Some Market Comments From Jason Zweig

On WSJ. Why Investors Need to See the Light and Slow Down

• Don't be happy; worry.
  
  The Dow Jones Industrial Average is up 46% since March 9, when the world itself seemed to be coming to an end. In the entire 113-year history of the Dow, only six rebounds have been bigger and faster. But the swiftness and magnitude of this bounce-back aren't reasons to be cheerful; they are reasons to be cautious.
  
  In March, stocks traded as low as 11.7 times their average earnings over the previous 10 years, adjusted for inflation, according to finance professor Robert Shiller of Yale University. That put the market at its lowest valuation since January 1986. Today, however, stocks are selling at 18.4 times Prof. Shiller's measure of earnings. That isn't only up hugely from March but is above the long-term average of 16.3 times earnings.
  
  Robert Rodriguez, chief executive of First Pacific Advisors in Los Angeles, says that in March, investors feared getting crushed in a further decline. Now all they seem afraid of is missing an even greater rally.
  
  Mr. Rodriguez is convinced that the consensus -- economic recovery by early next year at the latest -- is wrong. "People are talking about whether the shape of the recovery will be a 'V' or a 'W' or even a 'square root,' " he says, "but I think we are in what I call a 'caterpillar economy.' It will be up and then down, up and then down. We will be far from normal for a very long period of time. People deploying capital will end up destroying capital."
  
  I am not as worried as Mr. Rodriguez, but it is at times like these, when a rising market sweeps our spirits up with it, that investors need to evaluate their emotions and consider whether their beliefs and actions are justified.
  
  In August, corporate insiders -- officers and directors of public companies -- sold nearly 31 times as much stock as they bought. From last September through this past March, in the depths of the bear market, that ratio was just 2 to 1, according to TrimTabs Investment Research of Sausalito, Calif. The long-term average is about 7 to 1.

Regarding the corportate insiders selling, see this link: here

• The people who run companies don't know exactly what the future holds, but they do know more about their own firms than outsiders do. If they are furiously selling, how eagerly should the rest of us be buying?
  
  It is well-known that investors chase past performance, buying whatever has just made the most money for other people. What isn't commonly understood is that investors also chase their own past performance, buying more of whatever they themselves have made the most money on.
  
  Research by economist David Laibson of Harvard University shows that 401(k) participants tend to add significantly to whichever funds they already own that have gone up the most. "Investors expect," Prof. Laibson says, "that assets on which they personally experienced past rewards will be rewarding in the future, regardless of whether such a belief is logically justified."
  
  That is exactly what seems to be happening now: In June, according to Hewitt Associates, 401(k) participants put 41.0% of their new contributions into stocks. In July, as the Dow shot up 725 points, they pushed that rate up to 42.3%. Participants also cut their contributions to "lifestyle" funds that keep a portion of their assets in bonds and cash.
  
  The market's latest hot streak makes the future feel predictable, but it isn't. The Dow had an uncannily similar 46.5% gain in the 117 days that ended April 9, 1930; it lost almost 51% over the next year. Another 47% upswing in 1971 led to a long, choppy decline of more than 37%. The market also could go nowhere, as it did for months after a similar-size gain in 1975. Or it could hit new heights, as it did in 2004 after rising 47% from the lows of 2002.
  
  In his classic book "The Intelligent Investor," the great money manager Benjamin Graham wrote that "the investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances." If you can't exercise that kind of emotional control, then by Graham's definition you aren't an investor at all.
  
  I see nothing wrong with dollar-cost-averaging into this market, purchasing a fixed amount every month -- especially in a low-cost stock index fund. But to buy more of what has gone up, precisely because it has gone up, is to fall for the belief that stocks become safer as their prices rise. That is the same fallacy that led investors straight into disaster in 1929, 1972, 1999, 2007 and every other market bubble in history.
  
  The market's light has turned yellow. Don't try to run it.
  

Jason Zweig Review Of Alice Shroeder's "The Snowball".

Jason Zweig comments on Alice Shroeder's "The Snowball".

• Journey to the Center of Warren Buffett’s Mind
  
  November 14, 2008, 3:43 pm
  
  Not so long ago, investing used to be fun. Now it resembles an Olympic archery practice at which the target is you. Maybe you felt a little safer this Thursday, when the Dow went up 553 points. Well, today it dipped by as much as 352 before closing down 338 points.
  
