Portfolio Performance Quotes

If you find yourself stimulated in any way by your portfolio performance, then you are probably doing something very wrong. A superior portfolio strategy should be intrinsically boring.

But the simple truth is this: the more complex an investment is, the less likely it is to be profitable. Index funds outperform actively managed funds in large part simply because actively managed funds require expensive active managers. Not only are they prone to making investing mistakes, their fees are a continual performance drag on the portfolio.

To acquire an asset at greater cost than value is simply unwise.

All stakeholders should benefit from the capital we allocate in our portfolio, on a net value add basis.

Being net value adders puts us better positioned for long-term growth and longevity – because in the long term, capital flows to net value adders.

Since business is an exchange of value, with the greatest profits afforded to the businesses that add the most value most additionally – being a net value adder positions us to achieve the greatest ROI.

It is imperative to acquire assets at a financial cost that is less than their value. Timing the purchase based on changes in the marketplace or other factors may present great opportunity to widen the margin between cost and value.

Money managers tend to make irrational decisions just to protect their calendar year performances, even if they believe that decision is not in the best interest of investors.

Annual performance means nothing to individual investors.

the utilities and services sectors tend to perform well during an economic downturn; and as that downturn segues into a full recession, the technology, cyclicals, and industrial sectors will start to flourish. As the economy begins

I’m not going to worry about losing one friend if I have a hundred, but if I have two friends I’m really going to be worried. I’m not going to worry about losing my job because my one boss is going to fire me, because I have thousands of bosses at newspapers everywhere. One of the ways to not worry about stress is to eliminate it. I don’t worry about my stock picks because I have a diversified portfolio. Diversification works in almost every area of your life to reduce your stress.

If you buy an S&P 500 index fund, your investment is highly diversified and its performance will match that of 500 leading U.S. corporations' stocks. Is it possible to lose all of your money? Yes, but the odds of that happening are slim and none. If 500 leading U.S. corporations all have their stock prices plummet to zero, the value of your investment portfolio will be the least of your problems. An economic collapse of that magnitude would make the Great Depression look like Lifestyles of the Rich and Famous.

created a portfolio mix that I could comfortably put my trust money in for the next hundred or more years. I called it the “All Weather Portfolio” because it could perform well in all environments. Between 1996 and 2003 I was the only “client” investing in it because we didn’t sell it as a product.

Since exploitation pays, this could dampen our portfolios’ stock performance. Banking and shopping in ways that express solidarity with the poor could mean we pay more. And by acknowledging those costs, we acknowledge our complicity. When we cheat and rob one another, we lose part of ourselves, too. Doing the right thing is often a highly inconvenient, time-consuming, even costly process, I know. I try, fail, and try again. But that’s the price of our restored humanity.

What would a final exam look like in a course organized around a complex problem that must be considered in the light of several disciplines? Students would be asked to write an extended take-home essay about "what it means to be an American."-- and they would know from the first day of class that this was the final exam question. The second part of the final exam would require students to present and defend their papers in a public exhibition where parents would observe and ask questions. The Students’ oral and written work would be assessed on their ability to display a range of evidence to make their points. They would have to meet a performance standard to get a Merit Badge in American Studies.” -- this is the essence of the digital portfolio. (page 139)

On Diversification for Stress Management The below came from me asking, “What advice would you give your 30-year-old self?”: “My 30-year-old self wouldn’t have access to medical marijuana, so I’d have a limited canvas with which to paint. I’ve always made it a top priority since I was a teenager—and had tons of stress-related medical problems—to make that job one: to learn how to not have stress. I would consider myself a world champion at avoiding stress at this point in dozens of different ways. A lot of it is just how you look at the world, but most of it is really the process of diversification. I’m not going to worry about losing one friend if I have a hundred, but if I have two friends I’m really going to be worried. I’m not going to worry about losing my job because my one boss is going to fire me, because I have thousands of bosses at newspapers everywhere. One of the ways to not worry about stress is to eliminate it. I don’t worry about my stock picks because I have a diversified portfolio. Diversification works in almost every area of your life to reduce your stress.

Sex may be completely out in the open now, but it's still defined and controlled by a powerful subset of elite men. In the past thirty years, ideas about what makes women sexy have become narrower, more rigid, and more pornographic in their focus on display and performance. Nancy Jo Sales wrote an article in Vanity Fair about the 'porn star' aesthetic and young girls' behavior on social media, observing that pornography is not about liberation but about control. The more pornography, the more control. 'Girls talk about feeling like they have to be like what they see on TV,' the director of a youth-counseling service for teens told Sales. 'They talk about body-image issues and not having any role models. They all want to be like the Kardashians.' The pervasiveness of the porn aesthetic, combined with the under-representation of more multidimensional female characters, affects the attitudes, behavior, and ideas about gender roles in both girls and boys, but it's especially insidious for girls' self-concept; as they constantly absorb the message that the choice comes down to either duck-faced selfies across a portfolio of social-media accounts, or abject invisibility.

The combination of loss aversion and narrow framing is a costly curse. Individual investors can avoid that curse, achieving the emotional benefits of broad framing while also saving time and agony, by reducing the frequency with which they check how well their investments are doing. Closely following daily fluctuations is a losing proposition, because the pain of the frequent small losses exceeds the pleasure of the equally frequent small gains. Once a quarter is enough, and may be more than enough for individual investors. In addition to improving the emotional quality of life, the deliberate avoidance of exposure to short-term outcomes improves the quality of both decisions and outcomes. The typical short-term reaction to bad news is increased loss aversion. Investors who get aggregated feedback receive such news much less often and are likely to be less risk averse and to end up richer. You are also less prone to useless churning of your portfolio if you don’t know how every stock in it is doing every day (or every week or even every month). A commitment not to change one’s position for several periods (the equivalent of “locking in” an investment) improves financial performance.

Consider the following investing strategy: On the day before a Fed policy announcement, buy the stocks in the S&P 500 index. Sell them a week later, and buy them again the following week. Stick with that pattern until the Fed next meets. Sound ridiculous? A portfolio run this way since early 1994, when the Fed's policy-setting committee began publicly announcing interest rate decisions, would have returned about 650%. That is significantly better than the S&P 500's total return over the entire period of about 505%. The pattern of stocks performing

The performance of the American stock market is perhaps best measured by comparing the total returns on stocks, assuming the reinvestment of all dividends, with the total returns on other financial assets such as government bonds and commercial or Treasury bills, the last of which can be taken as a proxy for any short-term instrument like a money market fund or a demand deposit at a bank. The start date, 1964, is the year of the author’s birth. It will immediately be apparent that if my parents had been able to invest even a modest sum in the US stock market at that date, and to continue reinvesting the dividends they earned each year, they would have been able to increase their initial investment by a factor of nearly seventy by 2007. For example, $10,000 would have become $700,000. The alternatives of bonds or bills would have done less well. A US bond fund would have gone up by a factor of under 23; a portfolio of bills by a factor of just 12. Needless to say, such figures must be adjusted downwards to take account of the cost of living, which has risen by a factor of nearly seven in my lifetime. In real terms, stocks increased by a factor of 10.3; bonds by a factor of 3.4; bills by a factor of 1.8.

a blindfolded chimpanzee throwing darts at the stock listings can select a portfolio that performs as well as those managed by the experts.

