MONEY investing strategy

122 Ideas, Quotes, and Stats That Will Make You a Better Investor in 2015

Traders work on the floor of the New York Stock Exchange on November 21, 2014 in New York City.
Spencer Platt—Getty Images

Start the new year off right with this investing wisdom.

A year ago I started writing what I hoped would be a book called 500 Things you Need to know About Investing. I wanted to outline my favorite quotes, stats, and lessons about investing.

I failed. I quickly realized the idea was long on ambition, short on planning.

But I made it to 122, and figured it would be better in article form. Here it is.

1. Saying “I’ll be greedy when others are fearful” is easier than actually doing it.

2. When most people say they want to be a millionaire, what they really mean is “I want to spend $1 million,” which is literally the opposite of being a millionaire.

3. “Some stuff happened” should replace 99% of references to “it’s a perfect storm.”

4. Daniel Kahneman’s book Thinking Fast and Slow begins, “The premise of this book is that it is easier to recognize other people’s mistakes than your own.” This should be every market commentator’s motto.

5. Blogger Jesse Livermore writes, “My main life lesson from investing: self-interest is the most powerful force on earth, and can get people to embrace and defend almost anything.”

6. As Erik Falkenstein says: “In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves.”

7. There is a difference between, “He predicted the crash of 2008,” and “He predicted crashes, one of which happened to occur in 2008.” It’s important to know the difference when praising investors.

8. Investor Dean Williams once wrote, “Confidence in a forecast rises with the amount of information that goes into it. But the accuracy of the forecast stays the same.”

9. Wealth is relative. As comedian Chris Rock said, “If Bill Gates woke up with Oprah’s money he’d jump out the window.”

10. Only 7% of Americans know stocks rose 32% last year, according to Gallup. One-third believe the market either fell or stayed the same. Everyone is aware when markets fall; bull markets can go unnoticed.

11. Dean Williams once noted that “Expertise is great, but it has a bad side effect: It tends to create the inability to accept new ideas.” Some of the world’s best investors have no formal backgrounds in finance — which helps them tremendously.

12. The Financial Times wrote, “In 2008 the three most admired personalities in sport were probably Tiger Woods, Lance Armstrong and Oscar Pistorius.” The same falls from grace happen in investing. Chose your role models carefully.

13. Investor Ralph Wagoner once explained how markets work, recalled by Bill Bernstein: “He likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner.”

14. Investor Nick Murray once said, “Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage.” Remember this the next time you’re compelled to cash out.

15. Bill Seidman once said, “You never know what the American public is going to do, but you know that they will do it all at once.” Change is as rapid as it is unpredictable.

16. Napoleon’s definition of a military genius was, “the man who can do the average thing when all those around him are going crazy.” Same goes in investing.

17. Blogger Jesse Livermore writes,”Most people, whether bull or bear, when they are right, are right for the wrong reason, in my opinion.”

18. Investors anchor to the idea that a fair price for a stock must be more than they paid for it. It’s one of the most common, and dangerous, biases that exists. “People do not get what they want or what they expect from the markets; they get what they deserve,” writes Bill Bonner.

19. Jason Zweig writes, “The advice that sounds the best in the short run is always the most dangerous in the long run.”

20. Billionaire investor Ray Dalio once said, “The more you think you know, the more closed-minded you’ll be.” Repeat this line to yourself the next time you’re certain of something.

21. During recessions, elections, and Federal Reserve policy meetings, people become unshakably certain about things they know very little about.

22. “Buy and hold only works if you do both when markets crash. It’s much easier to both buy and hold when markets are rising,” says Ben Carlson.

23. Several studies have shown that people prefer a pundit who is confident to one who is accurate. Pundits are happy to oblige.

24. According to J.P. Morgan, 40% of stocks have suffered “catastrophic losses” since 1980, meaning they fell at least 70% and never recovered.

25. John Reed once wrote, “When you first start to study a field, it seems like you have to memorize a zillion things. You don’t. What you need is to identify the core principles — generally three to twelve of them — that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles.” Keep that in mind when getting frustrated over complicated financial formulas.

26. James Grant says, “Successful investing is about having people agree with you … later.”

27. Scott Adams writes, “A person with a flexible schedule and average resources will be happier than a rich person who has everything except a flexible schedule. Step one in your search for happiness is to continually work toward having control of your schedule.”

28. According to Vanguard, 72% of mutual funds benchmarked to the S&P 500 underperformed the index over a 20-year period ending in 2010. The phrase “professional investor” is a loose one.

29. “If your investment horizon is long enough and your position sizing is appropriate, you simply don’t argue with idiocy, you bet against it,” writes Bruce Chadwick.

30. The phrase “double-dip recession” was mentioned 10.8 million times in 2010 and 2011, according to Google. It never came. There were virtually no mentions of “financial collapse” in 2006 and 2007. It did come. A similar story can be told virtually every year.

31. According to Bloomberg, the 50 stocks in the S&P 500 that Wall Street rated the lowest at the end of 2011 outperformed the overall index by 7 percentage points over the following year.

32. “The big money is not in the buying or the selling, but in the sitting,” said Jesse Livermore.

33. Investors want to believe in someone. Forecasters want to earn a living. One of those groups is going to be disappointed. I think you know which.

34. In a poll of 1,000 American adults, asked, “How many millions are in a trillion?” 79% gave an incorrect answer or didn’t know. Keep this in mind when debating large financial problems.

35. As last year’s Berkshire Hathaway shareholder meeting, Warren Buffett said he has owned 400 to 500 stocks during his career, and made most of his money on 10 of them. This is common: a large portion of investing success often comes from a tiny proportion of investments.

36. Wall Street consistently expects earnings to beat expectations. It also loves oxymorons.

37. The S&P 500 gained 27% in 2009 — a phenomenal year. Yet 66% of investors thought it fell that year, according to a survey by Franklin Templeton. Perception and reality can be miles apart.

38. As Nate Silver writes, “When a possibility is unfamiliar to us, we do not even think about it.” The biggest risk is always something that no one is talking about, thinking about, or preparing for. That’s what makes it risky.

39. The next recession is never like the last one.

40. Since 1871, the market has spent 40% of all years either rising or falling more than 20%. Roaring booms and crushing busts are perfectly normal.

41. As the saying goes, “Save a little bit of money each month, and at the end of the year you’ll be surprised at how little you still have.”

42. John Maynard Keynes once wrote, “It is safer to be a speculator than an investor in the sense that a speculator is one who runs risks of which he is aware and an investor is one who runs risks of which he is unaware.”

