we are optimists.” — Norton Reamer and Jesse Downing

This week, our featured book is Investment: A History, by Norton Reamer and Jesse Downing. In the first post of the week’s feature, we are happy to present an interview with Reamer and Downing in which they discuss their goals for the book, important changes in the history of investing, and what the future holds for investors.

Don’t forget to enter our book giveaway for a chance to win a free copy of Investment: A History! You can also learn more about the book and its authors on the Investment: A History webpage and Youtube channel!

What will readers find in Investment: A History?

The book explains key elements in the long history of investment. Each chapter includes important stories and lessons that are intended to illustrate crucial dimensions of the investment world, as they have developed over the centuries. Our goal is to increase understanding of the investment practices and opportunities of today by understanding the history of investing.

In broad scope, what are the most important findings in the book?

Most people will be surprised to find out how remarkably uncomplicated it is to be a sensible investor, and in that regard we identified four basic investing principles. First, look at every investment as “real.” That is, when you invest, you own the underlying asset—e.g., with stocks you are buying a piece of a corporation. Don’t be distracted by the paper form of the investment. Understand the basics of whatever entity you are buying.

Second, it’s all about fundamental value, where “value” is determined by the value today of future cash flows that the investment may produce over its lifetime. Third, intelligent use of financial leverage is a legitimate tool for investors; in fact, it has helped build most of the great fortunes of history. Of course, excessive leverage can be extremely dangerous because all leverage will multiply returns—either positively or negatively. Finally, the most basic management skill is resource allocation: i.e., the effective allocation of capital and human resources.

Investing did not always exist in its current form. What were the precursors to the current investment landscape?

With ancient and pre-modern investment, we emphasize three areas: the basic investment vehicles of early history; the extreme inequality in the distribution of investment opportunity and benefit; and the surprising sophistication of some early investment vehicles, strategies, and purposes.

We believe that, to grasp the reality and significance of investment as a fundamental human activity, it’s necessary to begin in ancient times and understand the roles of agricultural land, lending and trade in the ancient world. At the same time, it is important to acknowledge that by today’s standards, it took an astonishing amount of wealth and power to even qualify to be an ‘investor.’ Finally, we felt it was essential to understand that in some respects—despite a lack of investment diversity and the absence of equality—investment even in those early days had features that were remarkably sophisticated and prescient. (more…)

Monday, February 15th, 2016

Book Giveaway! Investment: A History, by Norton Reamer and Jesse Downing

Investment: A History

“Norton Reamer and Jesse Downing have delivered a truly impressive history of investments and the investment-management business, starting from its earliest origins in the ancient world to its most recent and innovative forms, for example, the hedge funds, private-equity pools, and other forms of alternative investments in the twenty-first century. It is not only a complete history but a well-organized and analytical one, built with continual reference to the important principles of business and investing.” — Jay Light, dean emeritus, Harvard Business School

This week, our featured book is Investment: A History, by Norton Reamer and Jesse Downing. Throughout the week, we will be featuring content about the book and its authors on our blog as well as on our Twitter feed and our Facebook page. You can also learn more about the book and its authors on the Investment: A History webpage and Youtube channel!

We are also offering a FREE copy of Investment: A History. To enter our book giveaway, simply fill out the form below with your name and preferred mailing address. We will randomly select our winners on Friday, February 19th at 1:00 pm. Good luck, and spread the word!

Thursday, February 4th, 2016

Recipes for Cooked Books

Short Selling

“Investors can detect accounting issues by paying attention to unusual assumptions and changes in assumptions used in reporting financial statements…. Changes and anomalies in the assumptions can often point to early warning signs.” — Amit Kumar

This week, our featured book is Short Selling: Finding Uncommon Short Ideas, by Amit Kumar. In today’s post, Kumar lists and describes some of the ways one can tell a company is “cooking their books.”

Don’t forget to enter our book giveaway for a chance to win a free copy of Short Selling!

