Great Investors Are Observant

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“Risk comes from not knowing what you are doing”
– Warren Buffett

In last month’s article, we focused on “humility” as one of the great qualities to adopt for anyone who wants to become a great investor. This month we focus on a similar, but slightly different quality…Great Investors Are Observant

To become a great investor, one must adhere to firm beliefs which are formed by the observation of markets over many years. In our opinion, the diligent observation of market behavior over many market cycles will reveal certain Universal Truths, or Natural Laws which govern investment markets and investor behavior over time, and which the wise investor can attempt to exploit.
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Not so Fast Junior!

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“No Issue looms larger for the financial advice industry than demographics and the aging of the baby boomers.”
-Andrew Osterland: CNBC.com

Recently, enormous volumes have been written about the coming transfer of wealth which is likely to occur in the next several years, as wealthy baby boomers begin to die and transfer their wealth to their kids.  The media has adopted this topic as a popular theme, and I have seen hundreds of articles like the one below from Andrew Osterland, which proclaims that:

Over the next several decades, the biggest and wealthiest generation in U.S. history will transfer roughly $30 trillion in assets to their Gen X and millennial children, and if studies are accurate, most of those children will promptly fire their parents’ advisors. [from: Advisors brace for the $30 trillion ‘great wealth transfer’]

Indeed, this coming wealth transfer event has become a huge focus for the financial advice business, which is scrambling to figure out how to court the Millennial and Gen X children who stand to benefit from these inheritances.

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Scandalous Behavior

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“A staggering fraud… A bank that is too big to manage”
– Senator Elizabeth Warren, referencing the recent Wells Fargo Bank fraud case

If you have picked up a newspaper or turned on the business news this week, you probably have seen images of the pained face of John Stumpf, the beleaguered CEO of Wells Fargo Bank. Unfortunately for Mr. Stumpf, he has spent his week attempting to explain to Congress why a massive fraud was committed on the bank’s customers under his watch.

Over the last few years, thousands of Wells Fargo employees have been opening millions of unauthorized bank and credit card accounts, in order to boost their sales figures and earn bigger bonuses. In the process, they subjected millions of customers to unwarranted bank fees and interest payments on accounts they never asked for. The result: over 5,300 Wells employees who engaged in this fraud have been fired, Stumpf stands to lose his job, and Wells is being forced to pay the largest penalty fine in history, reported as $185 million.

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What is Valuable?

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 “When your Values are Clear to You, Making Decisions Becomes Easier”
– Roy Disney

Roy Disney was the co-founder of The Walt Disney Company along with his younger brother Walt, and is largely known as the force behind the company’s success.  While Walt was the creative genius, Roy was just as much a business genius, who made sure the company was financially successful.

His quote above is one of my very favorites, and serves as a constant reminder about the incredible power of personal values.  In my experience, personal values have tremendous power over human behavior, and I have observed that most people have an extremely strong ambition to enable their personal values in their lives.  Our values are like an invisible force which influence every action we take, goal we achieve, and decision we make.   When we have clarity about what is most important to us, the decisions and actions which influence our life’s trajectory become second nature, because they are guided by the compass of our personal values.

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Should you Hire a Financial Advisor? Depends on your Mindset.

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“As a society, we don’t understand relationship skills. Yet everything is at stake in people’s relationships. Mindset adds another dimension. It can help us understand even more about why some people are able to build lasting and satisfying relationships.”

– Carol Dweck, from the book “Mindset”

Carol Dweck is a researcher, educator and author of a marvelous book called Mindset, in which she discusses the importance of how we look at the world when it comes to success and achievement. In particular, the book discusses the important role mindset plays in the success or failure of relationships. Dweck makes the point that the very best, happiest and most productive relationships are based on the foundation of a similar mindset, in which two or more people have the same way of looking at the world, and what is most important.
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Great Investors Are Humble

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“Never make predictions, especially about the future”
– Casey Stengel

In last month’s article, we focused on “chasing performance” as one of the biggest mistakes to avoid for anyone who wants to become a great investor. This month we focus on a similar, but slightly different quality…Great Investors Are Humble

To become a great investor, one must have a healthy acceptance of the fact that investing is essentially an exercise in managing uncertainty about the future, and is an “inexact” science at best. Great investors understand that there is a limit to the effectiveness of analyzing current information about the world, as a means to make future judgements about asset prices. Although hard work and research are critical parts of the investment decision-making process, they do not guarantee a favorable outcome. More importantly, great investors recognize the limitations of their own intelligence, insight and skill as reliable tools in making effective decisions. There is no “black box”, and even the smartest and most skillful investors will struggle with predicting an uncertain future.

No matter how smart, or skilled the investor, it is wise to never overestimate your ability to be “right” every time, and the wise investor makes healthy allowance for the possibility of being wrong.
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