43. “History doesn’t crawl; it leaps,” writes Nassim Taleb. Events that change the world — presidential assassinations, terrorist attacks, medical breakthroughs, bankruptcies — can happen overnight.

44. Our memories of financial history seem to extend about a decade back. “Time heals all wounds,” the saying goes. It also erases many important lessons.

45. You are under no obligation to read or watch financial news. If you do, you are under no obligation to take any of it seriously.

46. The most boring companies — toothpaste, food, bolts — can make some of the best long-term investments. The most innovative, some of the worst.

47. In a 2011 Gallup poll, 34% of Americans said gold was the best long-term investment, while 17% said stocks. Since then, stocks are up 87%, gold is down 35%.

48. According to economist Burton Malkiel, 57 equity mutual funds underperformed the S&P 500 from 1970 to 2012. The shocking part of that statistic is that 57 funds could stay in business for four decades while posting poor returns. Hope often triumphs over reality.

49. Most economic news that we think is important doesn’t matter in the long run. Derek Thompson of The Atlantic once wrote, “I’ve written hundreds of articles about the economy in the last two years. But I think I can reduce those thousands of words to one sentence. Things got better, slowly.”

50. A broad index of U.S. stocks increased 2,000-fold between 1928 and 2013, but lost at least 20% of its value 20 times during that period. People would be less scared of volatility if they knew how common it was.

51. The “evidence is unequivocal,” Daniel Kahneman writes, “there’s a great deal more luck than skill in people getting very rich.”

52. There is a strong correlation between knowledge and humility. The best investors realize how little they know.

53. Not a single person in the world knows what the market will do in the short run.

54. Most people would be better off if they stopped obsessing about Congress, the Federal Reserve, and the president, and focused on their own financial mismanagement.

55. In hindsight, everyone saw the financial crisis coming. In reality, it was a fringe view before mid-2007. The next crisis will be the same (they all work like that).

56. There were 272 automobile companies in 1909. Through consolidation and failure, three emerged on top, two of which went bankrupt. Spotting a promising trend and a winning investment are two different things.

57. The more someone is on TV, the less likely his or her predictions are to come true. (University of California, Berkeley psychologist Phil Tetlock has data on this).

58. Maggie Mahar once wrote that “men resist randomness, markets resist prophecy.” Those six words explain most people’s bad experiences in the stock market.

59. “We’re all just guessing, but some of us have fancier math,” writes Josh Brown.

60. When you think you have a great idea, go out of your way to talk with someone who disagrees with it. At worst, you continue to disagree with them. More often, you’ll gain valuable perspective. Fight confirmation bias like the plague.

61. In 1923, nine of the most successful U.S. businessmen met in Chicago. Josh Brown writes:

Within 25 years, all of these great men had met a horrific end to their careers or their lives:

The president of the largest steel company, Charles Schwab, died a bankrupt man; the president of the largest utility company, Samuel Insull, died penniless; the president of the largest gas company, Howard Hobson, suffered a mental breakdown, ending up in an insane asylum; the president of the New York Stock Exchange, Richard Whitney, had just been released from prison; the bank president, Leon Fraser, had taken his own life; the wheat speculator, Arthur Cutten, died penniless; the head of the world’s greatest monopoly, Ivar Krueger the ‘match king’ also had taken his life; and the member of President Harding’s cabinet, Albert Fall, had just been given a pardon from prison so that he could die at home.

62. Try to learn as many investing mistakes as possible vicariously through others. Other people have made every mistake in the book. You can learn more from studying the investing failures than the investing greats.

63. Bill Bonner says there are two ways to think about what money buys. There’s the standard of living, which can be measured in dollars, and there’s the quality of your life, which can’t be measured at all.

64. If you’re going to try to predict the future — whether it’s where the market is heading, or what the economy is going to do, or whether you’ll be promoted — think in terms of probabilities, not certainties. Death and taxes, as they say, are the only exceptions to this rule.

65. Focus on not getting beat by the market before you think about trying to beat it.

66. Polls show Americans for the last 25 years have said the economy is in a state of decline. Pessimism in the face of advancement is the norm.

67. Finance would be better if it was taught by the psychology and history departments at universities.

68. According to economist Tim Duy, “As long as people have babies, capital depreciates, technology evolves, and tastes and preferences change, there is a powerful underlying impetus for growth that is almost certain to reveal itself in any reasonably well-managed economy.”

69. Study successful investors, and you’ll notice a common denominator: they are masters of psychology. They can’t control the market, but they have complete control over the gray matter between their ears.

70. In finance textbooks, “risk” is defined as short-term volatility. In the real world, risk is earning low returns, which is often caused by trying to avoid short-term volatility.

71. Remember what Nassim Taleb says about randomness in markets: “If you roll dice, you know that the odds are one in six that the dice will come up on a particular side. So you can calculate the risk. But, in the stock market, such computations are bull — you don’t even know how many sides the dice have!”

72. The S&P 500 gained 27% in 1998. But just five stocks — Dell, Lucent, Microsoft, Pfizer, and Wal-Mart — accounted for more than half the gain. There can be huge concentration even in a diverse portfolio.

73. The odds that at least one well-known company is insolvent and hiding behind fraudulent accounting are pretty high.

74. The book Where Are the Customers’ Yachts? was written in 1940, and most people still haven’t figured out that brokers don’t have their best interest at heart.

75. Cognitive psychologists have a theory called “backfiring.” When presented with information that goes against your viewpoints, you not only reject challengers, but double down on your view. Voters often view the candidate they support more favorably after the candidate is attacked by the other party. In investing, shareholders of companies facing heavy criticism often become die-hard supporters for reasons totally unrelated to the company’s performance.

76. “In the financial world, good ideas become bad ideas through a competitive process of ‘can you top this?'” Jim Grant once said. A smart investment leveraged up with debt becomes a bad investment very quickly.

77. Remember what Wharton professor Jeremy Siegel says: “You have never lost money in stocks over any 20-year period, but you have wiped out half your portfolio in bonds [after inflation]. So which is the riskier asset?”

78. Warren Buffett’s best returns were achieved when markets were much less competitive. It’s doubtful anyone will ever match his 50-year record.

79. Twenty-five hedge fund managers took home $21.2 billion in 2013 for delivering an average performance of 9.1%, versus the 32.4% you could have made in an index fund. It’s a great business to work in — not so much to invest in.

80. The United States is the only major economy in which the working-age population is growing at a reasonable rate. This might be the most important economic variable of the next half-century.

81. Most investors have no idea how they actually perform. Markus Glaser and Martin Weber of the University of Mannheim asked investors how they thought they did in the market, and then looked at their brokerage statements. “The correlation between self ratings and actual performance is not distinguishable from zero,” they concluded.

