One of the best ways to make sure the easy gains of the past 10 years haven’t made you complacent is to look back at the Crash of 1929.

Ninety years ago this week, the worst stock-market crash in U.S. history began. Almost everything today’s investors think about that pivotal event is wrong—and anyone who believes it’s irrelevant is wrong about that, too.

Everybody “knows” the market collapsed in 1929 because euphoric speculators bingeing on borrowed money drove stocks to absurd heights. That isn’t true.

Didn’t leading forecasters warn that a crash was coming? Not exactly.

Did anyone predict how long it would last and how bad it would get? Not even close.

Doesn’t the 1929 crash prove that if you hold stocks long enough, you’re bound to come out ahead? Only if you have the patience of a tortoise and the emotions of a stone….

Read the rest of the column

This article was originally published on The Wall Street Journal.

Read the rest

Further reading

By Anne Tergesen and Jason Zweig

Charles Schwab Corp. is scaling back a sales-incentive program designed to reward its top employees with all-expenses-paid trips.

In an email to its staff Friday, the discount brokerage and investment firm said that rather than take members of its Chairman’s Club to Hawaii next spring, Schwab will pay $5,000 after taxes and give them a paid week off.

Read the rest of the column

This article was originally published on The Wall Street Journal.

Read the rest

Further reading

It took a while for us to synch our schedules, but I recently chatted with David Perell for his North Star podcast.

I’ve fixed a few minor errors in the online transcript that David posted.  My corrected version follows.

Jason, welcome to the North Star podcast.

Great to be here, David. Thank you.

So you had the great fortune of spending six hours with Charlie Munger back in April, and he said a quote by Lee Kuan Yew that is as simple as “Figure out what works, what doesn’t and why.” But that’s stuck with you. And I want to hear why it resonated with you so strongly?

It seems to be a guiding principle for Charlie Munger’s life. And for anyone listening who isn’t familiar with him, he’s one of the greatest investors of our time, Warren Buffett’s business partner, and somebody who has just an extraordinary track record in the investing and business world. But I think what makes him unusual is his intellectual consistency. He really seems to try to apply that principle – “Figure out what works and what doesn’t, and why” – across all of his business thinking and maybe even across parts of his private life as well. And that kind of intellectual consistency is really rare. What’s remarkable about both Charlie Munger and Warren Buffett is that every year for decades at the Berkshire Hathaway meaning they’ve taken on this task of answering questions on any topic from anybody. And, remarkably, they always give the same answers and people keep coming back. And I think it’s because that sort of constant is rare in the business community and in public life as well. And people appreciate always hearing the same message delivered the same way.

That reminds me of something that you’ve written, that you try to say the same thing but in different ways, in ways in which that same message continues to be entertaining.

To give you the backstory on this, 20 years ago, I was a speaker at a journalism conference. And the question came from the audience. “Describe what you do for a living. Don’t tell me what it says on your business card or your resume. But tell me what you do for a living.” My answer was: Between 50 and 100 times a year, I say the exact same thing in such a way that neither my editors nor my readers will notice I’m repeating myself. That is kind of the way I think about my job. It’s because I am in the business of giving advice on investment decision making. And I think there’s only a handful of things that are true. And when you try to sort of expand beyond that set, you quickly get into the position of starting to tell people things that are bad for them. So I’ve willingly put myself in a box.

It seems like what you’re trying to do – and what Munger and Buffett are trying to do – is find principles, find axioms that then are stable and consistent enough that in times of joy and toil, you can still depend on those axioms. Is that the right way to put it?

That’s a very nice way of summarizing it. Just sticking to investing for a minute, another way I sometimes summarize my beliefs is: As an investor you want to bet on regression to the mean, rather than against it. What most people do, in technical terms, is they’re procyclical: If, when they invest, the US stock market is going up, then they want to be with the cycle and then some, so they borrow money to buy more stocks, or they buy something that itself is leveraged. They take on more and more risk as the ambient level of risk is rising. And then the flip side of that is they’re also procyclical in bad markets. So when prices are falling, they reduce their exposure to whatever is going down instead of buying more because it’s getting cheaper. So what I’ve tried to do – although of course I wouldn’t pretend that I’ve done it perfectly – is to be less enthusiastic when markets go up and more enthusiastic when they go down. And it’s a bit like being the skunk at the garden party. But that’s just the way it is.

