Jason Zweig: "The Devil's Financial Dictionary and The Intelligent Investor" | Talks at Google



hello and welcome everyone our speaker for today is Jason swag Jason writes a weekly column the intelligent investor for the world street journal it's a very very popular column he's also going to be speaking about this book the devil's financial dictionary so I'm not going to give away more on the subject of that book though but it's very interesting about you know if you look at the array of subjects that jason has written about over the last thirty years he's written the little book of safe money and investing guide he's also assisted the Nobel prize-winning psychologist Danny Kahneman in writing his book Thinking Fast and Slow Daniel Kahneman for those of you that know gave a fantastic talk at Google some time ago and Jason frequently speaks to CFA's investors students journalists so in talking to him before the talk I was asking him hey you know when did you get your CFA and he said I don't have one and I said you know do you have a CFP he said no and I said but least tell me you have an MBA and he said no and I found them pretty interesting and I guess you know he might talk more about you know why or why not that is a good or bad thing Jason is guided largely by saying of his father's it's remarkable how much you have to learn in order to realize how little you need to know it also brings to mind what Einstein said which is when he mentioned education is what remains after one has forgotten what one learned in school so without further ado ladies and gentlemen please join me in welcoming Jason spike thank you sorrow and it's my pleasure to be here I'm like everyone who writes and researches for a living Google has been an enormous help to me over the years so I think turnabout is fair play I'll try to give you some useful ideas today and of course for the folks who might be tuning in later on YouTube and welcome to all of you and thanks to everybody for coming today so I'm going to talk about my new book the devil's financial dictionary but I'll also talk a little bit at the end about my role in editing the Benjamin Graham book the Intelligent Investor and as many of you know Graham was probably the greatest investment advisor of the 20th century the founder of the modern discipline of security analysis Warren Buffett's teacher and it was certainly one of the great honors I've had in my career involved in editing his book the Intelligent Investor so this is the devil's financial dictionary and it was inspired very directly by the devil's dictionary by Ambrose Bierce and thank you google books if we have anybody from google books in the room this this is the title page the book first appeared in its final form over a century ago and many people would regard it as one of the funniest books ever written in the English language I'm among them and this is Bierce he was born in 1842 he is believed to have died in 1914 although no one really knows for sure he is believed to have died when weary of human folly he walked across the border into the Mexican Revolution hoping that he would be shot and no one really knows what happened to him to that but he did not suffer fools gladly and here are a few examples of definitions from the original devil's dictionary this is probably his best known definition those of you who are married sora perhaps you can sympathize with this love noun a temporary insanity curable by marriage another favorite of mine once you are in love you should remember this jealous adjective unduly concerned about the preservation of which of that which can be lost only if it is not worth keeping and here's one of his few financial definitions that's quite good finance noun the art or science of managing revenues and resources for the best advantage of the manager and I've included this one on it gives you a sense of how dark Pierce's view of the world was I don't really endorse his pessimism you can draw your own conclusions about his personality but I put it up because those of you who buy the devil's financial dictionary will encounter some definitions that I've written that also feature these little I call them flights of fancy in which an imaginary character explains helps us understand the definition and in this case Bierce is giving us a two lines of poetry from a non-existent medieval English poet named bori the bald but in any case so why did I want to write this book well some of you might be familiar with the 19th century British essayist and historian Thomas Carlyle who is today perhaps best known for saying that economics is the dismal science which is a little quip that he made in an article he wrote I believe in the 1840s and what I would argue after almost 30 years of writing about investing is that if economics is the dismal science then investing is the abysmal art and it is rendered boring and overly complicated a few words I've heard over the years about various investing books or some of these I'm sure anyone in this room who's who's read a book on investing might have adjectives of your own you would tend to apply but it's never really been clear to me why there's no sense of fun involved I'm when we talked about investing and also why so few people point out the ridiculousness and the absurdity that often is involved when people manage other people's money so that's some of the spirit I wanted to get at in the book and the other thing is it occurred to me as I was thinking about um recapturing some of the spirit of Ambrose Bierce that maybe if you can make people laugh you can help them learn and I think one of the real pitfalls of traditional financial advice is it's so somber and deadly serious and sort of self referential and often self-righteous and one of the things I've learned over the years is that yes it's true in the very long run financial markets and the returns on investments they're driven by economics fundamental forces of supply and demand I'm but in the short-term the medium-term even the fairly long-term for many years on three to five sometimes ten years markets are driven by psychology