82. Harvard professor and former Treasury Secretary Larry Summers says that “virtually everything I taught” in economics was called into question by the financial crisis.

83. Asked about the economy’s performance after the financial crisis, Charlie Munger said, “If you’re not confused, I don’t think you understand.”

84. There is virtually no correlation between what the economy is doing and stock market returns. According to Vanguard, rainfall is actually a better predictor of future stock returns than GDP growth. (Both explain slightly more than nothing.)

85. You can control your portfolio allocation, your own education, who you listen to, what you read, what evidence you pay attention to, and how you respond to certain events. You cannot control what the Fed does, laws Congress sets, the next jobs report, or whether a company will beat earnings estimates. Focus on the former; try to ignore the latter.

86. Companies that focus on their stock price will eventually lose their customers. Companies that focus on their customers will eventually boost their stock price. This is simple, but forgotten by countless managers.

87. Investment bank Dresdner Kleinwort looked at analysts’ predictions of interest rates, and compared that with what interest rates actually did in hindsight. It found an almost perfect lag. “Analysts are terribly good at telling us what has just happened but of little use in telling us what is going to happen in the future,” the bank wrote. It’s common to confuse the rearview mirror for the windshield.

88. Success is a lousy teacher,” Bill Gates once said. “It seduces smart people into thinking they can’t lose.”

89. Investor Seth Klarman says, “Macro worries are like sports talk radio. Everyone has a good opinion which probably means that none of them are good.”

90. Several academic studies have shown that those who trade the most earn the lowest returns. Remember Pascal’s wisdom: “All man’s miseries derive from not being able to sit in a quiet room alone.”

91. The best company in the world run by the smartest management can be a terrible investment if purchased at the wrong price.

92. There will be seven to 10 recessions over the next 50 years. Don’t act surprised when they come.

93. No investment points are awarded for difficulty or complexity. Simple strategies can lead to outstanding returns.

94. The president has much less influence over the economy than people think.

95. However much money you think you’ll need for retirement, double it. Now you’re closer to reality.

96. For many, a house is a large liability masquerading as a safe asset.

97. The single best three-year period to own stocks was during the Great Depression. Not far behind was the three-year period starting in 2009, when the economy struggled in utter ruin. The biggest returns begin when most people think the biggest losses are inevitable.

98. Remember what Buffett says about progress: “First come the innovators, then come the imitators, then come the idiots.”

99. And what Mark Twain says about truth: “A lie can travel halfway around the world while truth is putting on its shoes.”

100. And what Marty Whitman says about information: “Rarely do more than three or four variables really count. Everything else is noise.”

101. Among Americans aged 18 to 64, the average number of doctor visits decreased from 4.8 in 2001 to 3.9 in 2010. This is partly because of the weak economy, and partly because of the growing cost of medicine, but it has an important takeaway: You can never extrapolate behavior — even for something as vital as seeing a doctor — indefinitely. Behaviors change.

102. Since last July, elderly Chinese can sue their children who don’t visit often enough, according to Bloomberg. Dealing with an aging population calls for drastic measures.

103. Someone once asked Warren Buffett how to become a better investor. He pointed to a stack of annual reports. “Read 500 pages like this every day,” he said. “That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”

104. If Americans had as many babies from 2007 to 2014 as they did from 2000 to 2007, there would be 2.3 million more kids today. That will affect the economy for decades to come.

105. The Congressional Budget Office’s 2003 prediction of federal debt in the year 2013 was off by $10 trillion. Forecasting is hard. But we still line up for it.

106. According to The Wall Street Journal, in 2010, “for every 1% decrease in shareholder return, the average CEO was paid 0.02% more.”

107. Since 1994, stock market returns are flat if the three days before the Federal Reserve announces interest rate policy are removed, according to a study by the Federal Reserve.

108. In 1989, the CEOs of the seven largest U.S. banks earned an average of 100 times what a typical household made. By 2007, more than 500 times. By 2008, several of those banks no longer existed.

109. Two things make an economy grow: population growth and productivity growth. Everything else is a function of one of those two drivers.

110. The single most important investment question you need to ask yourself is, “How long am I investing for?” How you answer it can change your perspective on everything.

111. “Do nothing” are the two most powerful — and underused — words in investing. The urge to act has transferred an inconceivable amount of wealth from investors to brokers.

112. Apple increased more than 6,000% from 2002 to 2012, but declined on 48% of all trading days. It is never a straight path up.

113. It’s easy to mistake luck for success. J. Paul Getty said, the key to success is: 1) rise early, 2) work hard, 3) strike oil.

114. Dan Gardner writes, “No one can foresee the consequences of trivia and accident, and for that reason alone, the future will forever be filled with surprises.”

115. I once asked Daniel Kahneman about a key to making better decisions. “You should talk to people who disagree with you and you should talk to people who are not in the same emotional situation you are,” he said. Try this before making your next investment decision.

116. No one on the Forbes 400 list of richest Americans can be described as a “perma-bear.” A natural sense of optimism not only healthy, but vital.

117. Economist Alfred Cowles dug through forecasts a popular analyst who “had gained a reputation for successful forecasting” made in The Wall Street Journal in the early 1900s. Among 90 predictions made over a 30-year period, exactly 45 were right and 45 were wrong. This is more common than you think.

118. Since 1900, the S&P 500 has returned about 6.5% per year, but the average difference between any year’s highest close and lowest close is 23%. Remember this the next time someone tries to explain why the market is up or down by a few percentage points. They are basically trying to explain why summer came after spring.

119. How long you stay invested for will likely be the single most important factor determining how well you do at investing.

120. A money manager’s amount of experience doesn’t tell you much. You can underperform the market for an entire career. Many have.

121. A hedge fund once described its edge by stating, “We don’t own one Apple share. Every hedge fund owns Apple.” This type of simple, contrarian thinking is worth its weight in gold in investing.

122. Take two investors. One is an MIT rocket scientist who aced his SATs and can recite pi out to 50 decimal places. He trades several times a week, tapping his intellect in an attempt to outsmart the market by jumping in and out when he’s determined it’s right. The other is a country bumpkin who didn’t attend college. He saves and invests every month in a low-cost index fund come hell or high water. He doesn’t care about beating the market. He just wants it to be his faithful companion. Who’s going to do better in the long run? I’d bet on the latter all day long. “Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ,” Warren Buffett says. Successful investors know their limitations, keep cool, and act with discipline. You can’t measure that.

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MONEY Warren Buffett

The One Stock Warren Buffett Is Most Likely to Sell in 2015

Warren Buffett
Bill Pugliano—Getty Images

Is Buffett ready to move on from his biggest "mistake" stock?

