Tag Archives: Warren Buffett

Game Theory, Behavioral Finance, and Investing: Part 5 of 5

In the first four parts of this article, I have discussed a number of well-known behavioral biases that cause investors to make decisions that are, to put it kindly, less than optimal.  In this final installment, I summarize how best to avoid these costly traps.

As these blog posts have been published over the past couple of weeks, the issues are much in evidence.  Apple (AAPL), long the darling of the market, has lost favor and Groupon (GRPN) seems to be following a relentless downward spiral.  Surely many investors in Groupon must be asking themselves how they could possibly have seen the company as a good bet.  Apple stock, which was trading at $700 in mid-September, is currently at $544, a decline of 22% in two months.  The news that has come out on Apple does not seem sufficient to justify such a broad shift in the market’s consensus as to the long-term value of Apple as a company.  And, of course, we have the poster child of behavioral bias: Facebook (FB).  How is it possible that the market’s consensus view of the share value of such a widely held company could be almost 50% below its first day closing price of $38?  As Warren Buffett is quoted as saying, in the short-term the market is a voting machine and in the long-term the market is a weighing machine.  When voting overwhelms weighing, investor psychology is dominating.

Continue reading

Burton Malkiel: Buy Munis, Foreign Bonds, and Dividend Stocks

Burton Malkiel, Princeton professor and author of A Random Walk Down Wall Street, had an Op Ed piece in the Wall Street Journal on December 7th that advocates rethinking simple indexed portfolios.  While Vanguard has recently published research asserting the superiority of a simple asset allocation made up of 50% allocation in a stock index and 50% allocation in an aggregate bond index, Malkiel proposes that investors need to look at a range of asset classes that are less familiar to most investors.

To begin, Dr. Malkiel asserts that long-term Treasury bonds (10 years and longer) have such low yield that they are likely to have negative real long-term return (return net of inflation).  Rather than invest in Treasuries, he advocates Continue reading

Why Warren Buffett Was Right: “Diversification is Protection Against Ignorance”

The volatility in the broad stock market has shaken investors’ belief in the true value of portfolio diversification. The problem is that many of the people who believe that diversification no longer works, may not know how to build a truly diversified portfolio.

Warren Buffett is widely quoted as saying : “Diversification is protection against ignorance.” I’ll admit, that sounds pretty negative. But what I believe he meant, however, is that you diversify when you are not sufficiently confident to bet on which asset (or asset class) will do well and which will do poorly. 

Clearly, Mr. Buffett has done very well in managing a concentrated portfolio. But are you willing to take that bet? Continue reading

Relax: Doing Less With Your Investments

In his latest Behavior Gap Newsletter, Carl Richards nails that feeling of confusion that comes when we learn first hand that “past performance is not a guarantee of future results.”

Investing isn’t like hiring a basketball coach, Richards argues, but rather like planting an oak tree: Continue reading

Warren Buffett Exhibits Long-term Investor Thinking on CNBC

I enjoy watching Warren Buffett talk. He just makes so much sense! But it’s especially fun to watch him on his semi-regular visits to CNBC. In this one from earlier this week (video below) Becky Quick does give Buffett room to talk and a chance to break some news (like his opinion that Quantitative Easing 2 should end.) But CNBC is still CNBC and it’s fun to watch her try to drag the man famous for long-term investing into commentary on the market’s momentary gyrations. Continue reading

Arguing with Mark Cuban on Asset Allocation

After reading Mark Cuban’s January post on his well-read “blog maverick” painting asset allocation as Wall Street hucksterism, I wondered if others had responded to his arguments. I found several interesting pieces, one that took Cuban’s tirade as a jumping off point for a discussion of the importance of understanding and believing in your allocation on My Money Blog and another on Darwin’s Money that made its point of view clear in its title: “Mark Cuban is Dead Wrong.” Continue reading

The Internet Grows Up To Be A Gold Mine of Free Cash Flow

Round Mountain Gold Mine, Smokey Valley, Nevada, 2008, photo: Patrick Huber

This is a guest blog by Mycroft Psaras. It’s an edited version of a longer piece that can be found at The Free Cash Flow Analyst.

The internet is obviously an evolving and changing civilization with millions of new websites being created every day. As an investor though I have never been able to capitalize on Internet stocks in large numbers, because they have never been able to provide the price to free cash flow numbers that I look for when making an investment. Continue reading

Arguing for Cash Flow, Stock Picking

Warren Buffett has traditionally been a fan of high free cash flow. So is Eduard Hamamjian.

After a recent post about the debated idea of trying to time the market, I had a conversation with Hamamjian, who runs an investment advisory firm called GeaSphere.

Hamamjian argued for market timing — but not in isolation. When combined with portfolio diversification and smart stock picking,  he says it is the best way to get market-beating numbers.

Smart stock picking is no easy order, but his criteria are not that complicated. Continue reading

Investing like James O’Shaughnessy

In any field it’s fascinating to watch what the heavy weights are up to.  John Reese, founder and CEO of Validea and Validea Capital Management, (pictured) has spent the last 15 years studying history’s best investors and then building investment strategies based on that research. Among his “gurus”:  Warren Buffett, Peter Lynch, Ben Graham and others. In the August 20th, 2010 issue of his newsletter, the Validea Hot List, Reese takes an in-depth look at James O’Shaughnessy, an expert in quantitative stock modeling. O’Shaughnessy’s methods have inspired a Validea strategy which Reese says has averaged more than 8% annualized returns since its inception seven years ago, a period in which the S&P 500 has returned about 1.2% per year.

Below is a reprint of part of Reese’s write-up and a list of current stocks that score highly based on his O’Shaughnessy model. Continue reading

Jeremy Siegel says we are in a ‘bond bubble’

Jeremy Siegel, Wharton professor and author of well-known Stocks For The Long Run, published an article this week in the Wall St. Journal saying that we are in a bond bubble.  Bubbles are periods of irrational price appreciation in an asset class, followed by a return to rationality when everyone heads for the door and sells.  With yields from government bonds at multi-decade lows, this is hardly a risky call. Continue reading