  If you want to escape the arrows, you can find some refuge by reading the new biography by Alice Schroeder, “The Snowball: Warren Buffett and the Business of Life” (published by Bantam on Sept. 29, the day Congress voted down the first bailout plan and the Dow fell almost 800 points). Although he is lucky in many ways, Mr. Buffett is also the world’s most successful investor because he has worked extraordinarily hard and thought very deeply about his craft.
  
  Mr. Buffett gave Ms. Schroeder thousands of hours of face time, a privilege earlier biographers did not have. In 1995, Roger Loewenstein’s superb book “Buffett: The Making of an American Capitalist” analyzed Mr. Buffett’s rationale for specific investments in illuminating detail, but Ms. Schroeder has been able to delve more deeply into Mr. Buffett’s mind and heart.
  
  The result is riveting and encyclopedic. At 960 pages and 3½ lbs., “The Snowball” hits readers like an avalanche. Some people feel almost buried by the wealth of detail about Mr. Buffett’s family life, but the overall power of the story carries “The Snowball” forward. There is much to be learned from it.
  
  To me, the most striking thing to come out of the book is a clearer sense of Mr. Buffett’s extraordinary emotional detachment. Remember, this is an authorized biography; as Mr. Buffett’s spokesperson put it, “She [Ms. Schroeder] wrote every word, and he did not edit it.”
  
  After years of emotional isolation from the workaholic Mr. Buffett, his wife Susie “stayed up late at night alone, listening to music that transported her to some different place…. She loved…great soul music, like the Temptations, who sang of a world in which it was men who felt all the longing.”
  
  Passages like these are heartbreaking for even a stranger to read. How many of us could bear to let someone else bare our most intimate weaknesses and failures? And yet here we not only see the pain that Mr. Buffett caused his wife, but we know that he has acquiesced in letting us see it.
  
  This detachment, I think, is one of Mr. Buffett’s greatest strengths. He has the ability to hover over his own actions and judgments, as if he were having an out-of-body experience, looking down and evaluating the man who made them as if he were someone else entirely.
  
  In person, Mr. Buffett is as warm and empathetic a person as anyone I have ever met — but he also seems, in Ms. Schroeder’s telling, to be forever observing himself from a distance as well. There is, in her portrait of him, a streak of something at least mildly reminiscent of autism: a photographic memory, an effortless command of complex mental computations, an enduring obsession with collecting and measuring everything imaginable.
  
  This almost-autistic streak in Mr. Buffett exacted a terrible toll on his family as he toiled around the clock for years. Long before it was common, he worked out of a home office, and it is hard to shake the image of him padding through the house in his stocking feet, his face buried in an annual report, oblivious to his own family.
  
  Mr. Buffett’s unparalleled record of investing achievement came at a personal price most of us would never be willing to pay; although he now has a warm relationship with his adult children, his billions were earned only at an incalculable emotional cost in their earlier years.
  
  I shuddered several times as I read Ms. Schroeder’s account of how desperate Mr. Buffett’s family was for his affection. Anyone who thinks beating the market is easy should think twice, based on Mr. Buffett’s own experience.
  
  The Schroeder book makes it clear that in his early years, Mr. Buffett paid a toll so high, in currency so dear, that most investors would not dare to approach the same tollbooth.
  
  Here are the investing ideas that I think the book highlights in new detail:
  
  Discipline. What explains Mr. Buffett’s success? His one-word answer: “focus.” For him, that meant working all hours day and night, memorizing oceans of statistics about hundreds of stocks, and reading corporate financial statements on a family trip to
  
  Mr. Buffett’s uncanny ability to stay one step ahead of the markets comes from five decades of working harder on his homework than anyone else. Can you even name the three toughest competitors of every company whose stock you own?
  
  Self-confidence. From his father, an iconoclastic politician, Mr. Buffett inherited what he calls the knack of keeping an “inner scorecard,” rather than an “outer scorecard.” He does not care whether other people agree with him. He cares only whether his decisions make sense to him, based on his own rigorous research. Do you invest based on what “everybody knows” is “true,” or do you analyze all the evidence yourself?
  
