Behavioral Value Investor Newsletter #2

My youngest son, Jacob, loves to play with a toy cheetah in preschool. But not if the dinosaurs are out. Those are his favorites.

One morning, I asked him: "Do you think the dinosaurs will be out?"

"Yeah."

"What makes you think that?"

"They were out yesterday."

"So you think that because they were out yesterday that they will be out today?"

"Yeah."

Stock market participants are a bit older than my son. But in some ways no more sophisticated. Why do they think that stocks will be up today? Because they were up yesterday.

When Jacob came home, I eagerly asked him: “So were the dinosaurs out?”

“No…”

“What about the animals?”

“They weren’t out either. We played with blocks instead.” he said.

Current Investing Insights

Imagine that you are entering a forest. It’s the middle of the summer. The days are hot and dry. An unusual amount of dry deadwood is strewn all across the forest floor.

Other things have changed as well. Celebrity tourists, strangers to these lands, have set up shop and are now happy to give any passerby directions. The sign, which once used to read “Danger: Fire Hazard!” is hanging, crooked, on one nail. The word “Fire” is missing the “F”.

Once upon a time, rangers used to comb this forest on a regular basis. They would help those who lost their way and make sure that the forest was safe for travelers. No longer.

The crowds of visitors who come to visit the forest have multiplied from the trickle of years ago. They come without maps or safety equipment. And why should they carry such unnecessary burden? There hasn’t been a major fire in many years. Besides, there is always a friendly celebrity tourist on hand to offer guidance should any trouble arise.

What about the forest Fire Warden? The man tasked with heading off trouble before it starts? He has been replaced with one lacking the prudence of his predecessors. The new man doesn’t believe in precaution. He has made it loud and clear: he wants to see the fires raging before he takes any action. Why should a man of his power trouble himself with preempting a forest fire when he can take care of it as soon as he sees one up close?

To the contrary, the Fire Warden has a new mission: make as many travelers come to the forest and have a merry good time. He calls it full forest utilization.

Recently, word has spread that a fire did break out, albeit it was contained. Apparently, a wealthy tourist found a few equipment vendors willing to rent him five tents on the cheap. They didn’t bother questioning what one man would do with all of that equipment or how he could make sure all five remain in good shape.

And sure enough: having set up five tents with five fires, but still possessing only one pair of eyes, he let one of the fires get out of control. A couple of vendors were quick enough to reclaim their tents before the blazes engulfed them. Others suffered a major loss. What about the wealthy tourist? He was lucky enough to escape with just the skin on his back, unsinged, but no longer wealthy. Instead of fun memories, he took home a lesson: it’s dangerous to play with fire.

The word on the street is that there isn’t much to worry about. Sure, it’s dry and there is plenty of kindling in the forest. But that’s been the case for years, and yet no major fire. See? Besides, if a major blaze did erupt, surely the Fire Warden will quickly show up as promised and snuff it out.

Resources That Will Help You Be A Better Investor

·        Li Lu: Value Investing in China

·        Warren Buffett’s Big Investing Mistake

·        The Best Investing Books That Will Make You a Good Investor

·        The Duration of Value And Growth

·        Rational Irrationality In Investing?

If you are interested in learning more about the investment process at Silver Ring Value Partners, you can request an Owner’s Manual here.

If you want to watch educational videos that can help you make better investing decisions using the principles of value investing and behavioral finance, check out my YouTube channel where I regularly post new content.