Never forget that the portfolio’s the thing: Inevitably, it will contain poorly performing asset classes—there will always be at least one—but its identity will change from year to year.

There are many potential explanations for the less-than-robust performance, but IBM’s current strategy suggests that one component at least is a challenge to the traditional shrink-wrapped software business. As much as any software provider in the industry, IBM’s software business was optimized and built for a traditional enterprise procurement model. This typically involves lengthy evaluations of software, commonly referred to as “bake-offs,” followed by the delivery of a software asset, which is then installed and integrated by some combination of buyer employees, IBM services staff, or third-party consultants. This model, as discussed previously, has increasingly come under assault from open source software, software offered as a pure service or hosted and managed on public cloud infrastructure, or some combination of the two. Following the multi-billion dollar purchase of Softlayer, acquired to beef up IBM’s cloud portfolio, IBM continued to invest heavily in two major cloud-related software projects: OpenStack and Cloud Foundry. The latter, which is what is commonly referred to as a Platform-as-a-Service (PaaS) offering, may give us both an idea of how IBM’s software group is responding to disruption within the traditional software sales cycle and their level of commitment to it. Specifically, IBM’s implementation of Cloud Foundry, a product called Bluemix, makes a growing portion of IBM’s software portfolio available as a consumable service. Rather than negotiate and purchase software on a standalone basis, then, IBM customers are increasingly able to consume the products in a hosted fashion.

Mutual fund investors, too, have inflated ideas of their own omniscience. They pick funds based on the recent performance superiority of fund managers, or even their long-term superiority, and hire advisers to help them do the same thing. But, the advisers do it with even less success (see Chapters 8, 9, and 10). Oblivious of the toll taken by costs, fund investors willingly pay heavy sales loads and incur excessive fund fees and expenses, and are unknowingly subjected to the substantial but hidden transaction costs incurred by funds as a result of their hyperactive portfolio turnover. Fund investors are confident that they can easily select superior fund managers. They are wrong.

In the great majority of cases the lack of performance exceeding or even matching an unmanaged index in no way reflects lack of either intellectual capacity or integrity. I think it is much more the product of: (1) group decisions—my perhaps jaundiced view is that it is close to impossible for outstanding investment management to come from a group of any size with all parties really participating in decisions; (2) a desire to conform to the policies and (to an extent) the portfolios of other large well-regarded organizations; (3) an institutional framework whereby average is “safe” and the personal rewards for independent action are in no way commensurate with the general risk attached to such action; (4) an adherence to certain diversification practices which are irrational; and finally and importantly, (5) inertia.6 Classical

Passage Five: From Business Manager to Group Manager This is another leadership passage that at first glance doesn’t seem overly arduous. The assumption is that if you can run one business successfully, you can do the same with two or more businesses. The flaw in this reasoning begins with what is valued at each leadership level. A business manager values the success of his own business. A group manager values the success of other people’s businesses. This is a critical distinction because some people only derive satisfaction when they’re the ones receiving the lion’s share of the credit. As you might imagine, a group manager who doesn’t value the success of others will fail to inspire and support the performance of the business managers who report to him. Or his actions might be dictated by his frustration; he’s convinced he could operate the various businesses better than any of his managers and wishes he could be doing so. In either instance, the leadership pipeline becomes clogged with business managers who aren’t operating at peak capacity because they’re not being properly supported or their authority is being usurped. This level also requires a critical shift in four skill sets. First, group managers must become proficient at evaluating strategy for capital allocation and deployment purposes. This is a sophisticated business skill that involves learning to ask the right questions, analyze the right data, and apply the right corporate perspective to understand which strategy has the greatest probability of success and therefore should be funded. The second skill cluster involves development of business managers. As part of this development, group managers need to know which of the function managers are ready to become business managers. Coaching new business managers is also an important role for this level. The third skill set has to do with portfolio strategy. This is quite different from business strategy and demands a perceptual shift. This is the first time managers have to ask these questions: Do I have the right collection of businesses? What businesses should be added, subtracted, or changed to position us properly and ensure current and future earnings? Fourth, group managers must become astute about assessing whether they have the right core capabilities. This means avoiding wishful thinking and instead taking a hard, objective look at their range of resources and making a judgment based on analysis and experience. Leadership becomes more holistic at this level. People may master the required skills, but they won’t perform at full leadership capacity if they don’t begin to see themselves as broad-gauged executives. By broad-gauged, we mean that managers need to factor in the complexities of running multiple businesses, thinking in terms of community, industry, government,

When the stock market keeps going up, no stocks meet your hurdle rate and you remain on the sidelines. But the market continues its uptrend. It is extremely hard to watch your portfolios underperform and miss all the gains, and this can go on for years and years; this is especially true for the professional investors, as their performances are watched monthly, if not daily. Those

Employee Engagement is such a complicated corporate challenge of recent years, that it has turned decades old corporate belief "any can hold portfolio of Human Resource Manager" into myth.

Third, the idea that venture capitalists get into deals on the strength of their brands can be exaggerated. A deal seen by a partner at Sequoia will also be seen by rivals at other firms: in a fragmented cottage industry, there is no lack of competition. Often, winning the deal depends on skill as much as brand: it’s about understanding the business model well enough to impress the entrepreneur; it’s about judging what valuation might be reasonable. One careful tally concluded that new or emerging venture partnerships capture around half the gains in the top deals, and there are myriad examples of famous VCs having a chance to invest and then flubbing it.[6] Andreessen Horowitz passed on Uber. Its brand could not save it. Peter Thiel was an early investor in Stripe. He lacked the conviction to invest as much as Sequoia. As to the idea that branded venture partnerships have the “privilege” of participating in supposedly less risky late-stage investment rounds, this depends from deal to deal. A unicorn’s momentum usually translates into an extremely high price for its shares. In the cases of Uber and especially WeWork, some late-stage investors lost millions. Fourth, the anti-skill thesis underplays venture capitalists’ contributions to portfolio companies. Admittedly, these contributions can be difficult to pin down. Starting with Arthur Rock, who chaired the board of Intel for thirty-three years, most venture capitalists have avoided the limelight. They are the coaches, not the athletes. But this book has excavated multiple cases in which VC coaching made all the difference. Don Valentine rescued Atari and then Cisco from chaos. Peter Barris of NEA saw how UUNET could become the new GE Information Services. John Doerr persuaded the Googlers to work with Eric Schmidt. Ben Horowitz steered Nicira and Okta through their formative moments. To be sure, stories of venture capitalists guiding portfolio companies may exaggerate VCs’ importance: in at least some of these cases, the founders might have solved their own problems without advice from their investors. But quantitative research suggests that venture capitalists do make a positive impact: studies repeatedly find that startups backed by high-quality VCs are more likely to succeed than others.[7] A quirky contribution to this literature looks at what happens when airline routes make it easier for a venture capitalist to visit a startup. When the trip becomes simpler, the startup performs better.[8]