  Self-control. Mr. Buffett does not let the emotions of millions of strangers — the collective greed and fear of the markets — determine his own mood. When he feels his blood pressure rising or his nerves on edge, he calms himself down by gazing at snapshots of his kids or playing a game of bridge with his friends. Mr. Buffett restores his sense of self-control by refusing to dwell on the things he cannot control. Are you staring at every scarlet downtick on the Dow?
  
  Inversion. Mr. Buffett most likes to buy stocks not when they are going up, but when they are going down. In 1969, during a raging bull market, he shut down his original investment partnership. Then, in 1974, when stocks (and market sentiment) hit rock bottom, Mr. Buffett bought with such abandon that he felt “like an oversexed guy in a harem.” Again, in 1999, as investors went gaga for technology stocks, Mr. Buffett sat on his hands. In the miserable market of 2008, he is buying again (although sometimes on “sweetheart” terms not available to you and me). Are you tempted to stand aside from stocks until after they go up?
  
  The long view. From a very young age, Mr. Buffett developed the remarkable habit of regarding a dollar spent today as a small fortune he would not have in the future: “Do I really want to spend $300,000 for this haircut?” He felt that any money he could not invest was money that would never grow — and that he would thus incur a huge future price for any present spending. If you are among the many people cutting back your 401(k) contributions because the market has cratered, have you thought about the cumulative future costs of that decision?
  
  Rigid versatility. Throughout his career, Mr. Buffett has been tactically flexible but strategically inflexible. His core principles have never varied one iota: Buy only what he understands, never overpay, always put safety first, be patient. But Mr. Buffett is as stretchy as Plastic Man when it comes to implementation. He will buy silver ingots, or municipal bonds, or a privately held company that manufactures both bricks and cowboy boots — whatever is on sale at the right terms. Now that virtually every investment on earth is down between 10% and 60%, is cash the only thing that interests you?

Source: http://blogs.wsj.com/wallet/2008/11/14/journey-to-the-center-of-warren-buffetts-mind/

Investing In What We Know and Business Like Investing

Should You Buy What You Know?

Do you like this great investing book The Intelligent Investor ?

What is even more interesting is that billionaire investor Warren Buffett still continues to read this great book by Benjamin Graham and yet the great legendary investor still continues to learn from it!

Under the revised edition by Jason Zweig, Chapter 5, pg 125 (commentary on Chapter 5), there is this one interesting commentary:

Should You Buy What You Know?

Another excellent commentary in which Jason commented that the intelligent investor should not simply abuse any famous investment teaching. Take one of Peter Lynch's famous teachings "buy what you know", in which, Lynch teaches that one can outperform the experts if one uses their edge by investing in companies or industries one already understand. The next step is doing the research. In which accordingly to Lynch, no one should invest in a company, no matter how great its products, without studying its financial statements and estimating its business value.

So how does one abuse this great teaching?

Ahhh... according to Jason, many would only remember and adopt the very first part of the teaching, which is "buy what you know".

The next part of doing the research is sadly neglected by the investor!!!

How valid is this point? Have you seen it happened before? Were those 'investments' a success? Think about it...

Well, Jason puts it very nicely:

In short, familiarity breeds complacency. On the TV news, isn't always a neighbour or the best friend or the parent of the criminal who says in a shocked voice, "He was such a nice guy". That's because whenever we are too close to someone or something, we take the beliefs for granted, instead of questioning them as we do when we confront something more remote. The more familiar a stock is, the more likely is to turn an investor into a lazy one who thinks there's no need to do any homework. Don't let that happen to you.

Don't you agree?

Say you were a frequent flyer with Air Asia from day one and you are a firm believer in that business model. So should you 'invest' in Air Asia because you 'know' the business?

Well, if one had invested in Air Asia from day one (without doing the homework) since its IPO listing back in Nov 2004, such an investment would have yielded a terrible, terrible result considering the general market had enjoyed a remarkable bullish run since 2004.

The below picture shows Air Asia performance since its IPO.

