Sir John Templeton, the legendary mutual-fund manager who was a pioneer of international investing, lived in the quiet paradise of the Bahamas to escape the noise of Wall Street. He intentionally read The Wall Street Journal a few days late. His reasoning? He wanted to avoid emotional decisions based on news and headlines. He had lost as much as 10-15% on single days, but he knew panic and stress wouldn’t do anything to help his cause.
Many investors feel overwhelmed with the news and information they consume today. We can quickly get bombarded and lose sight of what matters. In this Signal From Noise, we step back to illustrate how some of the greatest investors of our time cut through noise and handle their emotions. After all, much of investing centers on our behavior and handling the emotional intensity innate in all humans. “How could economics not be behavioral?” Charlie Munger once said. “If it isn’t behavioral, what the hell is it?”
Insights come from great investors in Munger and Warren Buffett, Bill Miller, and Joel Greenblatt, with quotes from public interviews they’ve conducted.
Joel Greenblatt: Know what you own
At 27, Greenblatt founded a small hedge fund, Gotham Capital. It was 1985. He averaged a 40% return per year for the next 20 years, an astounding success rate that turned every initial $1 million into $836 million. But his journey began with turbulence after an early investment in Florida Cypress Gardens: The facility fell into a sinkhole, meaning the main pavilions fell into a hole that appeared out of nowhere. As The Wall Street Journal joked about the sinkhole, Greenblatt became nervous about how much money he’d lose.
His point: Events happen that you can’t anticipate. Investing is about the quality of your thoughts, not solely the hours crunching numbers, calculating intrinsic value, and typing up reports. Uncertainty is one of the few certainties in investing, and avoiding catastrophe and panic is a superpower. Greenblatt still feels a kick in his stomach when he loses a lot of money, but he’s usually adjusted within two or three days.
“I’ve made big mistakes with big positions, and then bad things just happen. Part of what you get paid for in this business is your stomach,” Greenblatt has said. “When you’re young, you figure you have time to make it back. When you’re older, you maybe have the experience to know that it will come back…Big, big picture, you have to have a little bit of a screw to take the pain, especially with a very concentrated portfolio that a number of people I know pursue.”
Greenblatt’s commentary conjures the quote by economist John Maynard Keynes, who in the 1930s made a timeless comment: “Markets can stay irrational longer than you can stay solvent.” Market movement, up or down, makes investors second-guess themselves. But Greenblatt says fully understanding what you own is “the only way I think you can deal with the emotion because you realize what you own is still good.”
Bill Miller: Harness the power of time
Miller is a legendary value investor and billionaire who famously beat the benchmark S&P 500 for 15 consecutive years. Most of his personal portfolio consists of Amazon stock and Bitcoin, which he started buying at around $200 per coin. As you can imagine, his portfolio was hit hard in 2022 as tech stocks and Bitcoin plummeted. But a hallmark of his philosophy is understanding his risk tolerance. Most investors, he says, overestimate how much risk they can handle. Taking the time to get a firm grasp of how much risk you can really absorb could benefit you for the next (inevitable) market crash.
“People bail at exactly the dumbest point, at exactly the moment when they should be buying your funds because they get clobbered,” Miller has said.
Miller ignores the moods of the market. On his website, where you can access his five main principles, he highlights “contrarian” as a critical pillar. He looks for opportunities during periods of uncertainty, often businesses that are out of favor. He says the most enduring edge in markets is behavioral, “as humans tend to react emotionally, especially during abnormal and volatile times. As a result, we tend to see the greatest investment opportunities when markets are panicking.”
What also helps Miller is that he buys stocks at points of low expectations: A stock’s performance depends on fundamentals relative to expectations. For big winners, he wants the gap between how a company performs and how it’s expected to perform to be widest. One example is Amazon, which Miller has owned for years and made a fortune on.
The other distinguishing factor for Miller comes straight out of Buffett’s playbook: Play the long game. Miller and other elite billionaire investors are essentially playing a different game from nearly everyone else, as their time horizon is much longer. Miller calls it “time arbitrage” because it’s about looking further out than anybody else. All companies have short-term problems. But to look beyond one earnings report, a few headlines, and a few Federal Reserve decisions is where Miller finds his brightest opportunities. He harnesses the precious value of time.
“In an environment with massive short-term data over-load and with people concerned about minute-to-minute performance, the inefficiencies are likely to be looking out beyond, say, 12 months,” Miller has said.
Warren Buffett: Uncertainty is your friend
Buffett might have framed emotions and investing best. He took over Berkshire Hathaway, a flagging textile company, in 1965. He’s since compounded returns at an average annual rate of about 20%. An initial $1,000 investment in Berkshire would be worth about $39 million today. Buffett has absorbed several market crashes, panics, bubbles, and market cycles through it all. He has thrived in a variety of environments and time frames. He began investing shortly after the Great Depression, during World War II, yet he kept evolving and learning, and he made his most profitable investment in the last decade when he swooped up Apple shares at a discount in Q1 2016.
In 1994, Buffett said: “We have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.” Then, in 2009, amid widespread fear following the Great Financial Crisis, he said: “We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance.”
Buffett calls himself a “focus investor” meaning he strays from the crowd and sticks to the investments he understands. He also knows when to put the blinders on, which is often. The more distracted others become, the more an advantage he believes he has.
The Oracle of Omaha also has said fear in investing is like a virus – it strikes people greater than others. Some can handle fears, others can’t. He has noted that one of the only predictable aspects of investing is that people will be full of greed, and then full of fear. For decades, Buffett has seen the same cycle repeat over and over.
“Uncertainty actually is the friend of the buyer of long-term values,” Buffett has said.
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