often crowd psychology sometimes abnormal psychology and another wonderful thing that a satirical dictionary format enables a writer to do is to look at Adam ology the the derivations of words as often one of the things we pick up when we learn where words come from is the hidden meanings that kind of lurk within the heart of terminology we use every day without really being very aware of it a one simple classic example is and I'll ask does anybody in the room know what do the words happy happen and perhaps all have in common does anyone know what the root word hap means in early english exactly means luck so remember the next time you're happy which I hope will be in a couple minutes from now remember that you're you're happy because you're lucky and to some extent to be lucky used to be happy so I wanted to have some fun with ideas like that on but it's also I wanted to bring in financial history because one of the critical things investors need to do is learn from mistakes now we can learn from our own mistakes but it's a lot cheaper to learn from other people's mistakes right and a really simple useful definition of history is it's the record of other people's mistakes and and also their regrets so we can learn from that and then the final thing that I think satire is used for is to fight confirmation bias to prevent us from digging ourselves into an ever deeper hole of our own decisions and just constantly drilling down to prove that what we've already done is right and just to sink into this sinkhole of our own sunk costs until we can't get out and if you can bring a little sense of play and make a little bit of fun of people's ideas maybe you can jolt them out of that complacency that at least was my hope so I'm just putting up one illustration from the book just to give you a sense of the feel that the publisher and I wanted to get across some of you may recognize this is a 16th century Dutch engraving taken from a painting by the great Dutch master Pieter Bruegel the elder and this was engraved around 1550 8 and the the queenly character sitting in the middle is a Barret Xia or greed and you can see all of these people and creatures are worshipping her serving her in one form or another filling her chest with gold her lap is full of gold there's a frog in the foreground or might be a toad frogs and toads were symbols of greed in medieval Europe and there are all kinds of other things going on and at the risk of bothering people who are eating their lunch I'll point out that on the far right a stork is feeding from the bottom of that bad figure immediately to the left and so I wanted to give you a few of the definitions in the book just to give you a feel for what I'm trying to do and I'm those of you who are in the market for financial advice should probably keep these first two in mind so big Purdue's noun a stockbroker or insurance agent who produces big commissions the term is erroneous however the broker or agent doesn't produce the Commission's it is his clients who produce them he just collects them so then financial adviser often someone who cares deeply about being prudent diligent competent and honest in which case his or her services will be priceless sometimes someone who cares only about being a big producer in which case you are in for big trouble this is one of my favorite definitions it's very short potential conflict of interest noun an actual conflict of interest every prospectus you read every document your financial advisor might hand you will mention this term potential conflict of interest and you should remember that the real meaning is actual conflict of interest I'm forecasting noun the attempt to predict the unknowable by measuring the irrelevant a task that in one way or another employs most people on Wall Street because the human mind hates admitting the truth that the world is largely random and unpredictable forecasters will always be in demand regardless of their futility Wall Street follows what marketing professor J Scott Armstrong has called the seersucker theory for every seer there is a sucker in the real world as with weather forecasts or predictions about who will win a sporting event those making the projections typically estimate the likelihood that they are correct Wall Street forecasts on the other hand almost never have probabilities attached as decision scientist Baruch off-road in 1994 when both forecaster and client exaggerated the quality of forecasts the client will often win the race to the poorhouse a long-term is another favorite of mine and I think it's one that's very useful for people to bear in mind long-term adjectives on Wall Street a phrase used to describe a period that begins approximately 30 seconds from now and ends at most a few weeks from now now here I've put up one of my favorite images this is a clay model of the liver of a sheep from ancient Babylonia and it was made sometime between 1900 and 1600 BC so it's well over 3,500 years old almost 4,000 years old and here's the definition baru noun in ancient mesopotamia a priest who specialized in predicting the future by studying the contours of a liver or lung taken from a sacrifice sheep the baru worked from an intricate template often rendered as a claim app that charted dozens of variations on the surface of the sheep's organ as in this example from the British Museum we may safely presume that when the burroughs predictions didn't come true he blamed it on the dead sheep the modern version of a Mesopotamian baru is known as a technical analyst and this is another illustration that I love this is from a 15th century British manuscript and it might look a little mysterious to you but I think you'll you'll understand when when I read the definition bonuses noun a mythical creature described by the ancient Romans and often included in medieval bestiaries the bonuses closely resembles a bull but with its horns curled back toward its tail because the horns are only for show as the Roman naturalist plenti wrote the bonuses has no way to deter predators and will run away as soon as it is threatened when it becomes