This rather terrible performance from Air Asia is not a shocker for me because I was less than impressed with the way Air Asia gave overly optimistic IPO earnings projections. See Air Asia. And if the investor had done the extra homework, the investor should have clearly seen that perhaps the IPO was simply priced based on sky high earnings projections. Which ultimately means it's probably way overpriced!)

How about Business Like Investing?

Well did you know that fellow blogger, Seng, had once written a great piece on investing called Fundamental Analysis (Do give a good read!)

Let me contribute a bit on Business like Investing or as Ah Seng Kor calls it BA or Business Analysis.

Business like Investing.

Making logical investment decisions is always crucial to one's success in investing. And it has been said that when one invests in a stock, perhaps one should consider it as if one has been given the opportunity to be a part owner of the business itself.

And when one adopts such an approach in their investment, one is forced to make investment decision based on simple logical decisions, decisions which are focused mainly on whether they believe that the stock that they want to purchase, represent a truly quality business in which they would want to be a part owner of such a business.

In short, one should think of being one of the bossie owning the business!!

And logically, if I am gonna be a BOSSIE in THE business, doesn't it make sense that I want to own a really good business?

In all honesty, who would want to own a lousy business?

And how would you rate your chances of making money from an ordinary, average business?

And needless to say, one would seriously not want to be own business with partners who you do not trust. Folks who would most likely cheat you the very second you have your back turned against them?

Put it this way, when we buy any stock, what are we doing in reality? We are buying the 'rights' to be a shareholder of the company, right? And since by the virtues of being a shareholder of the listed company, aren't we virtually the partner or part-owner (in regardless of the size of the shares that we purchase) of the business?

As said by one famous investor, Warren Buffett,

• “Investment is most intelligent when it is most businesslike.”

"We select our marketable equity securities in much the way we would evaluate a business for acquisition in its entirety. We want the business to be one

• that we can understand;
• with favorable long-term prospects;
• operated by honest and competent people; and
• available at a very attractive price."

Let's look at a simplistic example.

Ass-u-me and imagine that I own a famous barn yard called, Moo Moo Cow. So

if I were to approach you with a real-life opportunity to make an investment and be my business partner in my barn yard business, what's the first few things that you would be reasoning out?

1. How do we rate this barnyard business?

Do we understand what this cow business is all about? How on earth does one make money in a barnyard? etc etc....

2. Show me the Moola! We then need to know how profitable the business is. This is where we look at stuff like earnings track record, cash flow, profit margins etc etc.

3. And then we need to know what's next. Knowing what has happened before is important but just as important; we would want to know about the long term business prospect of the barn yard business. Got future or not?

4. Business weakness and competitors?

Don't you want to know what's the weakness in this bard yard business? Are there any business competitors from any cousin cows?

5. Do you trust the owners?

Do you trust this moo moo cow enough to be a part owner of this business? Will I attempt to take advantage of you as a business partner by short-changing you in any which way possible? Do you trust me enough?

Do you think that this cow is competent enough to manage your money?

In short, it's all about corporate governance here.

6. And last but not least, how much?

How much is this investment in this barnyard going to cost?

What kind of returns are you looking at when you invest in my barnyard?

And these are some simplistic logical, commonsense rational issues that one would want to consider if one wants to be a business partner of a business.

And if this barn yard is really real and is listed in the stock exchange, when one invest in this cow stock, shouldn't one adopt the same businesslike approach as if one was buying an actual stake in the barn yard?

Here's an old blog posting based on this approach published a long time ago.

http://whereiszemoola.blogspot.com/2006/01/buying-quality-businesses-megan-part.html

Yes, if one had adopted the business like investing perspective, one would have never even considered investing in Megan!!

And here is an article posted on Wallstraits: http://www.wallstraits.com/main/viewarticle.php?id=1202

Interview with Zweig: Your Money and Your Brain

Jason Zweig has a new book called, Your Money and Your Brain - How the New Science of Neuroeconomics.

Saw a web posting on an interview with Jason on his new book. ( here )

---------------------------------------------------------------------------------------

You seem to suggest in your book that investors should not fall for the story behind the stock. What else does one look at, then?

