“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!