Behavior Gap Round Up, 3.6.09

Some really amazing content made its way online this week. I hope it helps provide some perspective.

The Berkshire Hathaway 2008 Annual Letter

“Bubbles and Panics – “The investment world has gone from underpricing risk to overpricing it.” And “When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the US Treasury bond bubble of late 2008 may be regarded as almost as extraordinary.”

More Wisdom from Warren Buffett

There’s much to commend his letter this year, especially his calm reaction to the market slump that has slashed prices in many cases to bargain levels (“Price is what you pay; value is what you get.”) All investors (including myself) sometimes buy stocks that then go down. Nearly all of Mr. Buffett’s long-term holdings are down this year, which is hardly surprising since nearly all stocks are down. COP, BNI and MCO leap out because Mr. Buffett’s actions in these investments seem to so clearly contradict his words.

If even Mr. Buffett can succumb, then the rest of us shouldn’t be too hard on ourselves. At the same time, we should learn from his and our mistakes. So if you’re feeling some pressure to sell into the current pessimism, stop and think: If pessimism is your friend, euphoria your enemy, is this the time to sell?

20 Reasons Why I Love the Recession

Generation X has the investing opportunity of a lifetime.  If you’re a long term investor with a retirement account, you should be licking your chops when seeing the stock market down ~50% from it’s highs.  Dollar cost averaging into this market over the next few years could be the investment opportunity of a lifetime.”

Investment vs. Speculation

When I reflect on this, I realize that I spend 99.9% of my time as an investor and 0.01% of my time as a speculator.  Whenever I realize that I’m in a speculative thought process (such as noticing the Dow on CNN on the ubiquitous airport TVs), I immediately try to stop.  My goal is to spend 100% of my time as an investor.

Not surprisingly, there’s a huge amount of noise going around the system about speculation that is masquerading as investment.  Worst, the two get conflated on a regular basis in the context of what the government should be doing (e.g. incenting “investment” when they are merely either “incenting speculation” or “encouraging speculation”).  Of course, the endless stream of talking heads in the media don’t help this distinction.

When I read Buffett or Bogle, the distinction between investment and speculation is painfully clear to me.  I believe that much of the pain the global financial markets are feeling right now is a direct result of speculation.  As a result, I’m trying to come up with some simple parables for “investment vs. speculation.”  For example, “if you don’t understand what you are investing in, it’s speculation.”  Or, “if your time horizon is less than two years, it’s speculation.”

One of values I’ve always adhered to is that “I’m an investor, not a speculator.”  Now that the government is deeply in the mix, I think we need to spend a lot more “system time” thinking about how to incent and motivate investment, and how to avoid speculation.

The Dow in perspective

As bad as the Dow is right now — and it’s bad for millions who’ve lost jobs or rely on the stock market for interest-generating income — it looks pretty different when viewed since 1929. Not the greatest consolation, I know, but what else is there right now but context?

Based on the context of decades, I know that sometime soon, the Dow will right itself. Until then, I’m focusing on producing something of value every day. And swearing off cable TV news.

CNBC Gives Financial Advice: The Daily Show

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