The key is to understand a crucial distinction, first drawn by the great investor Benjamin Graham, who was Warren Buffett’s teacher. Stocks and businesses are not the same thing. Stocks flit around all the time; you can watch them moving up and down on your computer screen all day long. In New York, it’s not unusual for the price of a stock to change at least 10,000 times in a single day of dealing, and I imagine it’s not very different in Mumbai. Stock prices are in constant flux, but business values are not. The underlying value of an ongoing enterprise does not change every day. Something like 99% of all the trading activity in the typical stock is meaningless. The future value of a business has nothing to do with the current price of its stock. What you should do is learn to look past the noisy twitching of stock prices to the enduring value of businesses as living organisms.

Is the business run by honest people who treat outside investors fairly? Does it make products or provide services for which customers are willing to pay higher prices if necessary? Can you understand its financial statements?

These constitute the reality of the business and determine its future value. The “story” behind the stock is almost certainly nothing more than the stampede of thousands of speculators in and out of the shares. Train yourself to ignore them.

“The best financial decisions draw on the dual strengths of your investing brain: intuition and analysis, feeling and thinking,” you write. Isn’t there a dichotomy there?

Yes, there is. But let’s get our terminology straight, and again we can do so by going back to Benjamin Graham. Graham’s formal definition has never been improved upon: “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.” Notice carefully that this is neither an “or” nor an “and/ or” definition; all three components - analysis, safety, and an adequate result - must be present. If any of them is missing, you are not investing. You are speculating. In India, as in the United States, most people who call themselves “investors” are not investors at all. They are speculators. In the short run, particularly while the Indian capital markets are rapidly developing, speculators may be able to earn high returns by rapidly trading stocks without doing thorough analysis. But in the long run, you cannot earn sustainably high returns from mere “gut feelings.” I find it striking that in a society with cultural traditions of great patience and acute analytical ability, so many people trade as if their knickers were afire, scoffing at the long term and analysing nothing but the craziness of the crowd. There is no doubt in my mind that Indians have the potential to lead the world in investment skill. But, so far as I can tell from my faraway vantage point, what most Indians do is not investing. In my own portfolio, I do not invest with the next year in mind, nor even with the next decade in mind. I invest with the next century in mind; that is when my heirs will benefit from my decisions. I do not care what stock prices do this afternoon, or this week, or this month, or this year. I care whether business values are rising. That is what it means to be an investor. You have written about the link between dopamine and the way investors invest.

What’s the link?

Dopamine makes us pursue whatever we think will be rewarding. When we earn more than we expected, that generates a “positive prediction error” - a flood of dopamine that signals to our bodies that something good has happened. After only a few repetitions, the dopamine is released in our brains, not when we earn the actual gain, but when we believe we know that the gain is coming. It is not the reward but the prediction of it that generates pleasure in the brain. I call this the “prediction addiction.” You become addicted to your own belief that you are about to make money. Like any addict, when the reward does not come, you will go into a painful withdrawal.

Why do investors get greedy? Even Isaac Newton lost most of his money in the South Sea Bubble. What does Neuroeconomics have to say on that?

Greed is generated in the same regions of the brain that produce pleasure when we find food or shelter or love. These basic reward circuits are among the oldest systems in the human brain. Geniuses have them, too. Brilliant people are better at generating great ideas than the rest of us, but they are no better at controlling their own emotions than you or I. We get greedy because the anticipation of profits activates the dopamine system in the brain, flooding our neurons with a signal of excitement. Newton was not just one of the smartest men of all time, but was also very well-informed financially; he was the master of the Royal Mint. So he certainly knew better in the “thinking” part of his brain. But his “feeling” brain was swept away with greed. If you do not put policies and procedures in place, in advance, to control your emotions, you will never be able to resist the siren song of the markets when the markets go mad. Common sense and good judgment are vastly more valuable than intelligence.

What makes investors book profits fast, but hold on to their losses?

We do not merely buy stocks and sell them. What we really are buying is pride and prowess, and what we really are selling is pain and shame. Once a stock earns a large gain, you want to lock in the reason for your pride and the proof of your prowess; if you hang on too long, the profit may disappear. But, once a stock produces a big loss, you want to hide the source of your pain and shame. If you sell at the bottom, you will have to admit your error, and that admission will only compound your shame. Whenever humans are ashamed of anything, we cover it up. So we cover our financial losses by pretending they are not there.