Wednesday, February 3rd, 2016

Due Diligence in Short Selling

Short Selling

“Although buying low and selling high usually works for long ideas, selling short based only on high valuation usually does not work as well. Investment theses for short ideas work well when a company faces clear issues with its business model, whereas high valuation only serves as icing on the cake.” — Amit Kumar

This week, our featured book is Short Selling: Finding Uncommon Short Ideas, by Amit Kumar. In today’s post, Kumar explains some basics of short selling, and examines the practice of selling short based only on high valuation.

Don’t forget to enter our book giveaway for a chance to win a free copy of Short Selling!

Tuesday, February 2nd, 2016

On Reading Short Selling

Short Selling

“Short selling is not for the faint of heart. While fortunes have been made shorting, many have also been lost. Shorting stocks is for the financially experienced and sophisticated investors with a strong stomach for losses.” — Amit Kumar

This week, our featured book is Short Selling: Finding Uncommon Short Ideas, by Amit Kumar. For our first post of the week, we have excerpted Kumar’s Preface, in which he offers a word of caution and explains how he hopes his book will be used.

Don’t forget to enter our book giveaway for a chance to win a free copy of Short Selling!

Monday, February 1st, 2016

Book Giveaway! Short Selling: Finding Uncommon Short Ideas

Short Selling

Short Selling keeps the reader’s attention through real examples, cases, and interviews with investment professionals. This book is sound and accurate, ideal not only for academics and professionals but also for anyone who has an interest in the various strategies, risk, actual case studies, and mechanics of selling short. I know of no other text like it.” — Glen A. Larsen Jr., professor of finance, Kelley School of Business

This week, our featured book is Short Selling: Finding Uncommon Short Ideas, by Amit Kumar. Throughout the week, we will be featuring content about the book and its author on our blog as well as on our Twitter feed and our Facebook page.

We are also offering a FREE copy of Short Selling. To enter our book giveaway, simply fill out the form below with your name and preferred mailing address. We will randomly select our winners on Friday, February 5th at 1:00 pm. Good luck, and spread the word!

Friday, October 9th, 2015

Wall Streeters: Michael Milken, Junk Bond King, Part 2

Wall Streeters

“Giuliani readily took up Proxmire’s open-ended charge. He had made a name for himself in his first few years on the job with high-profile prosecutions of organized crime figures and hoped to enjoy even greater public recognition by going after many of the rich and powerful on Wall Street. With Milken now the most prominent name in corporate takeovers, he was Giuliani’s ultimate target. If anyone was to be identified as the central figure in the “complex network of information” that was purportedly costing American jobs and perverting high finance, it was Milken.” — Edward Morris

This week, our featured book is Wall Streeters: The Creators and Corruptors of American Finance, by Edward Morris. Today, we have a second excerpt from Morris’s look at Michael Milken, the “junk bond king,” in which Morris tells the story of Milken’s downfall.

Don’t forget to enter our book giveaway for a chance to win a free copy of Wall Streeters!

Thursday, October 8th, 2015

Wall Streeters: Michael Milken, Junk Bond King, Part 1

Wall Streeters

“While the investment logic for junk bonds may have been compelling, their lack of liquidity in the marketplace often remained a final stumbling block for the potential buyer. With few buyers and sellers in the high-yield bond market, investors faced an unwelcome prospect of holding a bond to its maturity date as the only sure way to be paid. Milken solved that liquidity issue by assuring those investors that Drexel would always be ready to buy or sell the bonds it was promoting.” — Edward Morris

This week, our featured book is Wall Streeters: The Creators and Corruptors of American Finance, by Edward Morris. Today, we have an excerpt from Morris’s explanation of Michael Milken’s rise to prominence on Wall Street.

Don’t forget to enter our book giveaway for a chance to win a free copy of Wall Streeters!

Wednesday, October 7th, 2015

Wall Streeters: J. Pierpont Morgan

Wall Streeters

“Pierpont had a quick and practiced financial mind, but he was also a large man with a commanding, sometimes terrifying presence. He spoke infrequently, but often explosively, and always with the certainty of someone whose word was challenged at peril. A persistent but unverified story circulated about Pierpont’s throwing “Jubilee Jim” Fisk (among the most notorious of the nineteenth-century robber barons) down a flight of stairs when a railroad negotiation turned into a business brawl.” — Edward Morris

This week, our featured book is Wall Streeters: The Creators and Corruptors of American Finance, by Edward Morris. Today, we have an excerpt from Morris’s section discussing J. Pierpont Morgan, a pivotal figure in the history of American finance.