Test-drive employees Interviews are only worth so much. Some people sound like pros but don’t work like pros. You need to evaluate the work they can do now, not the work they say they did in the past. The best way to do that is to actually see them work. Hire them for a miniproject, even if it’s for just twenty or forty hours. You’ll see how they make decisions. You’ll see if you get along. You’ll see what kind of questions they ask. You’ll get to judge them by their actions instead of just their words. You can even make up a fake project. In a factory in South Carolina, BMW built a simulated assembly line where job candidates get ninety minutes to perform a variety of work-related tasks.* Cessna, the airplane manufacturer, has a role-playing exercise for prospective managers that simulates the day of an executive. Candidates work through memos, deal with (phony) irate customers, and handle other problems. Cessna has hired more than a hundred people using this simulation.† These companies have realized that when you get into a real work environment, the truth comes out. It’s one thing to look at a portfolio, read a resumé, or conduct an interview. It’s another to actually work with someone.

In Money: Master the Game, Ray Dalio elaborated for Tony: “When people think they’ve got a balanced portfolio, stocks are three times more volatile than bonds. So when you’re 50/50, you’re really 90/10. You really are massively at risk, and that’s why when the markets go down, you get eaten alive. . . . Whatever asset class you invest in, I promise you, in your lifetime, it will drop no less than 50% and more likely 70% at some point. That is why you absolutely must diversify.

to learn how to not have stress. I would consider myself a world champion at avoiding stress at this point in dozens of different ways. A lot of it is just how you look at the world, but most of it is really the process of diversification. I’m not going to worry about losing one friend if I have a hundred, but if I have two friends I’m really going to be worried. I’m not going to worry about losing my job because my one boss is going to fire me, because I have thousands of bosses at newspapers everywhere. One of the ways to not worry about stress is to eliminate it. I don’t worry about my stock picks because I have a diversified portfolio. Diversification works in almost every area of your life to reduce your stress.

The purpose of this chapter is to explain what it means for skillful investors to add value. To accomplish that, I’m going to introduce two terms from investment theory. One is beta, a measure of a portfolio’s relative sensitivity to market movements. The other is alpha, which I define as personal investment skill, or the ability to generate performance that is unrelated to movement of the market. As I mentioned earlier, it’s easy to achieve the market return. A passive index fund will produce just that result by holding every security in a given market index in proportion to its equity capitalization. Thus, it mirrors the characteristics—e.g., upside potential, downside risk, beta or volatility, growth, richness or cheapness, quality or lack of same—of the selected index and delivers its return. It epitomizes investing without value added. Let’s say, then, that all equity investors start not with a blank sheet of paper but rather with the possibility of simply emulating an index. They can go out and passively buy a market-weighted amount of each stock in the index, in which case their performance will be the same as that of the index. Or they can try for outperformance through active rather than passive investing.

Active investors have a number of options available to them. First, they can decide to make their portfolio more aggressive or more defensive than the index, either on a permanent basis or in an attempt at market timing. If investors choose aggressiveness, for example, they can increase their portfolios’ market sensitivity by overweighting those stocks in the index that typically fluctuate more than the rest, or by utilizing leverage. Doing these things will increase the “systematic” riskiness of a portfolio, its beta. (However, theory says that while this may increase a portfolio’s return, the return differential will be fully explained by the increase in systematic risk borne. Thus doing these things won’t improve the portfolio’s risk-adjusted return.) Second, investors can decide to deviate from the index in order to exploit their stock-picking ability—buying more of some stocks in the index, underweighting or excluding others, and adding some stocks that aren’t part of the index. In doing so they will alter the exposure of their portfolios to specific events that occur at individual companies, and thus to price movements that affect only certain stocks, not the whole index. As the composition of their portfolios diverges from the index for “nonsystematic” (we might say “idiosyncratic”) reasons, their return will deviate as well. In the long run, however, unless the investors have superior insight, these deviations will cancel out, and their risk-adjusted performance will converge with that of the index.

Active investors who don’t possess the superior insight described in chapter 1 are no better than passive investors, and their portfolios shouldn’t be expected to perform better than a passive portfolio. They can try hard, put their emphasis on offense or defense, or trade up a storm, but their risk-adjusted performance shouldn’t be expected to be better than the passive portfolio. (And it could be worse due to nonsystematic risks borne and transaction costs that are unavailing.) That doesn’t mean that if the market index goes up 15 percent, every non-value-added active investor should be expected to achieve a 15 percent return. They’ll all hold different active portfolios, and some will perform better than others . . . just not consistently or dependably. Collectively they’ll reflect the composition of the market, but each will have its own peculiarities.

Pro-risk, aggressive investors, for example, should be expected to make more than the index in good times and lose more in bad times. This is where beta comes in. By the word beta, theory means relative volatility, or the relative responsiveness of the portfolio return to the market return. A portfolio with a beta above 1 is expected to be more volatile than the reference market, and a beta below 1 means it’ll be less volatile. Multiply the market return by the beta and you’ll get the return that a given portfolio should be expected to achieve, omitting nonsystematic sources of risk. If the market is up 15 percent, a portfolio with a beta of 1.2 should return 18 percent (plus or minus alpha). Theory looks at this information and says the increased return is explained by the increase in beta, or systematic risk. It also says returns don’t increase to compensate for risk other than systematic risk. Why don’t they? According to theory, the risk that markets compensate for is the risk that is intrinsic and inescapable in investing: systematic or “non-diversifiable” risk. The rest of risk comes from decisions to hold individual stocks: non-systematic risk. Since that risk can be eliminated by diversifying, why should investors be compensated with additional return for bearing it? According to theory, then, the formula for explaining portfolio performance (y) is as follows: y = α + βx Here α is the symbol for alpha, β stands for beta, and x is the return of the market. The market-related return of the portfolio is equal to its beta times the market return, and alpha (skill-related return) is added to arrive at the total return (of course, theory says there’s no such thing as alpha). Although I dismiss the identity between risk and volatility, I insist on considering a portfolio’s return in the light of its overall riskiness, as discussed earlier. A manager who earned 18 percent with a risky portfolio isn’t necessarily superior to one who earned 15 percent with a lower-risk portfolio. Risk-adjusted return holds the key, even though—since risk other than volatility can’t be quantified—I feel it is best assessed judgmentally, not calculated scientifically.