So, what is the best way to invest?

My fondest wish for Indian investors is that index-tracking funds will become widely available at very low management fees and dealing costs. If I were an Indian financial entrepreneur, I would study US firms like Vanguard, Barclays Global Investors and Dimensional Fund Advisors to learn how they run their tracking funds so efficiently and fairly. And if I were a young Indian investor, I would embrace low-cost tracking funds and put most of my money there for the very long run. The combination of diversification, simplicity, convenience, and low cost provides an insuperable advantage to the tracking investor. The life of a rising professional is busy enough without having to spend precious time and emotion following every momentary rise and fall of every stock you own. If your money cannot buy you peace of mind, why invest at all?

Does luck have a role in investing?

Luck has a great deal to do with it. Whenever a stock trades, the buyer thinks the seller is making a mistake. The seller thinks the buyer is mistaken. Only one of them can be right. After they both pay their dealing costs and any taxes on the transaction, neither may show any net profit for his pains. In the short run, almost anyone can be right a few times in a row, by luck alone - just as anyone can flip a coin right-side up several times in a row without any coin-flipping skill, whatsoever. Even in the long run, luck can rule the day. It can take years, even decades, to determine whether an investor has genuine and repeatable skill or is just lucky. The danger comes when you believe you are skillful and, in fact, you turn out to be merely lucky. Then you do things out of a belief that every step you take is the right one, and you end up slipping on a banana peel and falling down the stairs.

You talk about the “illusion of control.” Investors tend to be over-optimistic when they are directly involved and have had no negative experience from the over-optimism. How does this affect investing decisions?

It is easy to believe “I did it” when a stock you buy goes up. However, your actions did not cause the price to rise. Ask yourself this: If I had not bought the stock at all, would it not have risen without me? The way to escape the illusion of control is to invest with the aid of a checklist, a series of rules you must always follow before buying or selling any investment. This way, the rules make the decisions for you, and you take your pride out of the picture, enabling you to be more objective. In my book, I outline some rules that may be useful for many people.

Can financial future be foretold?

Some things can be. I am very confident predicting that the Indian stock market will lose a third of its value over the course of a few months. However, I have no idea, whatsoever, when this will happen. I am equally confident predicting that the Indian stock market will rise ten-fold and more over the long term. And I am more confident still in predicting that the true investors who have the courage to buy when the market crashes will make much more money in the long run than the fools who buy only when stocks go up.

Why are investors so addicted to CNBC? Their broadcast gives a feeling the “stock markets are in a crisis all the time.” Does that have an impact on the way investors invest?

Years ago, you could only find out a stock price in tomorrow’s (or sometimes, the next week’s) newspaper. Now you can find out the latest price every few minutes on CNBC or every few seconds online. This is the tragedy of technology - that the tool that should make us wiser, instead makes us act more foolishly than ever before. The human brain is a pattern-recognition machine. The more frequently you look at a series of data, the more often you will see “trends” and patterns that are not really there; they are nothing more than chaos clothed in a costume of regularity, illusions of order in streams of data that are utterly random. After two consecutive stimuli in the same direction, the human brain automatically, involuntarily, and uncontrollably expects a third. We extrapolate repetition out of what actually is randomness. CNBC is addictive because it continuously presents you with the opportunity to perceive what is not actually there: order, predictability, reliable patterns. It grips us the way all great fiction is gripping, with the added irony that very few of us realise that what we are watching is actually fiction.

Most of the investment experts do not really give any usable information. Is not listening to such experts better than taking them seriously?

I would listen very seriously to any financial expert who would provide a comprehensive record of every forecast he has ever made, both good and bad. Many forecasters will tell us about every single one of their successes. However, to the best of my knowledge, there is no financial forecaster alive who has ever provided a complete list of all his predictions, including the failures. There’s a reason for that: Anyone who really knew how to forecast the financial future would be most unlikely to let others in upon his secrets.

Poker and Investing!

Here's a wonderful article posted on CNN money website. It's an interview by Jason Zweig on Bill Miller.

• Bill Miller: What's luck got to do with it?

I like this part where Bill Miller talk about Puggy Pearson.

• Bill Miller on poker and investing
  
  Question: Right. Who's Puggy Pearson, and why should anybody care?
  