Don’t forget to enter our book giveaway for a chance to win a free copy of Wall Streeters!

Tuesday, October 6th, 2015

Has ‘Financialization’ Been Good for Us?

Wall Streeters

‘Most perplexing of all has been the continued existence of banks that are “too big to fail.” After the hundreds of billions of dollars used to bail out the eight mega-banks following the 2008 debacle, most of the same banks have only grown larger, and the banking industry more concentrated—and more politically influential. In the banks’ defense, their continued growth has made it possible for them to repay the rescue money that was provided to forestall their financial collapse; yet the repayments are hardly sufficient recompense for the widespread and long-lasting economic hardship suffered in the aftermath of the crisis.’ — Edward Morris

This week, our featured book is Wall Streeters: The Creators and Corruptors of American Finance, by Edward Morris. Today, we have an excerpt from Morris’s conclusion, in which he explains his goal in writing his book, and asks readers to consider the finance sector’s increasingly powerful role in the economy, particularly in light of the 2008 financial crisis.

Don’t forget to enter our book giveaway for a chance to win a free copy of Wall Streeters!

Monday, October 5th, 2015

Book Giveaway! Wall Streeters: The Creators and Corruptors of American Finance

Wall Streeters

“Enjoyable to read, easy to understand, Wall Streeters is a compendium of the last 150 years of ups and downs in American finance. Ed Morris uses the informative lens of biography to bring this history alive, and they are all here, from the saints to the sinners. Along the way readers will learn the problems and value of finance and Wall Street to our nation.” — David Cowen, president, Museum of American Finance

This week, our featured book is Wall Streeters: The Creators and Corruptors of American Finance, by Edward Morris. Throughout the week, we will be featuring content about the book and its authors on our blog as well as on our Twitter feed and our Facebook page.

We are also offering a FREE copy of Wall Streeters. To enter our book giveaway, simply fill out the form below with your name and preferred mailing address. We will randomly select our winners on Friday, October 9th at 1:00 pm. Good luck, and spread the word!

Friday, September 18th, 2015

A Dozen Things I’ve Learned from Charlie Munger About Risk, Part 2

Charlie Munger

“When any person offers you a chance to earn lots of money without risk, don’t listen to the rest of their sentence. Follow this and you’ll save yourself a lot of misery.” — Charlie Munger

This week our featured book is Charlie Munger: The Complete Investor, by Tren Griffin. For our final two posts (read the first here), we are happy to present a post from Tren Griffin explaining Charlie Munger’s take on the importance of understanding and being aware of risk in investing. The post was originally featured on Griffin’s blog, 25iq.

Don’t forget to enter our book giveaway for a chance to win a free copy of Charlie Munger: The Complete Investor!

A Dozen Things I’ve Learned from Charlie Munger About Risk, Part 2
By Tren Griffin

7.
“[With] a lot of judgment, a lot of discipline and an absence of hyperactivity… I think most intelligent people can take a lot of risk out of life.”
The three best ways to reduce risk are diversification, hedging and buying with a margin of safety argues Seth Klarman. Making life less risky is also assisted greatly if you make fewer decisions in domains where you do not know what you are doing after doing a significant amount of thinking about the domain involved and the decision. Doing this requires discipline since we all make psychological and emotional mistakes. One technique for avoiding risk is to place decisions that fall in the domain of “I don’t know” into a “too hard” pile if you can. Sometimes a decision is unavoidable and judgment will be required. Munger puts the investor’s objective simply: “What you have to learn is to fold early when the odds are against you, or if you have a big edge, back it heavily because you don’t get a big edge often.”

