"Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain."
- Warren Buffett, 2010 Berkshire Hathaway Shareholder Letter
As is often true, Warren said it best – tomorrow is always uncertain. For many people, the response to uncertainty is abandoning “risky” equities and moving money to “safe” assets like bonds or cash; while I would argue that “return-free risk” is a much more accurate description of securities like treasuries at their current yields (and with the very real risk of inflation due to the continually working printing press), that discussion will be saved for another day.
The focus of this article is on another outcome that has resulted due to a mix of uncertainty about what lies ahead and the desire by millions of individuals to attain attractive returns – a culture of continuous financial discussions and predictions. While both CNBC and Bloomberg trot out one “expert” after another to step up to the crystal ball, they almost always fail to monitor/report expert’s previous predictions and discuss the outcome. As with anything in life, this eliminates the need for accountability and ex-post analysis, which seriously hinders the effectiveness of learning from or relying on nearly everything they have to say.
As individual investors looking to achieve financial success with a long timeframe and a small margin of error (due to the importance of compounding), this is not an advisable strategy; you don’t have the luxury of making predictions (in the form of investments) and not being held accountable like many of the CNBC contributors do. For the individual investor, this means that you must have a system that not only generates ideas, but analyzes them intensely after the fact in order to continue learning.
Yet in reality, many investors fail to do this; on the contrary, they walk around telling stories about the ten-bagger they almost bought (and conveniently forgetting the other 40-50 they had considered for a minute or two before passing on), or ditch investments after they become CHEAPER simply due to the illogical fear of paper losses due to short term volatility.
My answer to this problem is an investment journal (like many of my better sounding ideas, I took it from James Montier's book "Value Investing"); using my own situation as anecdotal evidence (I’ve been doing this for nine months now), I can see that I’ve had mixed results to date: my bullish thoughts on Berkshire Hathaway (BRK.B, Financial) at $75/share and Microsoft (MSFT, Financial) at $24/share around June 8th appear to have been right (at least to this point) while my call on Nokia (NOK, Financial) is more than 20% in the red (thankfully I bought BRK.B and MSFT but ended up passing on NOK due lack of follow up research after my initial note).
Another item I noted at the time was that I believed Microsoft’s intrinsic value was $32-35/share, meaning that I should take a hard look at this company again and see whether my recent excitement about the name is due to attractive financials and a margin of safety, or simply strong emotions due to recent success from the stock…
The point isn’t about those names in particular, but rather about the process – it’s easy to trick yourself or forget about what you really believed/thought in the past; with an investment journal, it’s impossible. For the investor, it is a fantastic tool for monitoring your thought process and evolving; with time, it can help lead you along the path to a more intelligent investment strategy and long term financial success.
- Warren Buffett, 2010 Berkshire Hathaway Shareholder Letter
As is often true, Warren said it best – tomorrow is always uncertain. For many people, the response to uncertainty is abandoning “risky” equities and moving money to “safe” assets like bonds or cash; while I would argue that “return-free risk” is a much more accurate description of securities like treasuries at their current yields (and with the very real risk of inflation due to the continually working printing press), that discussion will be saved for another day.
The focus of this article is on another outcome that has resulted due to a mix of uncertainty about what lies ahead and the desire by millions of individuals to attain attractive returns – a culture of continuous financial discussions and predictions. While both CNBC and Bloomberg trot out one “expert” after another to step up to the crystal ball, they almost always fail to monitor/report expert’s previous predictions and discuss the outcome. As with anything in life, this eliminates the need for accountability and ex-post analysis, which seriously hinders the effectiveness of learning from or relying on nearly everything they have to say.
As individual investors looking to achieve financial success with a long timeframe and a small margin of error (due to the importance of compounding), this is not an advisable strategy; you don’t have the luxury of making predictions (in the form of investments) and not being held accountable like many of the CNBC contributors do. For the individual investor, this means that you must have a system that not only generates ideas, but analyzes them intensely after the fact in order to continue learning.
Yet in reality, many investors fail to do this; on the contrary, they walk around telling stories about the ten-bagger they almost bought (and conveniently forgetting the other 40-50 they had considered for a minute or two before passing on), or ditch investments after they become CHEAPER simply due to the illogical fear of paper losses due to short term volatility.
My answer to this problem is an investment journal (like many of my better sounding ideas, I took it from James Montier's book "Value Investing"); using my own situation as anecdotal evidence (I’ve been doing this for nine months now), I can see that I’ve had mixed results to date: my bullish thoughts on Berkshire Hathaway (BRK.B, Financial) at $75/share and Microsoft (MSFT, Financial) at $24/share around June 8th appear to have been right (at least to this point) while my call on Nokia (NOK, Financial) is more than 20% in the red (thankfully I bought BRK.B and MSFT but ended up passing on NOK due lack of follow up research after my initial note).
Another item I noted at the time was that I believed Microsoft’s intrinsic value was $32-35/share, meaning that I should take a hard look at this company again and see whether my recent excitement about the name is due to attractive financials and a margin of safety, or simply strong emotions due to recent success from the stock…
The point isn’t about those names in particular, but rather about the process – it’s easy to trick yourself or forget about what you really believed/thought in the past; with an investment journal, it’s impossible. For the investor, it is a fantastic tool for monitoring your thought process and evolving; with time, it can help lead you along the path to a more intelligent investment strategy and long term financial success.