The key to this matrix is the symmetry or asymmetry of the performance. Investors who lack skill simply earn the return of the market and the dictates of their style. Without skill, aggressive investors move a lot in both directions, and defensive investors move little in either direction. These investors contribute nothing beyond their choice of style. Each does well when his or her style is in favor but poorly when it isn’t. On the other hand, the performance of investors who add value is asymmetrical. The percentage of the market’s gain they capture is higher than the percentage of loss they suffer. Aggressive investors with skill do well in bull markets but don’t give it all back in corresponding bear markets, while defensive investors with skill lose relatively little in bear markets but participate reasonably in bull markets. Everything in investing is a two-edged sword and operates symmetrically, with the exception of superior skill. Only skill can be counted on to add more in propitious environments than it costs in hostile ones. This is the investment asymmetry we seek. Superior skill is the prerequisite for it. Here’s how I describe Oaktree’s performance aspirations: In good years in the market, it’s good enough to be average. Everyone makes money in the good years, and I have yet to hear anyone explain convincingly why it’s important to beat the market when the market does well. No, in the good years average is good enough. There is a time, however, when we consider it essential to beat the market, and that’s in the bad years. Our clients don’t expect to bear the full brunt of market losses when they occur, and neither do we. Thus, it’s our goal to do as well as the market when it does well and better than the market when it does poorly. At first blush that may sound like a modest goal, but it’s really quite ambitious. In order to stay up with the market when it does well, a portfolio has to incorporate good measures of beta and correlation with the market. But if we’re aided by beta and correlation on the way up, shouldn’t they be expected to hurt us on the way down? If we’re consistently able to decline less when the market declines and also participate fully when the market rises, this can be attributable to only one thing: alpha, or skill. That’s an example of value-added investing, and if demonstrated over a period of decades, it has to come from investment skill. Asymmetry—better performance on the upside than on the downside relative to what your style alone would produce—should be every investor’s goal.

Music is for everyone. It’s not—or at least shouldn’t be—an elitist, aristocratic club that you need a membership card to appreciate: it’s a language, it’s a means of connecting us that is beyond color, beyond race, beyond the shape of your face or the size of your stock portfolio. Musicians of color, however, are severely underrepresented in the classical music world—and that’s one of the reasons I wanted to write this book. Look up the statistics: 1.8 percent of musicians performing in classical symphonies are Black; 12 percent are people of color. But for me, day to day, performance by performance, it wasn’t about being a statistic: it was about trying to live my life and play the music that I loved, and often being

In December 1972, Polaroid was selling for 96 times its 1972 earnings, McDonald’s was selling for 80 times, and IFF was selling for 73 times; the Standard & Poor’s Index of 500 stocks was selling at an average of 19 times. The dividend yields on the Nifty-Fifty averaged less than half the average yield on the 500 stocks in the S&P Index. The proof of this particular pudding was surely in the eating, and a bitter mouthful it was. The dazzling prospect of earnings rising up to the sky turned out to be worth a lot less than an infinite amount. By 1976, the price of IFF had fallen 40% but the price of U.S. Steel had more than doubled. Figuring dividends plus price change, the S&P 500 had surpassed its previous peak by the end of 1976, but the Nifty-Fifty did not surpass their 1972 bull-market peak until July 1980. Even worse, an equally weighted portfolio of the Nifty-Fifty lagged the performance of the S&P 500 from 1976 to 1990.

If you’ve ever thought that it shouldn’t be so hard to examine your investment portfolio or hold your financial advisor accountable, you’re right. The system distorts your view of your money in the same way that a magician stacks the deck against the audience. It’s not evil or bad, but once you know how the magician does the illusion, you simply cannot be tricked so easily anymore. And once we all are in on the trick, the financial industry will need to improve, because the old, tired illusions won’t work anymore.

Deception and misdirection are acceptable in a magic show, but they are not at all appropriate in the arena of finance. The way we look at our investments and what we see when we examine our portfolios are both important because our view determines how well we navigate toward our financial goals.

A portfolio can only be “seen” as the data representing the holdings in each account, which means that your monthly investment statement is not actually your portfolio of stocks and bonds. Instead, the investment statement is more like the wrapper or costume between you and your money.

The seminal paper in the field was published in 1991 by William Sharpe, whose theories underpinned the original creation of the index fund, and was bluntly titled “The Arithmetic of Active Management.”16 This expanded on Sharpe’s earlier work, and addressed the suggestion that the index investing trend that was starting to gain ground at the time was a mere “fad.” The paper articulated what Sharpe saw as two iron rules that must hold true over time: The return on the average actively managed dollar will equal that of a dollar managed passively before costs, and after costs the return on that actively managed dollar will be less than that of a passively managed dollar. In other words, mathematically the market represents the average returns, and for every investor who outperforms the market someone must do worse. Given that index funds charge far less than traditional funds, over time the average passive investor must do better than the average active one. Other academics have later quibbled with aspects of Sharpe’s 1991 paper, with Lasse Heje Pedersen’s “Sharpening the Arithmetic of Active Management” the most prominent example. In this 2016 paper, Pedersen points out that Sharpe’s assertions rest on some crucial assumptions, such as that the “market portfolio” never actually changes. But in reality, what constitutes “the market” is in constant flux. This means that active managers can at least theoretically on average outperform it, and they perform a valuable service to the health of a markets-based economy by doing so. Nonetheless, Pedersen stresses that this should not necessarily be construed as a full-throated defense of active management. “I think that low-cost index funds is one of the most investor-friendly inventions in finance and this paper should not be used as an excuse by active managers who charge high fees while adding little or no value,” he wrote.17 “My arithmetic shows that active management can add value in aggregate, but whether it actually does, and how much, are empirical questions.

Just the opposite appears to happen in the medium term, three to eight years. A stock that was rising over one multi-year stretch has slightly greater odds of falling in the next. A 1988 study by Fama and another economist, Kenneth R. French, documented this. They looked back over the price records of hundreds of stocks and grouped them into portfolios based on their size. They found that about 10 percent of a stock's performance in one eight-year period-that is, there was a small but measurable tendency for a stock doing well in one decade to do poorly in the next. The effect was weaker, but still statistically significant, at shorter time-scales of three to five years. Others have corroborated such findings.

