Baseball, Brass Knuckles, And Wild Weekends

This article was orignially published on Marketfy.

It is going to be an interesting weekend. The Inauguration of Donald Trump as the 45th President of the United States promises a new wave of arguments, paid discussions, rallies, counter demonstrations, and at least a moderate chance of full on riots in some of our major cities. It will be loud, it will be constant, and it will be on the major news networks all weekend. I will watch some of it since I am a news junkie but is going to be painful at times. It seems everybody has an opinion about Mr. Trump, and some feel a need to express it loudly and, occasionally, with a baseball bat and Molotov cocktail.

There will be another, much more important argument this weekend as well. Did the Hall of Fame get it right? I think they did, for the most part. I confess that Curt Schilling losing votes because of his political opinions leads me to fear that politically correct thinking is invading baseball writers as well as the mainstream press, and I find that as bothersome as not allowing whiskey in the Press Box. If we use PC as a standard, than a bunch of folks like Ty Cobb, Tris Speaker, Eddie Murray, and a host of others would get the boot. The guy won 10 of 12 postseason games he pitched, carrying with that a playoff ERA of 2.82. He was a World Series MVP. He should get in.

What does all this have to do with markets and stocks? Nothing, but then again neither does much of the stuff you hear discussed with great passion and conviction on the major financial news networks. We have a tendency to over think all of this and look for clues where they do not exist. Former Chairman of the Yale Endowment and author of several fantastic investment books Charley Ellis recently did a interview with the Financial Times and told reporter John Authers where he said, “We all learned in school that if you studied harder you could get better grades, then we learn in our jobs if we do more work for the employer we get more promotions. Trying harder works in many, many places. It doesn’t work in straight jackets, Chinese finger puzzles, and it doesn’t work in investment management.”

When asked, to sum up his investment approach, legendary investor Walter Schloss put it very simply saying, “We buy cheap stocks.” I am constantly looking for new ways to find and evaluate potential cheap stocks, but the secret sauce is simply: We buy cheap stocks.

Talking about all the macro stuff is fun, and there are some observers like Henry McVey at KKKR that I think to get things right a lot more than they get things wrong, but focusing on cheap stocks will tell you all you need to know about macro investing conditions. When markets are out of favor, and it is a very good time to buy, and there are lots of cheap stocks. When markets are high, and sentiment favors stocks, there are usually very few cheap stocks, and it is a pretty good time to consider selling or hedging your portfolio.

Charlie Munger said back at the 2008 Wesco Annual meeting that, “One of the greatest ways to avoid trouble is to keep it simple. When you make it vastly complicated, and only a few high priests in each department can pretend to understand it what you’re going to find all too often is that those high priests don’t really understand it at all. The system often goes out of control." Some years later, in an interview wth the Wall Street Journal, he said that, “It's waiting that helps you as an investor, and a lot of people just can't stand to wait. If you didn't get the deferred-gratification gene, you've got to work very hard to overcome that.”

The concept of a magical key that provides instant stock market riches if we just work hard enough, read enough trading books, and chart enough lines is one of the biggest reasons most individual investors underperform, not just the stock market but with cash and inflation as well over time. Our greatest advantages as individual investors are size and time, and we give them away every day. We can buy exciting companies with solid prospects at bargain prices and wait for them to grow up. We can invest in a portfolio if liquid community bank stocks purchased below book value and just hold them until they either grow or sell. We do not have an investment or policy committee that will fire us if we build cash balance to buy in a severe market decline at the cost of short-term performance.

The advantages of individual investors are size and time. It is like having brass knuckles in a boxing match or loaded dice at the crap table. Roger Ibbotson did a study on stock market liquidity factors and found that small, less liquid value stock outperformed growth stock with higher valuations by a margin of more than 8 to 1 over time. There are a ridiculous number of studies that show that longer holding periods mean higher returns and a good deal of the performance comes via the natural upward drift of the market and keeping the broker and taxman’s hands off your stash.

These are powerful wealth building advantages, and every day I see individuals throw them away, step into the ring and get their clock cleaned. They draw lines on charts and are puzzled when they lose, even after they worked so hard reading this or that trading book. They unload the dice and buy the same popular stocks everyone else is buying expecting different results. But It doesn’t work that way.

Work smart. Use your advantages. Buy cheap stocks. Hold them for a long time. Hoard cash for a crash. That seems too simple, but it works. Best of all it leaves lots of time for naps, baseball, family and a voracious reading habit.

As for the weekend, I do think we will see some unrest around much of the nation, but those on both sides should listen to the wisdom of Charlie Munger, who once advised during a speech at the USC Law School graduation ceremony that, "Another thing I think should be avoided is extremely intense ideology because it cabbages up one’s mind. When you’re young it’s easy to drift into loyalties and when you announce that you’re a loyal member and you start shouting the orthodox ideology out, what you’re doing is pounding it in, pounding it in, and you’re gradually ruining your mind."

Have a great week everyone. Don’t forget, the new Ed Thorp book, "A Man for All Markets" is due next week. Be sure to preorder your copy. You will want this one in print as it’s a keeper.