Berkshire Hathaway CEO Warren Buffett has established himself as one of the greatest investors and capitalists of our time. His every move and every word is noted and analyzed, and for good reason: People can learn a lot about successful long-term investing through him.

However, even the Oracle of Omaha has made his share of mistakes, and we can learn from those, too. According to the company’s most recent 13-F filing, which discloses its positions in public companies at the end of each quarter, Buffett sold more shares of a company that he’s been gradually selling out of since 2009. Let’s take a closer look at this Berkshire holding. Chances are there’s something we can all learn from the story.

Buffett’s big “mistake of commission”

Back in 2008, Buffett invested billions of dollars into major oil company ConocoPhillips CONOCOPHILLIPS COP 1.7634% . At the time, oil was at all-time high prices, and the world was at the doorstep of a major economic crisis. Here’s how Buffett himself described his decision in his 2008 letter to shareholders:

Last year I made a major mistake of commission (and maybe more; this one sticks out). Without urging from Charlie [Munger] or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.

Here’s what ConocoPhillips’ stock has done since the quarter Buffett made the big buy:

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We are talking about five and a half years to recover, and at this stage, Berkshire’s holding in ConocoPhillips has fallen to only 472,000 shares from nearly 85 million at the peak in 2008. In all, Buffett invested more than $7 billion in the company, and he had sold almost half of that stake at a major loss by 2010.

Today’s ConocoPhillips is a different company

Berkshire did get some additional value from Buffett’s investment. In 2012, ConocoPhillips spun Phillips 66 PHILLIPS 66 PSX 4.0272% out in a tax-free spinoff, and Berkshire ended up with more than 27 million shares of the midstream and petrochemicals giant.

Just last year, Buffett was able to work some more of his magic with those shares, trading around $1.4 billion worth of them back to Phillips 66 in exchange for Phillips Specialty Products, which Berkshire could then pair with its own chemical business, Lubrizol. The beauty of this transaction? Because it was an asset swap, it was tax-free for Berkshire, which would have paid hefty capital gains had it sold those Phillips 66 shares on the open market.

As for ConocoPhillips, Buffett invested in a fully integrated major oil company, while the spinoff turned it into an exploration and production company. Frankly, this major transition of the business is likely one of the major reasons behind Buffett’s years-long process of reducing Berkshire’s holdings in the company. It’s no longer the company he bought.

The bigger picture

Probably the most important lesson here? Even though the ConocoPhillips investment turned out to be a disaster for Berkshire, and I think Buffett will fully exit the investment in 2015, it’s just a drop in the bucket that is the Berkshire portfolio. As of the most recent 13F, the company held more than $107 billion in stocks, and the largest holdings are diversified across the financial, consumer goods, and tech sectors.

The company’s largest exposure to an oil company is ExxonMobil EXXONMOBIL CORP. XOM 2.7205% , the largest of the integrated majors and, by most accounts, the best-run and most conservative with its capital. ExxonMobil makes up about 3.5% of the Berkshire stock portfolio.

The point? Billion-dollar mistakes sound big, but it’s all about the percentages. Berkshire’s portfolio is fairly concentrated, with about 83% invested in the 10 largest holdings, but it’s also a portfolio that gets new money on a regular basis.

Lessons learned

The first lesson is that no investor is infallible — we all make mistakes. There are two things that separate the best investors from the average:

  1. Do you learn from your mistakes and those of others?
  2. Do you focus on a workable investing process or get caught up in the short-term results?

Buffett didn’t let a billion-dollar mistake cause him to change a process that has proved effective for decades of market-crushing returns. If you’re going to follow Buffett, don’t mimic his moves. Develop a long-term process that’s focused on finding great companies. You’ll buy your share of flubs like ConocoPhillips in 2008, but getting a 10-bagger, like American Express AMERICAN EXPRESS CO. AXP -0.2898% has been for Berkshire, will cover up plenty of mistakes.

Jason Hall owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends American Express and Berkshire Hathaway and owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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MONEY investing strategy

Warren Buffett Does Things That You Shouldn’t Try at Home

Berkshire Hathaway Chairman and CEO Warren Buffett talks to television journalists
Nati Harnik—AP

Not everything Buffett does can be easily replicated by ordinary investors.

Warren Buffett’s annual letters to the shareholders of Berkshire Hathaway are the single best road map for success in the stock market that have ever been written. But it’s important to appreciate that Buffett’s personal road to success has included some detours that aren’t suitable for the average investor.

The origins of Buffett’s philosophy

Generally speaking, Buffett’s core philosophy is to buy great companies at reasonable prices. To use his words, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Take one glance at Berkshire’s portfolio of common stocks, and it’s clear Buffett means what he says. Among banks, for instance, he has common stock positions in the three best lenders in the country: Wells Fargo, US Bancorp, and M&T Bank. These companies are in no way mediocre. They are the best of the best, the cream of the crop.

However, Buffett doesn’t always abide by his advice to only invest in top-shelf stocks. This isn’t because he’s intellectually inconsistent — a flip-flopper, if you will — but rather because he uses different strategies at different times.

By his own admission, Buffett’s approach to investing has been influenced most heavily by three people, each of whom approach the discipline from a slightly different angle. Benjamin Graham stood for buying cheap stocks somewhat irrespective of quality. Philip Fisher believed in buying great companies somewhat irrespective of price. And Charlie Munger adopted the hybrid approach of buying wonderful companies at reasonable prices.

Buffett’s decision to invest in a company could be grounded in any one of these philosophies, or in all of them combined. To complicate things further, he has also been known on occasion to enter into a variety of sophisticated transactions that only someone with his resources, knowledge, and expertise should contemplate.

Parsing Buffett’s bet on Bank of America

I say all of this because it’s easy to misconstrue the rationale behind Buffett’s decision to invest in a specific company. Take Berkshire’s position in Bank of America BANK OF AMERICA CORP. BAC 0.5134% as an example. When Buffett wrote his latest letter to shareholders, the Charlotte, N.C.-based bank was Berkshire’s fifth-largest equity investment. You’d be excused for interpreting that as a ringing endorsement.

But Buffett’s decision to invest in Bank of America was not grounded in the philosophies of either Fisher or Munger, both of whom only condone investments in great companies. It was grounded instead in the philosophy of Graham, Buffett’s original mentor — who, it’s worth recalling, emphasized price over quality.

I would argue that the evidence for this is irrefutable. In the first case, Bank of America has proven time and again over the last few decades that it is not an elite bank. It has a bloated expense base — something Buffett despises. It overpays for acquisitions, some of which turned out to be complete disasters. And it’s horrible at the core competency of banking — namely, managing credit risk.