So when you look at somebody like Buffett, somebody like Munger, there are so many people who have a ferocious love for their ideas. Now, as a writer, as a journalist, as an analyst of the investment business, how do you separate skill from luck? How do you know that if you’re going to go spend six hours with somebody like Buffett or Munger is actually the best person to spend that time with?

Well, you don’t. You never know. But you can have a pretty good idea. I had a one-on-one interview with Charlie Munger four or five years ago. And we ended up talking for well over an hour. And he was terrific.

I figured, “Well, he’s only 95. I’m sure he’s still just as good as he was then,” and he was better.

Perfect. Now, in terms of Charlie Munger and in terms of Daniel Kahneman, who you’ve also spent a lot of time with. You worked on Thinking, Fast and Slow with him. Talk about some of the similarities that you’ve seen between the two of them and talk about some of the differences and then we’ll get into how both of those people have influenced yourself and your own worldview?

I think the most fascinating similarity between those two is Charlie Munger has said that he loves destroying his own ideas. And Danny Kahneman has said the same thing both to me and to other people and in public over the years. One of the most memorable moments from helping Danny write Thinking, Fast and Slow — and one of the most memorable moments was pretty early on — I had just published a book at that point on neuroeconomics and the psychology of investment decision making. And someone who read the book had written me this long email. It was probably, single-spaced, four pages long. With this detailed analysis of why he thought that one sentence in the book was wrong. I read it, and I immediately realized that the person was probably right. But I wasn’t actually smart enough to figure out for sure whether the person was right, or even how I should fix the flaw that the person was pointing out. And so the very next morning, when Danny and I were going to be working together in his apartment, I brought it with me and I showed it to him. I asked him, “What should I do?” I was asking him to help me. And he read it. And when he was done, he handed it back to me. And he said, “Do you have any idea how lucky you are?” And I said, “Well, what do you mean?” and he said, “Most people never have anyone point their errors out to them. In here, you have four pages, outlining exactly why you’re wrong, and what you should do about it.” At that point, I realized he was not going to give me any help. But I also took that lesson to heart. And I mean, it’s really important to get that kind of negative feedback, and to welcome it and really be open to it, not just as a writer, but as a thinker and as a person.

Yeah, and the thing that kept coming to my mind, as you were saying that is attachment to ideas. So I’ve noticed that when I speak with investors, the best ones that I’ve spoken with, I’m shocked at how quickly even in the course of a conversation they can change their mind. It’s as if they don’t feel the same kind of possession to their ideas, whereas other people treat them like children.

I think this is one of the most difficult things in the human condition. It takes a lot of time, it takes a lot of commitment and mental effort and struggle, to arrive at what feels like a conclusion. And I think one of the problems is that once it feels like a conclusion, it becomes very difficult to let it go. And, you know, to me, probably the single most memorable moment of the time I spent working with Kahneman was when we had written a chapter that I thought was wonderful. And I woke up the next morning and opened my email. And I must have had over a half dozen emails for me – just this sort of cascade of increasing despair – as he had read through it. The first subject line was something like “Why did we say this?”, and then it became “Are you sure?” And then “I don’t think so.” And the next one was something like “This is all wrong.” And I’m pretty sure the final one was “Disaster” or something like that. Then there was one more email from him and he had stayed up all night and the final email from him that said something like, “Don’t worry, I think I can fix it.”

And so when I saw him later that day, he had rewritten the entire chapter as if it had never existed. And as somebody who at that point had been a professional writer for, you know, 25 years, I was dumbstruck. I had never seen anybody do that. Certainly not me. And I said to him, “How did you do that? How could anybody do that?” And he just looked at me. And he was kind of puzzled at how astounded I was, and he just said, “I have no sunk costs.” And it was so clear to me that it wasn’t a performance. It was how he worked. So I started over and there’s no point starting over with what you already have. You start over with a completely blank slate. And that’s what he did.

