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đď¸ Uncertainty Is Your Friend
[5 minutes to read] Plus: Managing emotions like the best
Weekend edition
Canât get no satisfaction? Volunteering and getting fit simultaneously might do the trick.
Combining volunteering with exercise significantly boosts life satisfaction, according to a London School of Economics study. Participants reported a 27% jump in âbelongingâ and a 21% drop in âmental distress,â with a well-being boost of around 54%.
By the way, our very own Shawn OâMalley, the chief editor of our newsletter, just went on Millenial Investing to discuss key takeaways from studying The Essays of Warren Buffett.
Today, we'll discuss how some of the greats â including Buffett, Joel Greenblatt, and Bill Miller â regulate emotions in their investment processes.
All this, and more, in just 5 minutes to read.
â Matthew
Quote of the Day
"Brave doesnât mean youâre not scared. It means you go on even though youâre scared."
â Angie Thomas
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Trivia
The S&P 500âs dividend yield has moved down to 1.32%, the lowest since Q4 2021. When was the all-time low of 1.12%? |
Regulating Emotions to Invest Like the Best
Bill Millerâs fund beat the S&P 500 for 15 consecutive years (1991-2005)
Cutting through the noise
Sir John Templeton, the renowned mutual-fund manager and a trailblazer in international investing, chose to escape the busyness of Wall Street by living far away in the Bahamas. He read The Wall Street Journal days after publication, avoiding emotional reactions to day-to-day news headlines. Templeton accepted occasional 10-15% losses on single days, but he understood that panic wouldn't serve his long-term strategy.
Today's investors often feel overwhelmed by a flood of information. It's easy to lose sight of what truly matters. Below, we explore how some of the greatest investors have navigated the chaos and regulated their emotions. Investing, markets, economics â all of if âis largely about behavior and handling emotional intensity. As Charlie Munger put it, âHow could economics not be behavioral? If it isnât behavioral, what the hell is it?â
Drawing insights from legends like Warren Buffett, Bill Miller, and Joel Greenblatt, we highlight a few of their strategies for emotional management and decision-making in investing.
Joel Greenblatt: Know what you own
In 1985, at 27, Joel Greenblatt founded Gotham Capital. He achieved an average annual return of 40% over 20 years, turning an initial $1 million into $836 million. His journey, however, wasn't without setbacks.
An early investment in Florida Cypress Gardens turned problematic when a sinkhole swallowed the main pavilions. He couldnât have predicted that heâd invest in something that had a sinkhole under it.
His point: Events happen that you canât anticipate. Investing is about the quality of your thoughts, not solely the hours crunching numbers, calculating intrinsic value, and typing up reports. Uncertainty is one of the few certainties in investing, and avoiding catastrophe and panic is a superpower. Greenblatt still feels a kick in his stomach when he loses a lot of money, but heâs usually adjusted within two or three days.
"Iâve made big mistakes with big positions, and then bad things just happen," Greenblatt has told William Green on the Richer, Wiser, Happier podcast. "Part of what you get paid for in this business is your stomach. You need to handle the pain, especially with a concentrated portfolio. You have to have a little bit of a screw to take the pain, especially with a very concentrated portfolio that a number of people I know pursue.â
Greenblattâs approach echoes John Maynard Keynesâs timeless observation: âMarkets can stay irrational longer than you can stay solvent.â He believes that fully understanding what you own is crucial for managing emotional reactions because fully knowing your portfolio is âthe only way I think you can deal with the emotion because you realize what you own is still good.â
Bill Miller: Harness the power of time
Bill Miller, the legendary value investor, beat the S&P 500 for 15 consecutive years. Today, his portfolio is heavily invested in Amazon and Bitcoin, which he started buying at around $200 per coin. So he took a major hit in 2022, when both assets fell drastically.
But his deep understanding of risk tolerance guided him. Miller knows the value of knowing your risk limits, because he knows many investors overestimate their capacity for risk. When times are good, itâs easy to think you could survive a downturn. Itâs much harder to absorb paper losses when stocks are falling suddenly.
âPeople bail at exactly the dumbest point, at exactly the moment when they should be buying your funds because they get clobbered,â Miller noted.
Millerâs strategy involves ignoring market moods and focusing on long-term gains. He looks for opportunities in uncertain times, often targeting undervalued businesses. His âtime arbitrageâ approach involves looking further ahead than most investors, finding value beyond short-term data and market reactions.
He says the most enduring edge in markets is behavioral, âas humans tend to react emotionally, especially during abnormal and volatile times. As a result, we tend to see the greatest investment opportunities when markets are panicking.â
What also helps Miller is that he buys stocks at points of low expectations: A stockâs performance depends on fundamentals relative to expectations. For big winners, he wants the gap between how a company performs and how itâs expected to perform to be widest. One example is Amazon, which Miller has owned for decades and made a fortune on. Last week, it hit another fresh all-time high after more than doubling since last spring alone.
The other distinguishing factor for Miller comes straight out of Buffettâs playbook: Play the long game. Miller and other elite billionaire investors are essentially playing a different game from nearly everyone else, as their time horizon is much longer.
Miller calls it âtime arbitrageâ because itâs about looking further out than anybody else. All companies have short-term problems. But to look beyond one earnings report, a few headlines, and a few Federal Reserve decisions is where Miller ďŹnds his brightest opportunities. He harnesses the precious value of time.
âIn an environment with massive short-term data overload, inefficiencies are likely beyond 12 months,â Miller said.
Warren Buffett: Uncertainty is your friend
Buffett, the most famous investor of all time, took over Berkshire Hathaway in 1965 and has since averaged a remarkable 20% annual return. Through all kinds of market conditions, Buffett has thrived by embracing uncertainty and making strategic decisions during times of fear.
âWe have usually made our best purchases when apprehensions about some macro event were at a peak,â Buffett wrote in his 1994 letter to shareholders. âFear is the foe of the faddist, but the friend of the fundamentalist.â
During the Great Financial Crisis in 2009, he reiterated, âA climate of fear is the best friend of the investor. Those who invest only when commentators are upbeat pay a heavy price for meaningless reassurance.â
In October 2008, with fear all over Wall Street, Buffett said he was âbuying Americanâ and correctly predicted that most major companies would set new profit records five, 10, and 15 years later.
Buffett wrote: âA simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nationâs many sound companies make no sense.â
For years, Buffett has described himself as a âfocus investor.â He ignores the crowd and stays committed to investments he understands. Today, that means not chasing AI stocks he says he doesnât fully understand. It also means sitting on a âboatloadâ of cash during todayâs bull market, ready to buy undervalued assets sometime in the future.
He likens fear in investing to a virus, noting that it affects some more than others, but acknowledges the predictability of cycles of greed and fear. Just as investors panicked in 2008, early 2020, and throughout 2022âs selloff, Buffett was scooping up shares in great companies at fair prices.
âUncertainty actually is the friend of the buyer of long-term values,â Buffett has stated.
Dive deeper
For more, listen to William Greenâs compilation of interviews with Greenblatt, Miller, Howard Marks, and François Rochon.
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