In the second case, the structure of Berkshire’s investment in Bank of America hardly suggests that Buffett holds it in the same high regard as he does, say, Wells Fargo. Keep in mind that Buffett did not buy common stock in Bank of America; he bought preferred stock, which carries significantly less risk but also offers little upside. To make up for this, Buffett demanded that Bank of America gratuitously include warrants to purchase 700 million shares of common stock at $7.14 per share — a total value of $5 billion — at any time before the middle of 2021.

To the uninitiated, it might seem like I’m splitting hairs here. After all, $5 billion is $5 billion. What difference does it make that Berkshire’s position consisted of $5 billion of preferred stock plus warrants, rather than a commensurate amount of common stock?

This is a rhetorical question, of course, because it matters a lot. Consider that Buffett will ultimately emerge with the same roughly 6.5% stake in Bank of America, regardless of how the deal was structured. But by structuring it in the manner that he did, the 84-year-old financier shifted all of the risk onto Bank of America’s shareholders. If its shares failed to recover, then so be it; Berkshire would still get its 6% interest payment on its $5 billion preferred stake. But if the share price improved, as it indeed has, then Berkshire would exercise its warrants, make a fortune, and markedly dilute the bank’s shareholders.

And in the third case, all you have to do is compare Buffett’s effusiveness regarding his initial position in Wells Fargo to his much more restrained remarks about his sizable investment in Bank of America.

Here’s Buffett in his 1990 shareholder letter talking about Wells Fargo:

With Wells Fargo, we think we have obtained the best managers in the business, Carl Reichardt and Paul Hazen. In many ways the combination of Carl and Paul reminds me of another — Tom Murphy and Dan Burke at Capital Cities/ABC. First, each pair is stronger than the sum of its parts because each partner understands, trusts, and admires the other. Second, both managerial teams pay able people well, but abhor having a bigger head count than is needed. Third, both attack costs as vigorously when profits are at record levels as when they are under pressure. Finally, both stick with what they understand and let their abilities, not their egos, determine what they attempt.

And here’s the extent of Buffett’s substantive comments about Bank of America in his 2011 letter:

At Bank of America, some huge mistakes were made by prior management. [CEO] Brian Moynihan has made excellent progress in cleaning these up, though the completion of that process will take a number of years. Concurrently, he is nurturing a huge and attractive underlying business that will endure long after today’s problems are forgotten.

If this were an awards presentation at a high school track meet, Bank of America would have earned a participation ribbon while Wells Fargo took home a 5-foot-tall, bedazzled trophy for first place. The point is that Buffett didn’t invest in Bank of America because he thought it was a great company along the lines of Wells Fargo. He invested in it because it was weak and vulnerable and he could write the terms of the deal in such a way that, short of financial Armageddon, Berkshire simply could not lose.

If you follow in Buffett’s wake, proceed with caution

The lesson here is that if you’re going to follow Buffett into a stock, or if you’re going to cite his investment in a specific company to confirm or counter your opinion of it, then it would be well worth your time to investigate why he likely bought it in the first place. If he was under the influence of Graham’s philosophy, then you might not want to follow in his wake. But if Buffett was applying the philosophies of Fisher or Munger, then the company might indeed be worth a look.

TIME Money

Warren Buffett’s Latest Investment: Hillary Clinton

Hillary Clinton
Hillary Rodham Clinton listens before delivering remarks at an event in New York City on Nov. 21, 2014. Bebeto Matthews—AP

The Berkshire Hathaway CEO donated $25,000 in the third quarter to a pro-Hillary Super PAC

Warren Buffett is putting his money where his mouth is when it comes to Hillary Clinton.

In October, at Fortune’s Most Powerful Women summit, Buffett predicted that Hillary Clinton would be the next president of the United States. “Hillary Clinton is going to run, and she’s going to win,” Buffett said on stage.

Apparently, the prediction was more than just talk. According to Bloomberg, Buffett donated $25,000 in the third quarter to Ready for Hillary, a political organization that says it is laying the groundwork for a Clinton presidential run in 2016. That is the maximum the organization allows from a single donor. Overall, the group has raised $11 million.

Bloomberg says the donation was somewhat surprising because Buffett has criticized political action committees, like Ready for Hillary, in the past, and that he is known as a “political tightwad.” But Buffett has long been a supporter of Hillary Clinton. The Berkshire Hathaway CEO also backed Clinton’s 2008 election campaign and held fundraisers in her honor.

At Fortune’s Most Powerful Women’s conference, he added that he was willing to bet on a Hillary presidency. And now he has.

This article originally appeared on Fortune.com

MONEY Warren Buffett

The Surprising Lessons Warren Buffett Learned from a Candy Company

Berkshire Hathaway's Warren Buffett at the See's Candies booth Saturday, May 3, 2014, at the Berkshire Hathaway Annual Shareholder's Meeting, in Omaha, Neb.
Berkshire Hathaway's Warren Buffett at the See's Candies booth Saturday, May 3, 2014, at the Berkshire Hathaway Annual Shareholder's Meeting, in Omaha, Neb. Dave Weaver—Invision for See's

Instead of seeking great bargains, Buffett learned to find great businesses.

Warren Buffett’s success in business is well chronicled and nearly unparalleled. But you may not know he attributes a healthy dose of his success to a candy shop in California you may never have heard of.

The history

In 1972 See’s Candies was purchased for $25 million by Buffett and longtime Berkshire Hathaway lieutenant Charlie Munger through Blue Chip Stamps, a business controlled by Buffett and Munger.

Although Blue Chip Stamps has faded into obscurity as Americans stopped buying stamps, Buffett has gone on to say that See’s Candies is actually his “dream business.”

So what has made See’s so successful? First, although it hasn’t been a world-beater in growing its sales, it has been incredibly profitable and a cash-generating machine. From 1972-2011 it contributed a staggering $1.65 billion to the bottom line of Berkshire.

Knowing it brings in roughly $85 million annually in pre-tax profits, there will soon come a day when the total contribution of See’s to Berkshire will top $2 billion. And what has Berkshire done with all that cash?

In 2007 Buffett answered that very question by revealing, “After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses.”

Undoubtedly Buffett is thankful for the financial contribution See’s has made to Berkshire.

But it turns out through See’s Candies, he learned something even greater.

The gratitude

Buffett was very much an avid devotee of the value-investment philosophy predicated in the teaching of his former professor, boss, and mentor, Benjamin Graham. Graham spoke to the inefficiencies rooted in financial markets, and how there were always bargains to be had that Wall Street overlooked.