8.
“Each person has to play the game given his own marginal utility considerations and in a way that takes into account his own psychology. If losses are going to make you miserable – and some losses are inevitable – you might be wise to utilize a very conservative patterns of investment and saving all your life. So you have to adapt your strategy to your own nature and your own talents. I don’t think there’s a one-size-fits-all investment strategy that I can give you.” “If we’d used the leverage that some others did, Berkshire would have been much bigger… But we would have been sweating at night. It’s crazy to sweat at night.”
There is no recipe or formula for investing or dealing with risk. Everyone has a unique tolerance for risk since we are all more or less comfortable with various factors that create it. Some people find it useful to have heuristics (rules of thumb) to guide them in assessing whether a comfortable level of risk tolerance exists. Whether you can sleep soundly at night is a one heuristic. If your investments are preventing you from getting a good night’s sleep it may be wise to adjust your portfolio so that it is consistent with a comfortable sleep. Seth Klarman agrees with Charlie Munger on this point: “Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred. Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.”

9.
“This is an amazingly sound place. We are more disaster-resistant than most other places. We haven’t pushed it as hard as other people would have pushed it. I don’t want to go back to Go. I’ve been to Go. A lot of our shareholders have a majority of their net worth in Berkshire, and they don’t want to go back to Go either.” “I wanted to get rich so I could be independent, and so I could do other things like give talks on the intersection of psychology and economics.”
The factors which determine the level of risk that is appropriate for any given person include life goals, age and wealth. For example, Charlie Munger left the practice of law to become an investor since he had a fierce desire to acquire wealth so he could be independent. He did not want to have other people dictate what he did in life. The value of that freedom once acquired can be so high that a person can become unwilling to put at risk the amount of money require to ensure that this independence continues. Playing the game of life with house money (money that you don’t really need to be happy) is underrated. At the point where you are playing with house money the game substantially changes since your basic financially driven level of happiness is not at stake. Of course, you can still be rich and miserable, but that comes from other problems, attitudes and mistakes.

10.
“There is a lot to be said that when the world is going crazy, to put yourself in a position where you take risk off the table.” “Here’s one truth that perhaps your typical investment counselor would disagree with: if you’re comfortably rich and someone else is getting richer faster than you by, for example, investing in risky stocks, so what? Someone will always be getting richer faster than you. This is not a tragedy.”
There are times in life when the world will not make much sense, at least to you. As an example, the Intent bubble of 1999-2001 was a time like that. In my book on Charlie Munger I describe a decision I made to sell half of my telecom and Internet portfolio near the height of the bubble. The sale ensured that I would not be a burden to anyone in my retirement and that my children would be able to go to college with my financial assistance. Taking a little risk off the table if you plan to double down on some new risky investments is wise.

11.
“A lot of our major capitalistic institutions that parade as really respectable, they’re just casinos in drag. What do you think a derivative trading desk is? It’s a casino in drag. People feeling they’re contributing to the economy, and they’re managing risk. They make the witch doctors look good.” “I knew a guy who had $5 million and owned his house free and clear. But he wanted to make a bit more money to support his spending, so at the peak of the internet bubble he was selling puts on internet stocks. He lost all of his money and his house and now works in a restaurant. It’s not a smart thing for the country to legalize gambling [in the stock market] and make it very accessible.” “Gambling does not become wonderful just because it pertains to commerce. It’s a casino.”
One definition of gambling is: an activity involving chance that has a negative net present value after fees. Some people find gambling entertaining, since it produces brain chemicals that can be pleasurable. I don’t personally see the point of doing something that could potentially turn into a destructive addiction and potentially wipe you out financially. In my view there are many other non-addictive things that one can do to get a dopamine buzz that are not addictive and are potentially profitable. Munger says: “intelligent people make decisions based on opportunity costs — in other words, it’s your alternatives that matter. That’s how we make all of our decisions…. Opportunity cost is a huge filter in life. If you’ve got two suitors who are really eager to have you and one is way the hell better than the other, you do not have to spend much time with the other.” Gambling fails the opportunity cost test for me. The other point Munger is making is that gambling is not a productive activity. You are not building anything valuable when you gamble. The societal contribution of the activity is negative.