1. The conglomerate movement, “with all its fancy rhetoric about synergism and leverage.” 2. Accountants who played footsie with stock-promoting managements by certifying earnings that weren’t earnings at all. 3. “Modern” corporate treasurers who looked upon their company pension funds as new-found profit centers and pressured their investment advisers into speculating with them. 4. Investment advisers who massacred clients’ portfolios because they were trying to make good on the over-promises that they had made to attract the business. 5. The new breed of investment managers who bought and churned the worst collection of new issues and other junk in history, and the underwriters who made fortunes bringing them out. 6. Elements of the financial press which promoted into new investment geniuses a group of neophytes who didn’t even have the first requisite for managing other people’s money—namely, a sense of responsibility. 7. The securities salesmen who peddle the items with the best stories—or the biggest markups—even though such issues were totally unsuited to the customers’ needs. 8. The sanctimonious partners of major investment houses who wrung their hands over all these shameless happenings while they deployed an army of untrained salesmen to forage among even less trained investors. 9. Mutual fund managers who tried to become millionaires overnight by using every gimmick imaginable to manufacture their own paper performance. 10. Portfolio managers who collected bonanza incentives of the “heads I win, tails you lose” kind, which made them fortunes in the bull market but turned the portfolios they managed into disasters in the bear market. 11. Security analysts who forgot about their professional ethics to become storytellers and let their institutions be taken in by a whole parade of confidence men. This was the “list of horrors that people in our field did to set the stage for the greatest blood bath in forty years,

#11—What if I could only subtract to solve problems? From 2008 to 2009, I began to ask myself, “What if I could only subtract to solve problems?” when advising startups. Instead of answering, “What should we do?” I tried first to hone in on answering, “What should we simplify?” For instance, I always wanted to tighten the conversion fishing net (the percentage of visitors who sign up or buy) before driving a ton of traffic to one of my portfolio companies. One of the first dozen startups I worked with was named Gyminee. It was rebranded Daily Burn, and at the time, they didn’t have enough manpower to do a complete redesign of the site. Adding new elements would’ve been time-consuming, but removing them wasn’t. As a test, we eliminated roughly 70% of the “above the fold” clickable elements on their homepage, focusing on the single most valuable click. Conversions immediately improved 21.1%. That quick-and-dirty test informed later decisions for much more expensive development. The founders, Andy Smith and Stephen Blankenship, made a lot of great decisions, and the company was acquired by IAC in 2010. I’ve since applied this “What if I could only subtract . . . ?” to my life in many areas, and I sometimes rephrase it as “What should I put on my not-to-do list?

Interestingly, Agile’s scrum-team approach has its own way of aggregating some execution risk. For example, in a traditional “single task owner” approach, the risk of execution is not aggregated at all, leaving that task owner to add a lot of task-level buffer to self-insure and deliver on his commitment. In contrast, a 5-person scrum team aggregates the risk that any single individual will make slow progress, as the other four team members can often make up the deficit. But why aggregate only up to the scrum-team level? Taking a lesson from the insurance industry, the more that risk can be aggregated, the easier it is to manage. Applied to projects, this will nearly always mean that it’s better to aggregate risk at the project level. As a result, an Agile project can improve speed by avoiding sprint-level commitments.

While both Agile and CCPM offer ways to aggregate risk, CCPM advocates elevating this risk to the project and portfolio levels whenever beneficial, and whenever acceptable to the customer. In contrast, Agile focuses its risk aggregation on the scrum team, ignoring the benefits of aggregating risk to the highest level feasible. There’s no reason Agile projects can’t also benefit by aggregating the risk beyond the scrum team, to the project level.

Trefis.com

The situational diagnosis conversation. In this conversation, you seek to understand how your new boss sees the STARS portfolio you have inherited. Are there elements of start-up, turnaround, accelerated growth, realignment, and sustaining success? How did the organization reach this point? What factors—both soft and hard—make this situation a challenge? What resources within the organization can you draw on? Your view may differ from your boss’s, but it is essential to grasp how she sees the situation. The expectations conversation. Your goal in this conversation is to understand and negotiate expectations. What does your new boss need you to do in the short term and in the medium term? What will constitute success? Critically, how will your performance be measured? When? You might conclude that your boss’s expectations are unrealistic and that you need to work to reset them. Also, as part of your broader campaign to secure early wins, discussed in the next chapter, keep in mind that it’s better to underpromise and overdeliver. The resource conversation. This conversation is essentially a negotiation for critical resources. What do you need to be successful? What do you need your boss to do? The resources need not be limited to funding or personnel. In a realignment, for example, you may need help from your boss to persuade the organization to confront the need for change. Key here is to focus your boss on the benefits and costs of what you can accomplish with different amounts of resources. The style conversation. This conversation is about how you and your new boss can best interact on an ongoing basis. What forms of communication does he prefer, and for what? Face-to-face? Voice, electronic? How often? What kinds of decisions does he want to be consulted on, and when can you make the call on your own? How do your styles differ, and what are the implications for the ways you should interact? The personal development conversation. Once you’re a few months into your new role, you can begin to discuss how you’re doing and what your developmental priorities should be. Where are you doing well? In what areas do you need to improve or do things differently? Are there projects or special assignments you could undertake (without sacrificing focus)? In practice, your

Alexis Tsipras, the Syriza leader, has in recent weeks abandoned his pledge to “tear up” the country’s bailout agreement with international creditors and is emphasising more moderate steps to address Greece’s debt load as well as his deep commitment to the euro. Krishna Guha, of Evercore ISI, warned that — at a minimum — investors now faced “a four-week period of elevated uncertainty in which eurozone risk assets will struggle to perform”. Yet Mr Guha added: “We believe that Tsipras will prove more pragmatic than past Syriza rhetoric suggests. He has opened back channels to Berlin, Paris and Frankfurt, and has every incentive to try to negotiate relatively cosmetic changes to Greece’s programme and ride the early-stage Greek recovery rather than derail it.” Nick Wall, a portfolio manager at Invesco, also noted Mr Tsipras’ recent attempt to tack to the political centre. “They are going to need private sector investors, particularly if they are going to start running deficits again.

Mutual Fund Investments are not transparent: In India, SEBI regulates MFs. The money market MFs are regulated by RBI. There are restrictions as to the sponsor, board of trustees, asset management company, custodian, registrar, dealing with brokers, etc. The investment objective, fund manager, entry and exit loads, AUM, expense ratio and other terms and conditions are already known and provided in the SAI. Also, every MF scheme is required to publish a fact sheet on a quarterly/monthly basis that includes all the important facts that an investor would need to know about the scheme including portfolio holdings, past returns, performance ratios and dividends. Also, information relating to what’s in (bought) and what’s out (sold) by mutual funds is also available.

It is interesting that an investor who has some knowledge of the principles of equity valuations often performs worse than someone with no knowledge who decides to index his portfolio.