But thanks to his friendship with Munger, Buffett’s mind-set on investing began to shift. Instead of seeking great bargains, Munger continued to tell Buffett about to the need to find great businesses. A 1988 article in Fortune Magazine notes:

So in conversations with Buffett over the years [Munger] preached the virtues of good businesses, and in time Buffett totally accepted the logic of the case. By 1972, Blue Chip Stamps, a Berkshire affiliate that has since been merged into the parent, was paying three times book value to buy See’s Candies, and the good-business era was launched. ”I have been shaped tremendously by Charlie,” says Buffett. ”Boy, if I had listened only to Ben, would I ever be a lot poorer.”

Graham’s teaching doesn’t run contrary to this — he said, “Investment is most intelligent when it is most businesslike” — but it also wasn’t the principle focus. And through Munger and the resulting acquisition of See’s Candies, this insight was all the more affirmed.

When asked about See’s Candies at the Berkshire Hathaway Annual Meeting this year, both Warren and Munger chimed in on how grateful they were for buying it more than 40 years ago:

Buffett: “See’s has provided us with lots of cash for acquisitions and opened my eyes to the power of brands. We made a lot in Coca-Cola partly because of See’s. There’s something about owning one [brand] to educate yourself about things you might do in the future. I wouldn’t be at all surprised that if we hadn’t owned See’s, we wouldn’t have bought Coca-Cola.”

Munger: “There’s no question about the fact that See’s main contribution to Berkshire was ignorance removal. One of the benefits of removing our ignorance is that we grew into what we are today. At the beginning, we knew nothing. We were stupid. If there’s any secret to Berkshire, it’s that we’re pretty good at ignorance removal.”

The 400 million shares of Coca-Cola Berkshire now owns cost $1.3 billion to acquire between 1988-1994, but at the end of September they were worth a remarkable $17.1 billion. And that is to say nothing of the billions worth of dividends Berkshire received over the last two and a half decades.

Buffett openly admits none of that would’ve likely been available to Berkshire (and its shareholders) were it not for See’s Candies. As a result, it is clear the benefit of See’s extends well beyond the $2 billion contribution it has made to the bottom line.

What this reveals

Examples like this show us how we must always seek to learn from things both great and small, and give great credence to the Proverb “Let the wise hear and increase in learning.”

Few would guess a small candy shop would’ve taught Buffett so much.

Above all, this story reminds us to always be thankful of those things great and small, because we never know where they shall lead us.

MONEY financial advice

Tony Robbins Wants To Teach You To Be a Better Investor

Tony Robbins vists at SiriusXM Studios on November 18, 2014 in New York City.
Tony Robbins with his new book, Money: Master the Game. Robin Marchant—Getty Images

With his new book, the motivational guru is on a new mission: educate the average investor about the many pitfalls in the financial system.

It might seem odd taking serious financial advice from someone long associated with infomercials and fire walks.

Which perhaps is why Tony Robbins, one of America’s foremost motivational gurus and performance coaches, has loaded his new book Money: Master The Game with interviews from people like Berkshire Hathaway’s Warren Buffett, investor Carl Icahn, Yale University endowment guru David Swensen, Vanguard Group founder Jack Bogle, and hedge-fund manager Ray Dalio of Bridgewater Associates.

Robbins has a particularly close relationship with hedge-fund manager Paul Tudor Jones of Tudor Investment Corporation.

“I really wanted to blow up some financial myths. What you don’t know will hurt you, and this book will arm you so you don’t get taken advantage of,” Robbins says.

One key takeaway from Robbins’ first book in 20 years: the “All-Weather” asset allocation he has needled out of Dalio, who is somewhat of a recluse. When back-tested, the investment mix lost money only six times over the past 40 years, with a maximum loss of 3.93% in a single year.

That “secret sauce,” by the way: 40% long-term U.S. bonds, 30% stocks, 15% intermediate U.S. bonds, 7.5% gold, and 7.5% commodities.

Tony’s Takes

For someone whose net worth is estimated in the hundreds of millions of dollars and who reigned on TV for years as a near-constant infomercial presence, Robbins—whose personality is so big it seemingly transcends his 6’7″ frame—obviously knows a thing or two about making money himself.

Here’s what you might not expect: The book is a surprisingly aggressive indictment of today’s financial system, which often acts as a machine devoted to enriching itself rather than enriching investors.

To wit, Robbins relishes in trashing the fictions that average investors have been sold over the years. For instance, the implicit promise of every active fund manager: “We’ll beat the market!”

The reality, of course, is that the vast majority of active fund managers lag their benchmarks over extended periods—and it’s costing investors big time.

“Active managers might beat the market for a year or two, but not over the long-term, and long-term is what matters,” he says. “So you’re underperforming, and they look you in the eye and say they have your best interests in mind, and then charge you all these fees.

“The system is based on corporations trying to maximize profit, not maximizing benefit to the investor.”

Hold tight—there’s more: Fund fees are much higher than you likely realize, and are taking a heavy axe to your retirement prospects. The stated returns of your fund might not be what you’re actually seeing in your investment account, because of clever accounting.

Your broker might not have your best interests at heart. The 401(k) has fallen far short as the nation’s premier retirement vehicle. As for target-date funds, they aren’t the magic bullets they claim to be, with their own fees and questionable investment mixes.

Another of the book’s contrarian takes: Don’t dismiss annuities. They have acquired a bad rap in recent years, either for being stodgy investment vehicles that appeal to grandmothers, or for being products that sometimes put gigantic fees in brokers’ pockets.

But there’s no denying that one of investors’ primary fears in life is outlasting their money. With a well-chosen annuity, you can help allay that fear by creating a guaranteed lifetime income. When combined with Social Security, you then have two income streams to help prevent a penniless future.

Robbins’ core message: As a mom-and-pop investor, you’re being played. But at least you can recognize that fact, and use that knowledge to redirect your resources toward a more secure retirement.

“I don’t want people to be pawns in someone else’s game anymore,” he says. “I want them to be the chess players.”

MONEY Warren Buffett

Why Warren Buffett Just Bought Duracell

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc.
Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc. Andrew Harrer—Bloomberg via Getty Images

All signs indicate that Buffett has once again found another wonderful business at a fair price.

The last few months have been a busy for Warren Buffett’s Berkshire Hathaway and today we learned its buying spree continued.

It was announced this morning Berkshire has come to an agreement with Procter & Gamble THE PROCTER & GAMBLE CO. PG 0.0543% to buy battery manufacturer Duracell in exchange for the $4.7 billion worth of Procter & Gamble shares Berkshire held.

