In a Keynesian beauty contest judges are told not to pick the most beautiful woman but instead to pick the contestant they think the other judges will choose as the most beautiful. Keynes put it this way: “Speculation: The activity of forecasting the psychology of the market.” Keynes went on to say the speculator must think about what others are thinking about, what others are thinking about the market. Some people who call themselves traders only succeed in doing so because they have better information or are taking the other side of trades with “muppets” being sold down the river via false advice.
People who trade on inside information are actually investors, albeit ones that may go jail if caught.
BOOK MARGIN SAFETY PDF TV
Seth Klarman writes in his book Margin of Safety: “Technical analysis is based on the presumption that that past share prices meanderings, rather than underlying business value, hold the key to future stock prices.” Talking heads on cable TV barking out recommendations to buy X and Sell Y as if they were on ESPN Sports Center are speculators/entertainers and are not investors. To guess about market “behavior” based on a chart is just that: a guess! Speculators are focused on price whether it may be an old baseball card or share of stock. You will hear them talk about how the market “behaves” rather than what the value of a given stock may be. 212).Īs an example, people who “day trade” stocks using goofy charts and other voodoo-like practices are speculators. How good are you at predicting what people will do once assembled into a mob? The big danger here is that you just end up following the crowd and doing what Munger talks about here: “Mimicking the herd invites regression to the mean (merely average performance).” If you are not going to do any better than average, what’s the point of doing any works to outperform an index fund (more on this on the next post? Seth Klarman writes: “If you can’t beat the market, be the market.” (Margin of Safety, p. The objective of a “speculator” is to make predictions about the psychology of large masses of people, which if you are both smart and experienced is a sobering thought. “If you’re an investor, you’re looking on what the asset is going to do, if you’re a speculator, you’re commonly focusing on what the price of the object is going to do, and that’s not our game.” Operations not meeting these requirements are speculative.” “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. If you do not follow this approach in Charlie’s view you are a “speculator” and not an “investor.”Ĭharlie is a firm believer in what Benjamin Graham once said: For example, a share of IBM stock is just a small share of IBM’s overall business. We have to have a price that makes sense and gives a margin of safety considering the normal vicissitudes of life.” Charlie Munger Īnyone who wants to understand Charlie Munger must understand this: If you are buying a share of stock, the investing process is the same as if you were buying a business since a share of stock is just a partial stake in a business. This isn't a blocker.“No matter how wonderful is, it’s not worth an infinite price. If you'd like to post, please send a request to the moderators. The subreddit is temporarily in restricted mode due to an influx of new users. In this work we shall not strive for a precise demarcation between investment theory and analytical technique but at times shall combine the two elements in the close relationship that they possess in the world of finance.
These typical activities of the securities analyst are invariably carried on with some practical idea of purchase or sale in mind, and they must be viewed against a broader background of investment principles, or perhaps of speculative precepts. Critical examination of balance sheets and income accounts, comparisons of related or similar issues, studies of the terms and protective covenants behind bonds and preferred stocks. Strictly speaking, security analysis may be carried on without reference to any definite program or standards of investment, such a specialization of functions would be quite unrealistic.