What does this mean? It means that there is a statistical link to firm performance through the MCM component capabilities of selection, portfolio view, monitoring, and adaptive learning. That is, firms that have these processes in place have better market performance, brand equity, and customer equity relative to the market average.

obvious, rather than rolling up numerous ad hoc spreadsheets, and an effective and broad system for data capture can save time and increase visibility into business performance. Without it, you must be very precise in the data you collect in order to avoid overburdening the organization or hitting material data-quality issues. However, don’t let a broad reporting system allow you to neglect the process of effective reporting. A mass of data is not the same as a report. Even if executives can drill down into real-time portfolio information, that is too ad hoc to be a process for keeping projects on track, and you will still need a structure of reports

The collective value of a typical venture capital portfolio will go down before it goes up—the pattern is called the J curve—because the companies that are not going to survive die before the best performers begin to shine and pull the value of the portfolio up with them. That,

The product managers now meet together as a group. They think about what they can accomplish together to meet their group performance. Now,

This is relevant because impact can be measured even more dependably than risk and because, I believe, we are about to see it measured systematically in impact-weighted financial accounts, which will reflect a company’s impact and its financial performance at the same time. Once such accounts start to take hold, impact thinking will have a momentous effect, just as risk thinking did previously: investment portfolios will change to deliver measurable social and environmental impact alongside financial returns.

Consider the situation where the dentist examines his portfolio only upon receiving the monthly account from the brokerage house. As 67% of his months will be positive, he incurs only four pangs of pain per annum and eight uplifting experiences. This is the same dentist following the same strategy. Now consider the dentist looking at his performance only every year. Over the next 20 years that he is expected to live, he will experience 19 pleasant surprises for every unpleasant one!

One of my cardinal principles has been to focus on avoiding losses rather than chasing profits. In golf it is the shot in the river or wood that destroys the round; similarly with investing - it is the portfolio losses that drag down an overall performance.

One is beta, a measure of a portfolio’s relative sensitivity to market movements. The other is alpha, which I define as personal investment skill, or the ability to generate performance that is unrelated to movement of the market.

The best way to implement this strategy is indeed simple: Buy a fund that holds this all-market portfolio, and hold it forever. Such a fund is called an index fund. The index fund is simply a basket (portfolio) that holds many, many eggs (stocks) designed to mimic the overall performance of the U.S. stock market (or any financial market or market sector).

Simons’s team appeared to have discovered something of a holy grail in investing: enormous returns from a diversified portfolio generating relatively little volatility and correlation to the overall market. In the past, a few others had developed investment vehicles with similar characteristics. They usually had puny portfolios, however. No one had achieved what Simons and his team had—a portfolio as big as $5 billion delivering this kind of astonishing performance.

The correct period to judge performance is from a market peak to another peak or at least to the next all-time high.

Individual investors have significant advantages over professional money managers. Retail investors, like you and I, have nobody to report. We have no benchmark to beat and have no fear of capital flight. There are no quarter and year ends, and performance is not linked to calendars.

Professional money managers are worried about their annual results and may take irrational decisions to protect their performance record. Individual investors have nobody to report, and yearly performance does not mean anything to them.

It is a misconception that diversification will magically reduce the losses. It cannot be far from the truth. Diversification does not reduce losses but provides a weighted average return of your portfolio.

YouTube also contains a treasure trove of lectures by nearly all of finance’s leading lights, strewn throughout its vast wasteland of misinformation. Tread carefully. A few wrong clicks and you’ll wind up with a QAnon conspiracist or a crypto bro. Of the names I’ve mentioned in this book, I’d search for John Bogle, Eugene Fama, Kenneth French, Jonathan Clements, Zvi Bodie, William Sharpe, Burton Malkiel, Charles Ellis, and Jason Zweig. Worthwhile finance podcasts abound. Start with the Economist’s weekly “Money Talks” and NPR’s Planet Money, although most of the latter’s superb coverage revolves around economics and relatively little around investing. Rick Ferri’s Boglehead podcast interviews cover mainly passive investing. Another financial podcast I highly recommend is Barry Ritholtz’s Masters in Business from Bloomberg. Podcasts are a rapidly evolving area. Lest you wear your ears out, you’ll need discretion to curate the burgeoning amount of high-quality audio. Research mutual funds. All the fund companies discussed in this book have sophisticated websites from which basic fund facts, such as fees and expenses, can be obtained, as well as annual and semiannual reports that list and tabulate holdings. If you’re researching a large number of funds, this gets cumbersome. The best way is to visit Morningstar.com. Use the site’s search function to locate the main page for the fund you’re interested in and click the “Expense” and “Portfolio” tabs to find the fund expense ratio and detailed data on the fund holdings. Click the “Performance” tab to see the fund’s return over periods ranging from a single day up to 15 years, and the “Chart” tab to compare the returns of multiple funds over a given interval. ***

However, for people such as CEOs and venture capitalists—and even governments—what matters isn’t the performance of any one project but how a whole portfolio of projects performs. For them, it may be fine to take big losses on 80 percent of projects as long as the gains from the 20 percent of projects that deliver Hirschman’s happy ending are so big that they more than compensate for the losses. So I checked the data and found that the results were equally clear: Losses far exceeded gains. Whether it’s the average project or a portfolio of projects, Hirschman’s argument just doesn’t hold up.

1)Insufficient research and knowledge: Many beginners dive into investing without fully understanding the fundamentals or conducting thorough research. It's crucial to educate yourself about different investment options, financial markets, and investment strategies before getting started. 2)Failure to establish clear investment goals: Investing without clear goals can lead to haphazard decision-making and poor portfolio management. Beginners should define their investment objectives, such as saving for retirement, buying a home, or funding education, and then align their investment strategy accordingly. 3)Lack of diversification: Beginners sometimes make the mistake of investing all their money in a single investment or asset class. This lack of diversification can expose them to significant risks. It's important to spread investments across different asset classes, industries, and geographies to reduce the impact of any individual investment's performance on the overall portfolio. 4)Emotion-driven decision-making: Emotions can often cloud investment decisions. Beginners may get swayed by market hype, fear, or short-term fluctuations, leading to impulsive buying or selling. It's essential to make investment decisions based on rational analysis and a long-term perspective rather than reacting to short-term market movements. 5)Chasing quick profits: Beginner investors may be tempted by get-rich-quick schemes or investments promising high returns in a short period. Such investments often involve higher risks, and pursuing quick profits can lead to significant losses. It's important to have realistic return expectations and focus on long-term, sustainable investment strategies.