The details

At the end of June, Berkshire held roughly 53 million shares of Procter & Gamble worth nearly $4.2 billion, and since then P&G has seen its stock rise by almost 15%, explaining the $4.7 billion price tag.

When P&G released its earnings for the first quarter of fiscal 2015, it also announced that it would be exiting the Duracell business, preferably through the creation of a stand-alone company. At the time of the announcement, P&G’s CEO A.G. Lafley said:

We greatly appreciate the contributions of our Duracell employees. Since we acquired the business in 2005 as part of Gillette, Duracell has strengthened its position as the global market leader in the battery category. It’s a business with attractive operating profit margins and a history of strong cash generation. I’m confident the business and its employees will continue to thrive as its own company.

Then, P&G noted the reason behind the move was “consistent with its plans to focus and strengthen its brand and category portfolio,” and that “its goals in the process of exiting this business are to maximize value to P&G’s shareholders and minimize earnings per share dilution.”

Today, P&G noted that the $4.7 billion price tag for Duracell would represent an adjusted earnings before interest taxes and depreciation, or EBITDA, of seven-times fiscal year 2014’s.

The rationale

So, why would Buffett make such a move?

First, as highlighted by many news outlets like Bloomberg, similar to Berkshire’s previous deals in acquiring an energy subsidiary from Phillips 66 earlier this year, by exchanging P&G stock for the entirety of Duracell, Berkshire will be able to abstain from paying any capital gains taxes as if the P&G shares had been sold for cash.

Considering that the P&G stake stood on Berkshire’s books at a cost basis of just $336 million at the beginning of this year, the tax savings alone are a compelling value proposition for Berkshire Hathaway and its shareholders.

Also, knowing at heart Buffett’s always been a proponent of buying businesses at an appropriate price, the fact that the market traded at an 11.5-times EBITDA multiple in January of this year, according to the Stern School of Business at NYU, and the consumer electronics industry traded at nine-times EBITDA, then the $4.7 billion price tag seems more than reasonable.

In last year’s letter to Berkshire Hathaway shareholders, Buffett wrote that “more than 50 years ago, Charlie [Munger] told me that it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price.”

So, the consideration of the deal must extend beyond just the financial aspects of it. And Buffett’s words regarding the deal are quite telling.

In today’s announcement Buffett said:

I have always been impressed by Duracell, as a consumer and as a long-term investor in P&G and Gillette. Duracell is a leading global brand with top quality products, and it will fit well within Berkshire Hathaway.

It is of note that Buffett mentioned the Duracell brand first. One of my favorite Buffett quotes is:

“Buy commodities, sell brands” has long been a formula for business success. It has produced enormous and sustained profits for Coca-Cola since 1886 and Wrigley since 1891. On a smaller scale, we have enjoyed good fortune with this approach at See’s Candy since we purchased it 40 years ago.

And how is this applicable to Duracell?

Consider for a moment in its ranking of the Best Global Brands in 2014, Interbrand estimated that the brand value of Duracell stood at $4.9 billion, ahead of MasterCard ($4.8 billion) and narrowly trailing both Chevrolet and Ralph Lauren.

Said differently, Buffett paid less for Duracell — the company — than what one company estimated its brand value alone is worth.

Also, it isn’t just the Duracell brand that is compelling, but its business, too. P&G noted in its annual report that Duracell maintains over 25% of the global battery market share. And Interbrand noted in its report on the company:

Duracell continues to respond to consumer demands through innovation and new product launches. New technologies in rechargeable batteries, longer lasting energy storage times (Duralock) and synergies with wireless iPhone charging (PowerMat) demonstrate responsiveness to a changing marketplace. Duracell is working to further increase its presence by forging retailer-specific partnerships and nudging competitors out of view in the process.

Clearly, the company isn’t afraid of innovation, and it is responding to changing demands and desires of consumers.

The charge to the bottom line

We don’t know the details of how Duracell will fit in the massive empire that Berkshire Hathaway has become. But there is one thing we do know — to the delight of Berkshire’s shareholders — all signs indicate that Buffett has once again found another wonderful business at a fair price.

MONEY stocks

How to See the Stock Market Like Warren Buffett Does

Warren Buffett, chief executive officer of Berkshire Hathaway Inc.
Jeff Kowalsky—Bloomberg via Getty Images

Ultimately, intelligent investors mustn't view stocks as numbers on screens or charts moving up and down, but as businesses.

When I say “stock,” what comes to mind?

If it’s one that you own, do you think of a chart that is hopefully moving upwards? If it’s one you’re thinking about owning, do you think about how a few important numbers and metrics stack up against those of its peers?

One of the greatest investors of all time — the one and only Warren Buffett — looks at stocks in a way that is easy to understand yet incredibly hard to manage. But his strategy is one we should all remember when we think about the stocks we own and the ones we’re thinking about investing in.

The simple wisdom

When Buffett discusses the progress of Berkshire Hathaway’s four biggest individual stock holdings — Wells Fargo, Coca-Cola, American Express, and IBM — in his latest annual letter to shareholders, at no point does he mention their price.

Instead, he speaks of two critical things: Berkshire’s ownership stake in the companies themselves and how much of their bottom-line earnings are actually available to Berkshire because of that stake.

Berkshire Hathaway’s ownership of each of the big four has grown over the last few years thanks to its purchase of larger positions in Wells Fargo and IBM plus the share repurchase efforts of the management teams at Coca-Cola and American Express.

youll-never-see-your-stocks-the-same-way-again-1_large

Although those slight increases in ownership may not raise any eyebrows, dominate headlines, or even inspire a Tweet, consider Buffett’s own words:

If you think tenths of a percent aren’t important, ponder this math: For the four companies in aggregate, each increase of one-tenth of a percent in our share of their equity raises Berkshire’s share of their annual earnings by $50 million.

And that brings us to our second point: It isn’t just the ownership stake that matters, but the actual results of the company that is owned. Buffett went on to say:

The four companies possess excellent businesses and are run by managers who are both talented and shareholder-oriented. At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of a so-so business; it’s better to have a partial interest in the Hope diamond than to own all of a rhinestone.

As a result of both increased ownership and the continued success of Buffett’s “Big Four,” the portion of earnings available to Berkshire — although only the dividends paid out show up on its financial statements — has grown dramatically since 2011:

youll-never-see-your-stocks-the-same-way-again-2_large

But this growth is nothing new. In his 2011 letter to shareholders, Buffett said:

We expect the combined earnings of the four — and their dividends as well — to increase in 2012 and, for that matter, almost every year for a long time to come. A decade from now, our current holdings of the four companies might well account for earnings of $7 billion, of which $2 billion in dividends would come to us.