panic-stricken the bonuses spews immense quantities of flaming hot manure in its wake as the next stock market crash will show the typical investor who believes himself to be a bull will turn out to be a bonuses do not stand too close behind him irrational adjective a word you use to describe any investor other than yourself so here I have a little set of some of the behavioral finance definitions in the book they form a little bit of a theme as you might imagine overconfidence a belief unjustified by the evidence that one knows more or is better than others the predominant personality trait of most investors and nearly every amateur trader to be overconfident is to be ignorant of your own ignorance in the financial markets overcoming overconfidence is essential and extremely expensive bull noun a person who believes that an asset will go up in price a belief often based exclusively on the fact that the person happens to own it a bull in full stomp is almost incapable of absorbing any evidence suggesting that the asset might go down instead bull market noun a period of rising prices that leads many investors to believe that their IQ has risen at least as much as the market value of their portfolios after the inevitable falling prices they will learn that both increases were temporary and this one is very important and we'll come to that we'll circle back to this when I talk about Benjamin Graham toward the end career risk noun the risk that by thinking independently a money manager might lose clients and danger a big salary and harm his or her career for money managers the only risk that matters when professional investors are right no one will ask why their clients will be too busy counting their profits to seek an explanation but when money managers are wrong their clients will immediately want to know why they made the mistake portfolio managers can either be wrong in a crowd in which case no one will blame them for making the same mistake everybody else made or wrong and alone in which case they will look like idiots a option now sorry hang on one second like everything in life this is a little harder than it looks option down the right to buy or sell a financial asset at a fixed price on or before a specific time from the Latin Optio I choose a boon for stockbrokers whose clients don't understand how options work and generate a fortune in commissions as they attempt to learn and here I have a little flight of fancy explain he asking me a client of the brokerage firm born rich and how I put two children through Harvard by trading options unfortunately they were my broker's children perhaps the earliest recorded options trade according to Aristotle was made by Thalys of Miletus circus 624 to 547 BC one of the seven sages of Greece who put down deposits on all year by olive oil presses one winter when his knowledge of astronomy purportedly told him that the next year would bring a good olive crop faily spade almost nothing and profited hugely when the abundant harvest created high demand for presses thus making him one of the first individual investors to make more money trading options than his brokers did he was also one of the last now obviously I have to remind all the Googlers that this refers to exchange traded options rather than incentive options and broker the comparative form of broke also used as a noun a person who buys and sells stocks bonds mutual funds and other assets for people who are under the delusion that the broker is doing something other than guesswork one early definition of a broker sometimes attributed to the British lexicographer Samuel Johnson is a negotiator between two parties who contrived to cheat both and here I'd like to show you this wonderful although maybe not so tasteful engraving from 1720 which illustrates the South Sea Bubble and the various other speculations that swept through Europe at that time and these are two brokers who are distributing securities and you can see that hostility to the financial industry is not exactly a contemporary phenomenon this is almost 400 years ago a panic noun and verb contagious fear that sweeps across a crowd a market or a planet frightening multitudes of people into selling and leaving the rest wondering whether they should like swarms of cicadas long ago there were panics roughly every 17 years in 1819 1837 1857 1873 1893 and 1907 the word derives from the god Pan who haunted the pastures and wild places of ancient Greece in the form of a grinning but ugly man with the horns ears and hairy leg of legs of a goat pan was the god of herds and flocks serenading them with his pipes fittingly Pan was the son of Hermes the god of shepherds messengers diplomacy travel trade and every suggesting that the relation ship between panic and trade is as old as commerce itself and this illustration comes from September 1873 immediately after the panic of 1873 that swept through Wall Street and the caption is panic as a health officer sweeping the garbage out of Wall Street New York only a few years earlier had been subject to several cholera epidemics that were believed to have been caused very likely correctly by the abundance of garbage in the streets including horse manure and other things and so sanitation workers were organized and hired by the city and they would these sweeping crews would go through but here what the artist has done very cleverly is he's transformed one of them into the Greek god Pan to symbolize the financial panic that had just struck a risk noun the chance that you don't know what you were doing when you think you do the prerequisite for losing more money in a shorter period of time than you could ever have imagined possible risk can be formally defined as the odds of an adverse or undesirable outcome when the forecast is for an 80% chance of sunshine for example then the risk of rain is 20% or as the extent to which extreme outcomes differ from the average it has been philosophically defined by finance professor Elroy Timpson of London Business School this way risk means more things can happen than will happen in the end risk is the gap between