Principal Management Corporation, the manager of the LargeCap Value Fund, actually provides no investment management services, focusing instead on “clerical, recordkeeping and bookkeeping services.” Responsibility for the day-in and day-out portfolio management rests with a subsidiary of Alliance Capital Management, Bernstein Investment Research and Management.17 The fee arrangement between Principal and Bernstein involves only a portion of Principal’s take from its investors. For the year ended December 31, 2003, Principal’s no-load Class B shares bore the burden of a 2.51 percent expense ratio, as detailed in Table 8.7. Investors paid a 12b-1 fee of 0.91 percent, other expenses of 0.85 percent and a management fee of 0.75 percent. Principal’s fees all but guarantee that investors will fail to generate satisfactory returns. The management fee arrangement between Principal and Bernstein provides clues to the economies of scale available in the money management industry. At asset levels below $10 million, of the 0.75 percent management fee, 0.60 percent goes to Bernstein and 0.15 percent goes to Principal. As assets under management increase, Bernstein’s fee share decreases and Principal’s fee share increases. At the final break point of $200 million in assets, of the scale-invariant 0.75 percent fee, Bernstein receives 0.20 percent and Principal receives 0.55 percent. The fee structure clearly illustrates scale economies in the investment management business. Bernstein, the party responsible for the heart of the portfolio management process, earns fees that diminish (with increases in assets under management) from 0.60 percent of assets to 0.20 percent of assets. Since Bernstein’s work changes not at all as asset levels increase, the reduction in marginal charges makes sense. It makes no sense that Principal’s mutual-fund clients accrue no benefits from economies of scale. Total expenses incurred by investors remain at 2.51 percent regardless of portfolio size. As Bernstein’s management fee declines, Principal’s management fee increases. For assets above $200 million Principal adds a management fee of 0.55 percent to other fees of 1.76 percent, bringing the egregious total to 2.31 percent for Principal and 0.20 percent for Bernstein. In this topsy-turvy world, Principal earns a marginal management fee of 0.55 percent for performing back-office functions, while Bernstein earns a marginal management fee of 0.20 percent for making security-selection decisions. As scale increases, Bernstein earns less while Principal takes more.

Here Jannes meets on a regular cadence with his direct reports, where they can quickly see and understand the status of each of his strategic objectives. Four distinct zones are visualized: strategic improvement, performance monitoring, portfolio roadmap, and leadership actions, each with current

But an active investor can overweight a stock only if other market players take offsetting underweight positions. By definition, the sum of overweight positions must equal the sum of underweight positions, allowing the market weight to remain the market weight. Obviously, based on subsequent performance, the overweighters and underweighters turn into winners and losers (or losers and winners). If the stock in question performs well relative to the market, the overweighters win and the underweighters lose. If the stock performs poorly relative to the market, the overweighters lose and the underweighters win. Before considering transaction costs, active management appears to be a zero-sum game, a contest in which the winners’ gains exactly offset the losers’ losses. Unfortunately for active portfolio managers, investors incur significant costs in pursuit of market-beating strategies. Stock pickers pay commissions to trade and create market impact with buys and sells. Mutual-fund purchasers face the same market-related transactions costs in addition to management fees paid to advisory firms and distribution fees paid to brokerage firms. The leakage of fees from the system causes active management to turn into a negative-sum game in which the aggregate returns for active investors fall short of the aggregate returns for the market as a whole.

Security selection may provide substantial excess returns to skilled investors, but those excess returns come directly from the pockets of other players who suffer poor relative returns. When aggregating the returns for all actively managed portfolios, the combined results inevitably mimic the market, less a discount equal to the amount paid to play the game. For the investment community as a whole, security selection plays a return-reducing role in investment performance.

Human labour does not stand a chance against disruptive technologies. Artificial Intelligence can handle insurance claims, do basic bookkeeping, manage investment portfolios, do legal research, and perform HR tasks.

Is there a small habit that can support a major habit?” (For example, packing your exercise clothes in the morning so they’ll be ready for the gym in the evening.) “Do I often end the day frustrated because I didn’t complete the most important tasks?” (Identify the most important tasks for the next day and then schedule them into your calendar.) “What quick activities make me feel inspired or happy?” (For example, watching a short motivational video each morning.) “What five goals are the most important to me right now?” (What can you do daily to support all five of these goals?) “What are the activities that I love to do?” (Think of tasks that can support hobbies, like running, knitting, traveling, or reading.) “What areas of my financial life do I need to improve?” (If you’re in debt, then address this first. But if you have money in the bank, then you should build a habit that focuses on building up your investment portfolio.) “Can I improve the quality of my interpersonal relationships?” (Think about your interactions with your parents, children, significant other, and closest friends. Is there anything you can do daily to make these interactions better?) “What makes me feel great about myself?” (If something brings you enjoyment, then you should either do it every day or schedule time for it each week.) “How can I become more spiritual in my daily life?” (For example, read from a book of prayers, practice a bit of yoga, or recite positive affirmations.) “What is a new skill I’ve always wanted to master?” (For example, make a habit of researching and learning about talents like home brewing, playing a musical instrument, learning a new language, or anything that sounds fun.) “Is there anything I can do to support my local community or an important cause?” (We all believe in something. So if you schedule time daily for this activity, then it’s not hard to consistently help others.) “Is there something that I can do to improve my job performance and get a raise?” (For example, build a skill that will become valuable to the company.)

And that is why, when attempting to balance and evaluate their investment port-folio, people often err by failing to knock down mental walls among accounts. As a result, their true portfolio mix—the combination of stocks, bonds, real estate, insurance policies, mutual funds, and the like—is often not what they think, and their investment performance often suffers.

Like all traders and investors, I periodically review the performance of my portfolios and check in on whether they are getting the job done. I say periodically, because the temptation – a dangerous one for many – is to be constantly watching and let’s face it, this is a long term game, not a get rich quick punt, right? As such, over the past few months, one of my personal favourites – the covered call, has continued to deliver the cash flow I seek from that particular portfolio. For example, this calendar year, in the Australian market, FMG being the one blot on the ledger, we have had only one loser from 13 closed positions. For those that obsess about win/loss ratios – a flawed measure in my book – that is a 92% win rate for the calendar year. Of course, this is a reflection of the underlying market conditions, which have been supportive of the strategy.

Let’s take one last peek at the Monte Carlo simulation. We won’t penalize the active portfolio for taxes, as we will give it the benefit of the doubt that no one would be silly enough to do active investing in a taxable account. Let’s just say that the active investor acts with human nature and pays the 1.5 percent penalty. So, now the average dollar invested has a 3.5 percent drag comprised of 2.0 percent expenses and 1.5 percent penalty for chasing performance. Running this in the Monte Carlo simulation against Kevin’s 0.23 percent fees, while he watches SpongeBob, creates the odds listed in Exhibit 5.6.

The first is asset allocation: What assets are you going to hold in your portfolio? And in which proportions are you going to hold them? The second is market timing. Are you going to try to bet on whether one asset class is going to perform better in the short run relative to the other asset classes you hold?