12.
“When any person offers you a chance to earn lots of money without risk, don’t listen to the rest of their sentence. Follow this and you’ll save yourself a lot of misery.”
When it comes to investing it is wise to follow the advice of Howard Marks and think of the future as a probability distribution rather than some fixed outcome that is knowable or predictable in advance. Almost nothing about the future is certain except death and taxes. No one says it better than Howard Marks when it comes to risk: “not being able to know the future doesn’t mean we can’t deal with it. It’s one thing to know what’s going to happen and something very different to have a feeling for the range of possible outcomes and the likelihood of each one happening. Saying we can’t do the former doesn’t mean we can’t do the latter.”

Thursday, September 17th, 2015

A Dozen Things I’ve Learned from Charlie Munger About Risk, Part 1

Charlie Munger

“This great emphasis on volatility in corporate finance we regard as nonsense. Let me put it this way; as long as the odds are in our favor and we’re not risking the whole company on one throw of the dice or anything close to it, we don’t mind volatility in results. What we want are favorable odds.” — Charlie Munger

This week our featured book is Charlie Munger: The Complete Investor, by Tren Griffin. For our final two posts, we are happy to present a post from Tren Griffin explaining Charlie Munger’s take on the importance of understanding and being aware of risk in investing. The post was originally featured on Griffin’s blog, 25iq.

Don’t forget to enter our book giveaway for a chance to win a free copy of Charlie Munger: The Complete Investor!

A Dozen Things I’ve Learned from Charlie Munger About Risk, Part 1
By Tren Griffin

1.
“Risk to us is 1) the risk of permanent loss of capital, or 2) the risk of inadequate return.”
Risk has many different dimensions that must be considered including sources, magnitude, outcomes and decision making inputs. In terms of a definition, Seth Klarman writes that risk is: “described by both the probability and the potential amount of loss.” Charlie Munger emphasizes an important point in his quotation since it is the permanent loss which should be the focus of investors since temporary drops can actually represent an opportunity for an investor if they can purchase more of an asset at the lower price and ride out the drop in price. The focus of this definition of risk is on potential “outcomes.” In terms of “sources” of risk, Warren Buffett believes that “risk comes from not knowing what you’re doing” and that “the best way to minimize risk is to think.” This is why Charlie Munger spends so much time thinking about thinking. The magnitude of risk assumed by a given investor on any investment depends on the nature of the asset, but also the price paid for the asset. In addition to not knowing what you are doing, one way to increase risk to pay such a high price for an asset that there is no margin for error. Seth Klarman makes the important point that “risk and return must be assessed independently or every investment…. risk does not create incremental return only price can do that.” Howard Marks makes the insightful point that risk itself cannot be counted on to generate higher financial returns, since if this was the case the assets would not actually be riskier. Richard Zeckhauser has his own definition of risk focused on the “inputs” a person has in the decision-making process rather that the “outcome” based definition of Buffett and Klarman. Zeckhauser believes that “risk” is limited to situations where all potential future states and their probabilities are known. Roulette in his view involves risk since you know all future states and probabilities in playing the game. When the probabilities of potential future states are not known, Zeckhauser calls that situation “uncertainty” and when you don’t know all potential future states he refers to that as “ignorance.” Most of life is uncertain rather than risky. True risk, as Zeckhauser defines it, is actually not that common in real life. For the rest of this blog post when I refer to “risk” I will be referring to the Klarman/Buffett/Marks definition of risk as an outcome (‘the possibility of loss or injury”) because that is what I believe Charlie Munger is referring to in each quotation. (more…)

Thursday, September 17th, 2015

Ky Trang Ho talks to Tren Griffin about Charlie Munger

Charlie Munger

“There are many great investments that Munger has made, but arguably none was more important than the purchase of See’s Candies. It was the first investment made by Munger and Buffett for which they paid a purchase price reflecting a bargain based on qualitative factors.” — Tren Griffin

This week our featured book is Charlie Munger: The Complete Investor, by Tren Griffin. Today, we are happy to present an excerpt from an interview with Tren Griffin, conducted by Ky Trang Ho and originally posted at Forbes. In the interview, Griffin and Ho discuss the inspiration behind the book, some of Charlie Munger’s greatest investment hits, Munger’s greatest investment failures, and much more!