what investors think they know and what they end up learning about their investments about the financial markets and about themselves stocke noun the right to own a fraction of a business regarded by most investors as the right to play a video game so that gives you a taste I think of some of the definitions I have in the book and how I hope using a little bit of a forked tongue might help shock people out of accepting things at face value when they're dealing with the financial markets and here just getting back to the idea of dis confirmation are a couple of quotes from Warren Buffett and his business partner Charlie Munger about Charles Darwin and I think the main thing I learned in working on this book is how hard it is to mock an idea and to poke fun at it fairly if you don't know what you're talking about in order to hit the target and to find the humor or the absurdity that's lurking at the heart of an idea a marketing pitch or any other investing concept might be confronted with you have to understand it pretty well because if if you poke fun at it without fully understanding it it just comes across as mean and so far in the three months this book has been out I haven't had anybody on Wall Street complained to me that I was unfair in fact on a lot of investment bankers and fund managers have said to me oh you you you were way too nice so I think there's a there's an important lesson in this which is um it can be quite useful for you as individuals and maybe as members of an organization or you commit to an idea on an investment a project um or a significant new initiative it might be worth privately seeing if you can ridicule it first what's funny about it what makes no sense and I think that can be a useful mental exercise I I would obviously I would run that past my supervisor before I tried it if I were you but I think there's a lot of wisdom that can come from trying to find the the absurdity the humor that's lurking inside an idea it's believe me it's much better to do it in advance beforehand than to find out after the fact that what we just spent all our time and money on was ridiculous so let me talk for a few minutes about the intelligent investor I'm in 2003 I had the great honor of editing the book and I learned a great deal from doing that Benjamin Graham was born in 1894 he died in 1976 he was one of the most successful investors of the 20th century and interestingly he spent a great deal of time in the first edition of the book on this question you know what makes an intelligent investor and he was he took great pains to emphasize that it's not the kind of intelligence that we might normally associate with intelligence measures and it has nothing to do with IQ or SAT scores or GREs or any other standardized test it also doesn't have anything to do with credentials time and he was very specific what he meant as he put it it's a function more of character than intelligence as most people define it and he also in throughout his writings enables us to see what he meant by character what what makes that kind of intelligence and these are critical virtues for anybody who wants to succeed as an investor regardless of what investing approach you take so you have to be patient you have to be prudent it's very important to be independent and skeptical that's at the heart of everything you have to be curious and eager to learn that one at least has stood me in good stead you have to be disciplined and that really means self-control so Ram drew a key distinction between investment and speculation this paragraph I think every investor should memorize an investment operation is one which upon thorough analysis promises safety of principle and an adequate return operations not meeting these requirements are speculative and then he defines each of these terms thorough analysis the study of the facts in the light of established standards of safety and value so you have to work at it safety of principal protection against loss under all normal or reasonably likely conditions or variations and here I want to emphasize he he's not saying that the asset you're analyzing can't lose money what he's saying is you should be very confident based on evidence that the business risk is minimal that you're not buying into a company or firm or a market or an asset class that will simply go away you're not going to lose 90% of your money or more because you didn't foresee an obvious flaw in the business model or the value eight and you know a really simple example from the headlines of the past few months would be valiant pharmaceuticals which really built its business on the idea of acquiring one drug company after another and then drastically raising prices immediately after the acquisition which any number of people said probably isn't a sustainable business model and at least based on what we've seen in recent weeks that seems to have been borne out and this is the most fascinating part of Graham's definition of all I think how does he what does he mean by adequate or he sometimes use the term satisfactory return any rate or amount of return however low which the investor is willing to accept provided he acts with reasonable intelligence so what he's really saying is when you when you are investing you should ask yourself what is the minimal rate of return I'm willing to accept to enter into this investment and that's a very helpful way of steering people away from having unrealistic expectations which is so often a problem and so Graham drew another really helpful distinction that I think is often overlooked he talked about two kinds of investors defensive and enterprising and the conventional definition of investor I think we've all heard it many of you have probably taken questionnaires that financial advisors give you asking you how much risk you want to take or you can take and often it breaks down into these three categories that I regard as kind of silly actually conservative moderate and an aggressive the notion that there are you know a hundred million investors in the United States and only three types seems a little silly I'm