Skilled investors can maximize their long-term performance by maximizing the margin of safety of each stock held in the portfolio, which is to say, by concentrating on the best ideas. To be “skilled,” an investor must be able to identify which stocks are more undervalued than others, and then construct a portfolio containing only the most undervalued stocks. In doing so, investors take on the risk that an unforeseeable event leads to an unrecoverable loss in the intrinsic value of any single holding, perhaps through financial distress or fraud. This unrecoverable diminution in intrinsic value is referred to in the value investing literature as a permanent impairment of capital, and it is the most important consideration for value investors. Value investors distinguish the partial or total diminution in the firm’s underlying value, which is a risk to be considered, from a mere drop in the share price, no matter how significant the drop may be, which is an event to be ignored or exploited. The extent to which the portfolio value is impacted by a portfolio holding suffering a permanent impairment of capital will depend on the size of the holding relative to the portfolio value—the bigger the holding, the greater the impact on the portfolio. Thus the more concentrated an investor becomes, the greater the need to understand individual holdings. Says Buffett of the “know-something” investor:28 [If] you are a know-something investor, able to understand business economics and to find five to 10 sensibly priced companies that possess important

The great advantage of indexing investment operations is that we can avoid the vain search for superior performance and concentrate our time and energy on investment policy and asset-mix decisions. Instead, it focuses your attention on the most important decision in investing: defining the long-term “policy” portfolio that will both minimize the risk of avoidable mistakes and maximize the chances of achieving your true investment objectives.

In fact, Yale’s return for the ten years ending June 30, 1998 amounted to 15.5 percent per annum, more than three full percentage points short of the S&P 500’s 18.6 percent result. The endowment’s deficit relative to the then-highest-performing asset class of domestic equity caused naysayers to question the wisdom of undertaking the difficult task of creating a well-diversified equity-oriented portfolio.

you will marvel at how very unusual Yale’s team of star performers is in combining rigor and objectivity with the personal warmth and trust that avoids “politics” or “positioning” and maximizes real listening for full understanding every day.

The fifth secret may well be the most important: personal respect and affection. Visitors to Yale’s Investments Office are invariably impressed by the open architecture and informal “happy ship” climate that is almost as obvious as the disciplined intensity with which the staff work at their tasks and responsibilities. Positive professionals perform at their peak productivity and teams get better with low turnover.

The harsh reality of the negative-sum game dictates that, in aggregate, active managers lose to the market by the amount it costs to play in the form of management fees, trading commissions, and dealer spread. Wall Street’s share of the pie defines the amount of performance drag experienced by the would-be market beaters.

There is evidence that the pressure applied by these external tests results in teachers giving more objective tests for their CAs, with less emphasis on constructed-response (CR) formats, performance assessments, or portfolios (Pedulla et al., 2003).

Like all traders and investors, I periodically review the performance of my portfolios and check in on whether they are getting the job done. I say periodically, because the temptation – a dangerous one for many – is to be constantly watching and let’s face it, this is a long term game, not a get rich quick punt, right?

Overweighting assets that produced strong past performance and underweighting assets that produced weak past performance provides a poor recipe for pleasing prospective results. Strong evidence exists that markets exhibit mean-reverting behavior, a tendency for good performance to follow bad and bad performance to follow good. In markets characterized by mean reversion, investors who fail to rebalance portfolios to long-term targets end up with outsized exposure to recently appreciated assets that prove most vulnerable to poor future results. Only by regularly rebalancing portfolios to long-term targets do investors realize the results that correspond to the policy asset-allocation decision.

Growth-Stock Approach Every investor would like to select the stocks of companies that will do better than the average over a period of years. A growth stock may be defined as one that has done this in the past and is expected to do so in the future.2 Thus it seems only logical that the intelligent investor should concentrate upon the selection of growth stocks. Actually the matter is more complicated, as we shall try to show. It is a mere statistical chore to identify companies that have “out-performed the averages” in the past. The investor can obtain a list of 50 or 100 such enterprises from his broker.† Why, then, should he not merely pick out the 15 or 20 most likely looking issues of this group and lo! he has a guaranteed-successful stock portfolio? There are two catches to this simple idea. The first is that common stocks with good records and apparently good prospects sell at correspondingly high prices. The investor may be right in his judgment of their prospects and still not fare particularly well, merely because he has paid in full (and perhaps overpaid) for the expected prosperity. The second is that his judgment as to the future may prove wrong. Unusually rapid growth cannot keep up forever; when a company has already registered a brilliant expansion, its very increase in size makes a repetition of its achievement more difficult. At some point the growth curve flattens out, and in many cases it turns downward.

The best-performing 2,000 stocks—25 percent—accounted for all the gains. The worst performing 6,000—75 percent—collectively had a total return of 0 percent.

When you are familiar with something, you have a distorted perception of it. Fans of a sports team think their team has a higher chance of winning than nonfans of the team. Likewise, investors look favorably on investments they are familiar with, believing they will deliver higher returns and have less risk than unfamiliar investments. For example, Americans believe the U.S. stock market will perform better than the German stock market; meanwhile, Germans believe their stock market will perform better.26 Similarly, employees believe the stock of their employer is a safer investment than a diversified stock portfolio.27

if you invested in the top 10% of last year’s funds, you would match (but not exceed) the performance of an index fund with low expenses in the next year.

If you own a portfolio of stocks, you must learn to sell the worst performers first and keep the best a little longer. In other words, always sell your mistakes while the loss is still small, and watch your better selections to see if they progress into your big winners.

order to short a stock, you will need to open up a margin account with your broker, as Joe Campbell did. You’ll also need a margin account in order to trade stocks using margin. When you buy a stock on margin, it means that you are borrowing money from your broker, in order to purchase more shares of stock than you would normally be able to buy with just the cash sitting in your brokerage account. Let’s say that I have $10,000 in my margin account. Most brokers in the U.S. will allow me to go on margin to purchase $20,000 worth of stock in that account. What this means is that they are lending me an additional $10,000 (usually at some outrageous annual interest rate like 11%, which is what E*Trade currently charges) to buy more shares of stock. If I buy $10,000 worth of stock and the stock goes up 10%, I’ve just made $1,000. But if I can increase the amount of stock that I’m buying to $20,000 using a margin loan, I will have made $2,000 on the same 10% move. That will mean that my trading account has just gone up by 20% ($2,000/$10,000). Of course, if the stock goes down 10% and I’m on full margin, I will have lost 20% of my account value. Trading on margin is thus a form of leverage: it amplifies the performance of your portfolio both on the upside and the downside. When you buy a stock using margin, the stock and cash in your trading account is held as collateral for the margin loan. If the stock falls enough, you may be required to add more cash to your account immediately (this is called “getting a margin call”), or risk having the broker force you to immediately sell your stock to raise cash. Often this will lead to your selling the stock at the worst possible time.

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