And while the earnings growth of the Big Four may not continue at its recent pace of more than 15% annually, $7 billion may even be a dramatic understatement.

The key takeaway

As Buffett’s famed mentor Benjamin Graham said in his seminal book The Intelligent Investor: “Investment is most intelligent when it is most businesslike.”

Ultimately, intelligent investors mustn’t view stocks as numbers on screens or charts moving up and down, but as businesses. We must largely ignore movements in stock prices and evaluate the fundamental business dynamics, knowing that over time stock prices will reflect changes in underlying fundamentals and the results of the business.

For example, since Chipotle CHIPOTLE MEXICAN GRILL INC. CMG -0.6376% went public on Jan. 26, 2006, its stock has moved up or down by 5% roughly once every four weeks, or 132 times. But those investors who have patiently waited, ignoring the price gyrations and trusting in the company’s hugely successful business, would have seen a $1,000 investment grow to nearly $14,000 at the time of writing.

Examples like this show why Buffett once remarked, “The stock market is designed to transfer money from the active to the patient.”

Does this mean you should simply pour money into great businesses? No, because, as Buffett has also said, “A business with terrific economics can be a bad investment if the price paid is excessive.”

But we must see that whenever we make an investment, we must always consider it part-ownership in a company, not simply a stock. Buffett does, and so should you and I.

MONEY

Most Financial Research Is Probably Wrong, Say Financial Researchers

Throwing crumpled paper in wastebasket
Southern Stock—Getty Images

And if that's right, the problem isn't just academic. It means you are probably paying too much for your mutual funds.

In the 1990s, when I first stated writing about investing, the stars of the show on Wall Street were mutual fund managers. Now more investors know fund managers add costs without consistently beating the market. So humans picking stocks by hand are out, and quantitative systems are in.

The hot new mutual funds and exchange-traded funds are scientific—or at least, science-y. Sales materials come with dense footnotes, reference mysterious four- and five-factor models and Greek-letter statistical measures like “beta,” and name-drop professors at Yale, MIT and Chicago. The funds are often built on academic research showing that if you consistently favor a particular kind of stock—say, small companies, or less volatile ones—you can expect better long-run performance.

As I wrote earlier this year, some academic quants even think they’ve found stock-return patterns that can help explain why Warren Buffett has done so spectacularly well.

But there’s also new research that bluntly argues that most such studies are probably wrong. If you invest in anything other than a plain-vanilla index fund, this should rattle you a bit.

Financial economists Campbell Harvey, Yan Liu, and Heqing Zhu, in a working paper posted this week by the National Bureau of Economic Research, count up the economic studies claiming to have discovered a clue that could have helped predict the asset returns. Given how hard it is supposed to be to get an edge on the market, the sheer number is astounding: The economists list over 300 discoveries, over 200 of which came out in the past decade alone. And this is an incomplete list, focused on publications appearing in top journals or written by respected academics. Harvey, Liu, and Zhu weren’t going after a bunch of junk studies.

So how can they say so many of these findings are likely to be false?

To be clear, the paper doesn’t go through 300 articles and find mistakes. Instead, it argues that, statistically speaking, the high number of studies is itself a good reason to be more suspicious of any one them. This is a little mind-bending—more research is good, right?—but it helps to start with a simple fact: There’s always some randomness in the world. Whether you are running a scientific lab study or looking at reams of data about past market returns, some of the correlations and patterns you’ll see are just going to be the result of luck, not a real effect. Here’s a very simple example of a spurious pattern from my Buffett story: You could have beaten the market since 1993 just by buying stocks with tickers beginning with the letters W, A, R, R, E, and N.

Winning with Warren NEW

Researchers try to clean this up by setting a high bar for the statistical significance of their findings. So, for example, they may decide only to accept as true a result that’s so strong there’s only a 5% or smaller chance it could happen randomly.

As Harvey and Liu explain in another paper (and one that’s easier for a layperson to follow), that’s fine if you are just asking one question about one set of data. But if you keep going back again and again with new tests, you increase your chances of turning up a random result. So maybe first you look to see if stocks of a given size outperform, then at stocks with a certain price relative to earnings, or price to asset value, or price compared to the previous month’s price… and so on, and so on. The more you look, the more likely you are to find something, whether or not there’s anything there.

There are huge financial and career incentives to find an edge in the stock market, and cheap computing and bigger databases have made it easy to go hunting, so people are running a lot of tests now. Given that, Harvery, Liu, and Zhu argue we have to set a higher statistical bar to believe that a pattern that pops up in stock returns is evidence of something real. Do that, and the evidence for some popular research-based strategies—including investing in small-cap stocks—doesn’t look as strong anymore. Some others, like one form of value investing, still pass the stricter standard. But the problem is likely worse than it looks. The long list of experiments the economists are looking at here is just what’s seen the light of day. Who knows how many tests were done that didn’t get published, because they didn’t show interesting results?

These “multiple-testing” and “publication-bias” problems aren’t just in finance. They’re worrying people who look at medical research. And those TED-talk-ready psychology studies. And the way government and businesses are trying to harness insights from “Big Data.”

If you’re an investor, the first takeaway is obviously to be more skeptical of fund companies bearing academic studies. But it also bolsters the case against the old-fashioned, non-quant fund managers. Think of each person running a mutual fund as performing a test of one rough hypothesis about how to predict stock returns. Now consider that there are about 10,000 mutual funds. Given those numbers, write Campbell and Liu, “if managers were randomly choosing strategies, you would expect at least 300 of them to have five consecutive years of outperformance.” So even when you see a fund manager with an impressively consistent record, you may be seeing luck, not skill or insight.

And if you buy funds that have already had lucky strategies, you’ll likely find that you got in just in time for luck to run out.

TIME Earnings

Warren Buffett Just Lost Another $1.5 Billion

Billionaire investor Warren Buffett speaks at an event on September 18, 2014 in Detroit, Michigan.
Billionaire investor Warren Buffett speaks at an event on September 18, 2014 in Detroit, Michigan. Bill Pugliano—Getty Images

Losses in IBM and Coke add to a recent rough patch for Buffett

Another day, another $1 billion down the market’s drain. Spare a thought for Warren Buffett, whose portfolio is not doing him any favors this week. On Monday Buffett lost nearly $1 billion on his third-largest investment, IBM, after the company posted disappointing earnings. On Tuesday, Coca-Cola did the same thing, posting third-quarter revenue that fell short of expectations and warning of currency headwinds.

Coke is Buffett’s second-largest investment and has been one of the stalwarts of his portfolio for decades. (He left Coke’s board in 2006 and his son Howard took a board seat there in 2010). With 400 million shares, Tuesday’s decline of $2.72 cost…

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