and there's a much more basic problem which is that it's extraordinarily difficult to measure individual risk tolerance before the risk comes home to roost and many of you may have taken a risk tolerance questionnaire that asks you and if the stock market went down 20% what would you do would you would you stay put would you buy more would you sell I see people nodding the problem is until it goes down 20% everyone says oh yeah I'd buy more then it goes down 20% and people sit on their hands or it goes down 50% and they sell or it goes down 80% and they don't buy another stock for 20 years even though this risk tolerance questionnaire said they had plenty of tolerance so Graham instead draws a completely different distinction and it has nothing to do with appetite for risk or the capacity to take risk or withstand it it's how hard you're willing to work how interested are you I mean presumably everyone in this room and most of the people watching online are interested enough in investing to spend a few minutes listening to a talk so you are probably enterprising or at least tilting in that direction and so Graham says if you're defensive what you're trying to do is avoid big mistakes and very importantly you don't want to work very hard at it you don't want to spend your Saturday afternoon reading 10 Kay's or downloading financial documents from the SEC website and that's fine I'm if you are enterprising then you're probably willing to commit a lot of effort to investing as an enterprise that's why he chose that word because it is an enterprise it's an operation Graham called it operation it's work and for people who enjoy it it's it's a lot of fun it's enormous ly challenging the critical observation here is it doesn't matter whether you're defensive or enterprising what matters is that you know which one you are if you are defensive but you think you're enterprising you're going to be very sorry if you're enterprising and you think you're defensive you'll be disappointed because you won't have done as well as you could in bull markets and you probably will be disappointed in bear markets as well so you know for people who are defensive a simple portfolio of index funds that you never touch and never trade is perfect totally defensible decision if you're enterprising that was not going to be very satisfying and the virtue of all of this is unlike the conventional way of separating investors this is very easy to measure everyone intuitively knows how interested am I in investing as a process so another very powerful idea for Graham is the margin of safety and I'll summarize it in a very simple way which is just this that most people most individual investors ask themselves how much money will I make when I'm right and this is particularly among men this is a very standard question now on Grahams terms the intelligent investor instead will ask or in addition will also ask how much money will I lose if I'm wrong that forces you to focus on your margin of safety then just a couple of quick distinctions here so all of us in this room are individual investors most people watching online are also and we've been told for our entire lives that we can't compete with big institutions like mutual funds and hedge funds and pension plans insurance companies banks all the other investors with millions of dollars worth of research and resources high-frequency trading platform unavailable to us and there is a counter ideology that you often hear which is an individual investors can beat the pros at their own game if you just are faster and smarter and you heard this a lot in the 1990s it's been cropping up a lot again lately but I would ask a entirely different question which is why would you want to play that game the pros can't even win that game you know every year typically 7080 percent of all professional investors underperform the market so why would I want to play the game that they don't even know how to win wouldn't it make more sense for me to play my game and one of the reasons it's so hard for professional investors to win is because of the way victory is defined so they must they have to measure success by how they do relative to a market benchmark like the S&P 500 and short-term how are they doing year-to-date over the past twelve months six months three months one month week often many of them measure their results daily and that leads to an obsession with the short-term and complete myopia for the long-term but how would individual investors how can you how should you measure success it seems pretty obvious to me instead of measuring your success relative to the S&P 500 who cares right and instead of measuring its short-term just measure it against what you're trying to achieve which probably isn't beating the S&P 500 and certainly isn't beating it over the past 60 days or 60 minutes many of you have probably read the wonderful Richard Fineman book what do you care what other people think which I love but I also love the title of the book this is such a helpful reminder why would I care whether I'm beating the market that doesn't make me richer or poorer and if I want to match the market I can do it for almost free with an index fund maybe I have other goals I'm but certainly measuring my success by what other people are doing is not something I'm interested in and I don't think anybody should be and one of the critical advantages for individuals is how long your time horizon can and should be I mean many of you are young you're in your 20s or 30s those decades are well behind me but I measure my time horizon on in centuries I I often say I'm investing for the next hundred years and because I have children I have causes and I care about and I'm not going to be able to build a long-term legacy with my family's wealth if I focus on what's happening today this hour this minute so here are two wonderful things that Graham said this is from the intelligent investor and it's so important I will read it out loud but note this important fact the true investor scarcely ever is forced to sell his shares and at all other times he is free to disregard