Chris Gottscho, Portfilio Manager

Thoughts on "Extraordinary Popular Delusions and the Madness of Crowds"

— by Chris Gottscho

“Extraordinary Popular Delusions and the Madness of Crowds,” written in 1841, is a favorite book of mine that I reread every few years. Along with being entertaining, the underlying message about human psychology is an important one. While technology and investment markets have changed a lot, the structure of human brains has not, and markets will always be inefficient because people will continue to be emotional. In the face of this emotion, the rational investor will always have an edge.

The most important factor in investment success is having the right psyche. You could memorize every word of Ben Graham’s books and every letter Warren Buffett has ever written, but without the right mental detachment from investing you likely won’t have success. Lots of people say they are long-term investors, but then they want to make money every year. As Charlie Munger says: “The big money is not in the buying and selling, but in the waiting.”

Currently, we think the bond bubble we’ve been seeing for a number of years is beginning to show signs of popping, and that we are in the early stages of a huge shift from bonds into stocks. We have thought for a few years that folks need to start losing some meaningful money in bonds before they decide that investing in a company like Costco is a better idea than owning ten year bonds at little, or perhaps even negative, interest rates. While investment performance can never be guaranteed, if you invest in a $100 stock earning $8, you are getting an 8% rate of return, and it is likely to be a real rate of return because many companies can raise prices and have their asset values go up to compensate for any rise in interest rates and inflation. On the other hand, for the tens of trillions of dollars that have flowed into negative yielding or de minimis yielding bonds in the past seven years losses can mount quickly if interest rates start to rise. Please keep in mind this is an investment comment and not a political one, but we think that due to the recent election, a number of likely policy changes in the U.S. will push interest rates higher and incentivize investors to shift from bonds into stocks.

It is remarkable the extent to which people don’t learn from history.

We hope you enjoy this book as much as we do – it is relevant to politics and international relations just as much as to investing – and it is a good read as you sit by the fire with a mug of cocoa!

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This letter contains the current opinions of the authors and Norman Fields, Gottscho Capital Management, LLC; such opinions are subject to change without notice. This letter is distributed for informational purposes only. References to particular investments or types of investments are for illustrative purposes only and are not recommendations to buy or sell such investments. Nor are these references indicative in any way of performance returns in the accounts we manage. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as a recommendation of a particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.

Past performance is not a guarantee or a reliable indicator of future results. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Bonds may decline in value due to market, interest rate, issuer, credit, and inflation risk. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Commodities contain heightened risk including market, political, regulatory, and natural conditions. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate his or her ability to invest long-term, especially during periods of downturn in the market.
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