Don’t forget to enter our book giveaway for a chance to win a free copy of Charlie Munger: The Complete Investor!

Berkshire’s Charlie Munger: The Legendary Investor’s Strategy And Best ETF, Mutual Fund Picks
Ky Trang Ho and Tren Griffin

Ho: What inspired you to write a book about Charlie Munger?

Griffin: During the peak of the Internet bubble I began to search for an explanation of what was happening in the world since it made little sense to me at that time. Far too much paper wealth was being created far too quickly for what was happening during this bubble to be real. I had for many years been aware of the work and writing of Warren Buffett but decided at that time to re-read his work and think about it much more deeply.

I took off a full week from work to re-read everything he had ever written and think about it. As part of that process I was attracted more and more to the ideas and methods of Charlie Munger who was mentioned and talked about in this material written by and about Buffett. To understand Munger better I decided to compile his work from various sources into a private book written just for me. Writing about anything helps you understand the topic better. It forces you to think everything through from start to finish.

Warren Buffett has said that if you can’t write it down, you have not thought it through. As I compiled the material and wrote about Munger I began to understand his methods better and that they are applicable far beyond investing. (more…)

Wednesday, September 16th, 2015

Read the Introduction to Charlie Munger: The Complete Investor

Charlie Munger

“Much of what is interesting about Munger is explained by this simple sentence: ‘I observe what works and what doesn’t and why.’ Life happens to Munger as it does to everyone, but unlike many people, he thinks deeply about why things happen and works hard to learn from the experience.” — Tren Griffin

This week our featured book is Charlie Munger: The Complete Investor, by Tren Griffin. In this post, we are happy to present an excerpt from Tren Griffin’s Introduction, in which Griffin introduces his readers to Charlie Munger, the man and the investor, and explains why Munger is such a fascinating and successful character.

Don’t forget to enter our book giveaway for a chance to win a free copy of Charlie Munger: The Complete Investor!

Wednesday, September 16th, 2015

A Dozen Things I’ve Learned from Charlie Munger About Making Rational Decisions, Part 2

Charlie Munger

“Rationality … requires developing systems of thought that improve your batting average over time.” “Luckily, I have selected very easy problems all my life, and I have a reasonable batting average.” “You don’t have to have perfect wisdom to get very rich – just a bit better than average over a long period of time.” — Charlie Munger

This week our featured book is Charlie Munger: The Complete Investor, by Tren Griffin. In today’s post, we are happy to present the second half of a post from Tren Griffin explaining Charlie Munger’s take on rationality, and why being rational is crucial for both investing and for life (view the first part here). The post was originally featured on Griffin’s blog, 25iq.

Don’t forget to enter our book giveaway for a chance to win a free copy of Charlie Munger: The Complete Investor!

A Dozen Things I’ve Learned from Charlie Munger about Making Rational Decisions, Part 2
By Tren Griffin

6.
“Second, what are the subconscious influences where the brain at a subconscious level is automatically doing these things-which by and large are useful, but which often malfunctions.” “Ordinary people [are] subconsciously affected by their inborn tendencies.”
After an expected value process is completed and you believe your decisions is rational, Charlie Munger suggests that the decision be cross-checked for possible errors. The reality is that no one has a fully rational mindset. It would not be possible to get out of bed in the morning if every human decision had to be made based on careful expected value calculations. Heuristics have been developed by humans to get through a day which sometimes cause decisions to become irrational, especially in a modern world which is very unlike most of history. In other words, no human is perfectly rational because everyone is impacted by emotional and psychological tendencies when making decisions. As a result, thinking rationally is a trained response. To be as rational in your daily life as Richard Zeckhauser is in playing bridge a person must overcome errors based on emotional or psychological mistakes. Rationality is in practical terms relative. Charlie Munger believes staying rational is hard work and requires constant practice and lifelong effort. Making mistakes is inevitable and will never stop, but you can learn to make less than your statistical share of mistakes. (more…)