the current price quotation he need pay attention to it and act upon it only to the extent that it suits his book and no more buy suits his book Graham is using the old-fashioned Wall Street term for your interim profits and losses thus and I highlighted this in red thus the investor who permits himself to be stampeded or are unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage that man and of course Graham was writing in the 70s and we could say that investor would be better off if his or her stocks had no market quotation at all for the investor would then be spared the mental anguish caused him by other person's mistakes of judgment and Graham often used the term quotation 'el loss to describe what happens when there's an interim decline in the market so think about what he's saying here what he's saying is that as an individual rather than an institution you have this massive advantage of not needing to care about what the market is doing in the short term and if you do care you have taken your biggest advantage over institutions and turned it into a crippling disadvantage because what you've done is you've shifted yourself from playing your own game on your own playing field or pitch to playing their game which they can't win and you surely can't win because you don't have the resources they do not that it would help them win either so then Graham said later in 1974 we have heard many complaints that institutional dominance of the stock market has put the small investor at a disadvantage because he can't compete the facts are quite the opposite I am convinced that an individual investor with sound principles and soundly advised can do distinctly better over the long pole than a large institution where the Trust Company which of course today we would think of as a mutual fund company or maybe a broker or investment bank may have to combine its operations to 300 or less the biggest companies in the country or the world the individual has up to 3,000 issues for his investigations and choice most true bargains are not available in large blocks by this very fact the institutions are well nigh eliminated as competitors of the bargain hunter so what he's really saying is not only can individuals do well competing against institutions but there's some reason to believe if your head is in the right place you could do even better so what do I take away from all of this the first is just to emphasize the point Graham was just making which is you need to position yourself if you are an enterprising investor you need to ask where can I go where the big institutions can't and one obvious choice would be stocks that are smaller than average another would be just for lack of a complex term stinker stocks companies that have done terribly lately that professional investors are throwing out of their portfolios they're throwing them overboard as fast as they can creating value for the future stocks that are hard to understand you may as engineers or quantitatively inclined people be able to fight your way through a prospectus better than a lot of professional investors another way to be intelligent is to be patient extend their time horizon years and decades as I mentioned be independent and there's a wonderful passage from Graham you are neither right nor wrong because the crowd disagrees with you you are right because your data and your reasoning or right one of Warren Buffett's favorite passages for good reason and then there's a wonderful saying from Ralph Waldo Emerson the essayist and philosopher that I love is easy in the world to live after the world's opinion it is easy in solitude to live after our own but the great man the great investor is the one who in the midst of the crowd keeps with perfect sweetness the independence of Solitude and I wouldn't recommend this in the workplace or at home as a way to get along with your family but as an investing philosophy it's absolutely brilliant and if you look at the careers of the world's greatest investors people like Graham or Warren Buffett or Charlie Munger you very much see this kind of mentality at work people who separate themselves from the prevailing tides of emotion in the marketplace when other people are euphoric they find that troubling when other people are miserable they find that exciting and the only way you can do that is with this kind of emotional detachment so thank you I would love to take some questions yeah this was fantastic folks if you have questions just raise your hands and I'll pass on the mic yes I'll take this one first if you don't mind thank you very great entertaining presentation but you know one issue we we have I think even other people here within the picking stocks is that we don't really believe that we can actually pick stocks that not gonna go out of business like see it's very great like you're saying so where is this dog that I know for sure if it go down I'm gonna buy more let me like it even iBM is not like that anymore like there's no blue chips or nothing for low to small stocks like we we don't like it be arrogant to believe that we can investigate their annual reports their management they could be lying in their report attitude so that's why I guess maybe we should just declare ourselves defensive investors and go with index because you the index not going to go to zero right so we hope but if you but if you can say maybe if you know well which were the stocks that maybe the large caps that we know that Benjamin Griffin when we used to NF invest his core portfolio was it like the standard tow or whatever is at that time and kind of what do you think could be equivalent this time or panic just to yeah well thank you for that and and I think you you largely answered your own question I think the critical factor for everyone is to be well calibrated you need to know about yourself how defensive or how enterprising am I prepared to be and how qualified do I feel to become enterprising if you're not comfortable with it or you've done a reasonable analysis and and you can't get comfortable that you could ever assess the probabilities then