Mar 21, 2014

John Templeton on the limits of computer models in the investment process

Despite the development of neural networks, expert systems, and other forms of exotic anthromorphic computer systems, it is unlikely that the component of human wisdom will be replaced in the investment process. Machines can be used to process hard data, but not human qualities such as greed, fear, or creativity. If we reflect on the fact that companies are really groups of people who manage assets and work with each other to create wealth; that they are intimately affected by other complex groups, politicians, local citizens, belligerent militarists, and so on; then it is clear that machines cannot adequately capture the complexity of these human conditions.

~ John Templeton, Looking Forward: The Next Forty Years, 1993, pp. 8-9

Mar 19, 2014

Michael Mauboussin on the roles of luck and skill in determing success

In a probabilistic environment, you are better served by focusing on the process by which you make a decision than on the outcome.  Blackjack is a game of chance.  That means you will do best by following a rule that reflects the real probability of being dealt the right cards: don’t hit when you’ve been dealt a seventeen or more.  But it’s crucial to bear in mind that because of the substantial role that luck plays in this process, good decisions don’t ensure attractive outcomes.  If you make a good decision and suffer a poor outcome, pick yourself up, dust yourself off, and get ready to do it again.

When evaluating other people’s decisions, you are again better served by looking at their decision-making process rather than on the outcome.  There are plenty of people who succeed largely by chance.  More often than not, they are completely unaware of how they did it.  But they almost always get their comeuppance when fortune stops smiling on them.  Likewise, skillful people who have suffered a period of poor outcomes are often a good bet, since luck evens out over time.

~ Michael J. Mauboussin, Think Twice: Harnessing the Power of Counterintuition, 2009

Mar 18, 2014

Alexis de Tocqueville on the state of education in America in 1831

It is not only the fortunes of men which are equal in America; even their requirements partake in some degree of the same uniformity. I do not believe that there is a country in the world where, in proportion to the population, there are so few uninstructed and at the same time so few learned individuals. Primary instruction is within the reach of everybody; superior instruction is scarcely to be obtained by any. This is not surprising; it is in fact the necessary consequence of what we have advanced above. Almost all the Americans are in easy circumstances, and can therefore obtain the first elements of human knowledge.

~ Alexis de Tocqueville, Democracy in America, Chapter 3, The Social Condition of the Anglo-Americans

(This entire chapter is worth reading. To put this in perspective, remember that De Tocqueville wrote this in 1831 before Horace Mann began the destruction of education in the private sector starting in Massachusetts... see Sheldon Richman, "Separating School and State.")

Mar 16, 2014

Jeremy Grantham: "There’s probably quite a bit left in this rally"

Bubbles don’t usually stop until sensible investors, value investors, and prudent investors have been hung out to dry.  That hasn’t happened yet, so there’s probably quite a bit left in this rally.
~ Jeremy Grantham, Barron's, March 17, 2014

Mar 15, 2014

Santa Clara University basketball coach on recruiting Canadian high school senior Steve Nash

After seeing him I was nervous as hell just hoping that no one else would see him.  It didn’t take a Nobel Prize winner to figure out this guy’s pretty good. It was just a case of hoping that none of the big names came around.

~ Santa Clara head coach Dick Davey, 1992

(“You’ve got to be the worst defensive player I’ve ever seen,” he told Steve and his family as they all walked out of an arena in Vancouver together after a game.)

Mar 14, 2014

Warren Buffett on the value of macro forecasting

Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important.

~ Warren Buffett, "Why I Like to Think of Stocks Like Farms," Fortune, March 17, 2014

Mar 12, 2014

Morgan Stanley strategist Adam Parker: "I don't think 15.5 times earnings for the S&P 500 is in bubble territory"

I think we all romanticize that we're going to sniff out the bubble the day before everyone else and get rich and famous for it, but at the end of the day I don't think 15.5 times earnings for the S&P 500 is in bubble territory. 

I think that there's been some real changes to the market because of the quantitative easing.  And the number one important thing is that basically companies have all pushed out their financial obligations for 2 or 3 years so the balance sheets are in great shape and the risk of bankruptcy is very low.  That's been a big change over the last few years.

If we're about to head into a bubble, then you'll want to be long for a while.  I think everyone wants to call in and talk about it. If you want to call the top of the cycle, two things would be in place. One is hubris. And the other is debt. Hubris meaning some form of management arrogance gone awry. ... I don't think we're very frothy on that point.

~ Adam Parker, Morgan Stanley market strategist, as appeared on CNBC's Squawk on the Street, March 11, 2014

Mar 8, 2014

Barton Biggs on bull markets and sex

A bull market is a lot like sex.  It feels best just before it ends.

~ Barton Biggs