  Well, the late Puggy Pearson was a professional gambler, lived in Las Vegas, had a 5th grade education, but nonetheless became legendary in poker, and really in other gambling circles, because of his undeniable skill at a game that involves a high degree of chance.
  
  And he won the World Series of Poker, I think in 1973. He also told me he actually won it one other time, but they awarded it to somebody else, because they didn't want him to win it twice. (Laughter) Back in the early years.
  
  Question: In the old days.
  
  I didn't know whether to believe him or not, but that's what he said. But in any case, he summed up the skills required for successful poker in a pithy way. And those skills, in my view, are also the skills necessary for successful investment.
  
  Somebody once asked Bill Ruane [the late manager of the legendary Sequoia Fund], and I happened to be in the audience that day, "How do you learn about investing?"
  
  And Bill said, "Well, if you read Ben Graham's Security Analysis and The Intelligent Investor you'll be well versed in it. And then if you read Warren Buffett's shareholder letters and understand them too, you'll know everything there is to know about investing. And you will become a successful investor."
  
  And I think Bill was right, but it takes a lot of time to do that. Puggy Pearson made it a little pithier when he said, his line was, "There ain't only three things to gambling. Knowing the 60/40 end of a proposition, money management, and knowing yourself."
  
  And if you translate that into investing, knowing the 60/40 end of a proposition means knowing when you have some competitive advantage over somebody else. And you don't bet, you don't gamble, you don't invest, unless you have some competitive advantage. I'll come back to what that means in a second.
  
  Second, money management means well, okay, if I've got a competitive advantage, how much do I invest? Do I invest 10 percent? 20 percent? 50 percent? Three percent? So knowing the proper money-management strategy, the proper amount of money to invest is the second thing.
  
  And then knowing yourself, that means knowing how you react to stress, how you react to adverse outcomes, how you react when things go well. Do you get giddy and overconfident when things are going well? Do you get morose and difficult when things go badly? Do you make bad decisions at both extremes? Just understanding your own psychology, what your weaknesses and strengths may be, as it comes down to evaluating decisions when the markets are at extremes.
  
  Those three things are really all that successful investing involves.
  
  Let's go back to the first one, though, and the 60/40 end of a proposition. There's three sources of competitive advantage in investing: informational, analytical and behavioral.
  
  Informational is - well, let's say you manage money for a Middle Eastern government, and you go over there and the oil minister tells you that they're going to double oil production in the next three months, you know something other people don't know.
  
  But informational advantages are very difficult to get. They're difficult for two independent reasons. Number one, the [U.S.] government tries to keep you from getting them, because they want a level playing field. There are rules against inside information and acting on it. People know when companies are going to release their earnings, and there's supposed to be equal access to that information. And then the hedge funds are the other independent reason. Many of them are trying to get an informational advantage. With so many of them out there doing this full time, it's very difficult for people to get an informational advantage - even other professionals such as ourselves.
  
  The second category is analytical advantages. This is where you know the same things that other people know, but you weight them differently, you give them different probabilities. And that can happen a lot. If you've owned the company over a long period of time, you can get a sense of how their business is evolving, how their capital allocation is going to work, that other people aren't thinking about. And you might have a different sense of their risk, the risk in assessing the investment. So the analytical advantage involves different probabilistic weights on the same information that other people have.
  
  And then the third one is behavioral. And that's the most enduring, because behavioral advantages arise out of the manifest tendencies of large numbers of people to react in predictable ways to certain kinds of situations. So we know that people are risk averse. We know that their coefficient of loss is about two to one - which means that they feel the pain of losing a dollar twice as intensely as they feel the pleasure of gaining a dollar.
  
  Question: Correct.
  
  People overweight the most recent information. They overreact to dramatic information, or dramatic circumstances. They tend to have what's called outcome bias, which is they judge things on their outcome, and not on their process. So a lot of these behavioral elements are things that you can actually identify and exploit to your advantage if you are aware of them - and aware also that no matter how much you're aware of them, you're not immune to them yourself. You really have to have a sense of discipline and patience, and understanding in that.

Do read the rest of the wonderful interview here: Bill Miller: What's luck got to do with it?