you should stay defensive now being defensive in grettings terms doesn't mean that your portfolio should all be cash it just means you're not going to analyze individual securities you could put all your money in stocks if you wanted to and putting it in index funds is a perfectly defensible choice and and a classic defensive choice I I I would add one thing I think which is that both Warren Buffett and Charlie Munger his partner have often talked about the importance of combining patience with what Charlie Munger likes to call gumption you know extreme determination at the right moment and if you have the sort of temperament we're in a period like the fourth quarter of 2008 or the first quarter of 2009 you can say I don't think the world is coming to an end I think financial assets are cheap I'm going to add more so one way you can be enterprising is you could be enterprising with a defensive portfolio you could say the next time there's a financial crisis or a crash and there will be one probably sooner rather than later although I have no idea when but the next time there's a market panic you could say I'm going to add a substantial amount of money to my portfolio now you don't have to do that and the next crash might be the final crash and it might turn out not to be a good idea but if history is any guide people who take that step in times of extreme disruption tend to do very well in the long run I think we had another question here yeah thank you for coming today Jason I said a question who do you think of the Benjamin Graham's and Warren Buffett's of the 21st century on your top three candidates in your opinion oh boy I'm not sure I want to go on record with that actually I'm you know uh yeah well no I don't know that that would make a difference I think it's very it's really important to be humble about anybody's ability to identify skilled managers in advance and there certainly are plenty of people out there who are building great track records right now but the amount of statistical analysis you have to do on their performance to have any confidence that it isn't just luck is really significant and in most cases on what we have is reputation that has gone largely unaligned and there are not that many managers whose records I've really statistically analyzed yet because typically by the time I get ready to do that on their performance has deteriorated so I think I maybe talk to me afterwards but for now I'm going to pass it's a really interesting question but I'm going to pass on that one for now thank you Jason for a great insightful presentation I have two-part question if it's okay one is a follow-up on the question that was just asked if you asked the same question the 70s and 80s would you have named Buffett at that time or would you not have for the exact same reason and if you would have why would you have yeah um I think in the 70s very few people would have named Warren Buffett and that was a really interesting useful lesson in that you know in many cases just given the standard margins of outperformance we tend to observe in the stock market where someone who outperforms a benchmark like the S&P 500 by one percentage point a year compounded is regarded as an extraordinary achievement so you know over a period when stocks are up seven or eight percent someone who earns eight or nine gets an enormous amount of favorable attention it's a pretty narrow margin and then given the standard deviation that is usually embedded in a track record like that often you need 50 to 80 years to have 95% confidence that the person is skillful and not lucky and at that point you've pretty much dealt with a human lifespan your own and the money manager and so there's kind of a paradox that by the time you can be confident that the person is really good at what he or she is doing you're both about to die I'm so I don't think most people would have identified Buffett in the 70s quite a few did in the 1980s Carol Loomis the great financial journalist at fortune identified him almost immediately when she met him in the 60s I'm Carol is a good friend of mine and I'm some other people did as well but most people who've invested in Berkshire Hathaway arrived later the ones who made the most money from Berkshire are the ones who identified him earliest so second question during your presentation you referred to one specific example where investors had a principal loss of principal our valiant when I look at the 13 FS there's a quite a few renowned value investors some mutual funds that go back all the way to the 70s the Buffett in the 70s talk highly about some hedge funds some that actually worked with Buffett in Geico so a lot of past successes what do you think in your opinion were errors of judgment you're obviously looking in hindsight and then were the lessons that one could have learned from say something like investigative journalism that maybe the investors didn't apply to dig deeper yeah and I think the you know the the recent collapse in the stock price at Valeant Pharmaceuticals is is going to be a case study for years to come in investing classes and I don't think we have the full explanation what the cognitive errors were the analytical errors that professional money managers made but on I do think that what often happens in situations like is and I'm speaking in general any direct research on valiant and I have spoken directly about it with many of investors you're referring so I'm just speculating but I think in many cases people rely on the assurances of management and let qualitative factors skew judgments that otherwise would be quantitatively based and when as an investor you always have to be very sensitive to retroactive revisions of the reason you own of security if originally you invested based on quantitative measures and you now find that you're using qualitative justifications for continuing to hold it then that is a red flag and certainly one of the things I've learned over the past decade is the importance of having a structured decision process and working off a checklist or another template that compels you to organize your thinking and your rationale and it also makes it harder for you to migrate away from that over time and I think what we'll learn with hindsight is that many of these investors bought the stock for one set of reasons and then held it for a different set and that is always a red flag in investing as it is in a lot of other things in life I mean someone who married a spouse for one set of reasons and then stays with the spouse for another set it's probably not likely to have a very happy marriage and the same thing applies in the financial I think yes yeah I notice you have a lot of comments about marriage and I'm wondering if you know your wife is going to be watching this but yeah we have time for one last question I think you forceable dad oh you are heinous on other than that interest yes in managing other people's money do you see any model that is not has the potential of conflict of interest what do you think about and then follow up on it is it what do you think about the VC model where the charge management 20% on the profit right well there are there are many and groups in the asset management business who will tell you that they have no conflict of interest in fact I had a long email dialogue about a year ago with a financial adviser who said to me my fit my financial planning practice is conflict free I have no conflicts of interest at all just ask my clients and I tried to point out to him than in fact no matter how he charges he can't help but have conflicts of interest in fact if he didn't charge at all he would still have a conflict there's a it's there's an irreducible conflict in the fact that someone who's managing your money is managing your money not his or her own and there I don't think there's any way to eliminate that the key is for the asset manager and the client to be on the same page and to understand where the conflicts are and what the conflicts are so someone who's charging for example two and 20 as a hedge fund might or or some VC funds might has a clear incentive to raise money hang on to the money often take very substantial risks and one of the things you want to look for and again this is just a bit of general advice is as engineers you're very familiar with this sort of approach you want to look at the dispersion right you want to say well who out there is doing this more cheaply and what does it look like over at this end of the distribution and then who is doing it much more expensively and what does that look like and then we are in that continuum does this person or fund fall and am i comfortable with that is there a better cheaper way to do it where are the results do the results seem to be improved by higher fees I mean I guess it's theoretically possible but certainly what you want to do is you want to look at the alternative ways that you could be charged and ask yourself whether you're more comfortable with one of those other models of paying fees rather than this one you don't have to pay two and twenty if you don't want to and you might get stuck doing it if you like the people or the process but I don't think you should accept any fee structure as a given or set in stone and they're increasingly there there's a diversity of ways people will charge to manage your money and I think also individual investors tend to underestimate their own negotiating power you should always get the Form ADV which is the standard SEC disclosure that any registered investment advisor has to provide and often when you read the adv you will see something very interesting that the person you met with never mentioned our fees are negotiable and very few asset managers will volunteer that fact but by law if they may negotiate they must say they negotiate in the disclosure form they don't have to tell you directly but they do have to tell you in the disclosure form and if you see it there you should bring it with you when you meet with the person so I would just encourage you to be as aggressive on that front as you're comfortable being because these are the primary determinant of the difference between good performance and great performance and it's one thing that you can control probably much more so than you've been led to believe so I would just encourage that fantastic this was great and I really do hope that you know when your book is out that you visit again I'll bring my wife all right thank you so much all right thank you my pleasure

10 thoughts on “Jason Zweig: "The Devil's Financial Dictionary and The Intelligent Investor" | Talks at Google

  1. Very often veeerrry interesting talks… Horrible sound and direction… HTF a company like google, on their own site, presents crap like this!!!!! No compreendo!!! Look at TED and learn..

  2. sourav, the audio quality is very very poor, we could get any clarity !! please see if u can help in anyway //

  3. Google sure has a lack of understanding. Let me explain for YouTube viewers. For presenters using power point for their presentation, the YouTube viewer only is given a teaser view of the power point information. Obviously, if the technology was up to minimum standards, we YouTube viewers would not only see a talking head, we would also be exposed to the power point presentation. Just make a photographic memory so you can get up to speed after you have listen to the presenter chew his cud. Shame on Google for having the technology and not knowing how to use it.

  4. Great insights from Jason Zweig — a wonderfully wise, insightful, and entertaining observer of financial markets.

  5. I'll purchase the book when his investments have averaged 20% per year over the last 10 years. Until then, he's just a book salesman to me; not a professional investor.

  6. It's another google talk that I wanted to watch but bailed because of poor audio. Could you please do something about it!

  7. Dear google, I love googletalks. Could you please upload two versions for each talk, highly edited one only with highlights, 15mins max
    And then the full one. It will drastically change channel ratings. Thank you!

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