I’m curious to walk through the writing process with you from incubation to publishing and execution. Do you begin with a conversation? How does the way that you live and kind of structure your life – and I’m really interested in conversation and reading – then inform and begin to improve your writing process over time?

There’s a lot of variation. And there’s a big difference between writing for The Wall Street Journal and book writing, or, you know, the little bit of creative writing that I do on the side.

My reading away from the office, when I’m not working, has absolutely nothing to do with my day job. Nothing to do with finance. I will not read investing or finance books. I don’t watch Wall Street movies. In fact, The Big Short is the only financial movie I’ve seen in the past 20 years. And that’s because I personally believe it’s really important for writers, no matter what you write about, to refresh your brain when you’re not on the job. And the best way to recharge your brain is to engage in in things that are different from what you’re doing in your work-day life.

So, I read classic novels, I read history, I read biographies, I read books on science or philosophy. But I still will pick up threads in all of that reading that that are more like grains of sand that go into the oyster, and they eventually will make something, and that process is kind of mysterious. I might read something by Mark Twain or Emily Dickinson or Shakespeare or Bertrand Russell. And it just kind of sits up in my head for weeks, months, years, and then eventually comes out. And I might recognize it, or I might not until after I’m done writing, and then I realize that an idea kind of came in, at a glancing angle or from an oblique.

So what you were saying reminds me of a quote from Michael Pollan. He says that every night before he goes to sleep, he gets into that kind of fiction mode, reads the greats because he wants while he’s sleeping while he’s dreaming, he says he does so much of his work then. And he wants the night time work to be inspired by the greatest writers of all time.

Yeah, it’s interesting to hear you say that, David, because that’s kind of what I do, too. I mean, I, I tend to go to sleep a few minutes before my wife does. And that’s my last reading of the day, and there’s a few books I always have on my bedside table or almost always have.

One is the Essays of Montaigne, which I’ve written about a lot. And that’s kind of — that book is almost like a touchstone for me. I think the only time I didn’t have that book with me from the time I first read it when I was 18, I guess, is when I traveled 3500 miles overland in West Africa in the backs of trucks where it wasn’t really practical to bring it. But it’s gone with me just about everywhere else. And I don’t read it every night. I have a bunch of books on my night table. But it’s certainly one of the books I will read before I go to sleep.

Another is Sir Thomas Browne – whose name may not be very well known to people – who was a 17th century English essayist, who wrote this wonderful, ornate, complicated, Latin-inflected prose that I love, even though I don’t write the way he wrote. But his writing is gorgeous and complicated. And it’s not super accessible for a lot of people today. But it had a lot of influence on me, and I will periodically look at that. And then I usually have a Mark Twain book or Moby-Dick. Something like that.

So, I mean, my dad, who was very literary, had a phrase that it took me a long time to appreciate, was called “integumentary toughness,” which is just another way of saying you have a thick skin. And I don’t know where it comes from exactly, or why I’m going to flatter myself into saying that I have it.

One of the earliest memories I have of thinking that I was going to be a writer was when I was in sixth grade. And our English teacher, Mrs. Powers, handed back to me some assignment we had done — with an A+ on it. I threw it out decades ago, but I still remember it. I was describing something about winter, because in upstate New York [where I grew up], that’s a pretty common theme or was then, when we used to get three feet of snow in the wintertime. And I remember, I described something with these exact words, because I still can picture it. And I don’t know whether it was a person or a thing. Might have been a tree. But it was “pinioned in the fluffy white trusses of Mother Nature.” And Mrs. Powers had underlined it, put a checkmark and in the margin, she had written, “Beautiful!”

And I remember looking at it, after she handed it back to me. I remember looking at it, and so I guess I was 12. And of course, there was no internet in those days. This is why I hesitate to tell you what year it was. It’s probably 1970 or something.

And I remember looking at it and saying, “‘Trusses’? What did I mean, ‘tresses,’ or ‘trusses’?”

So tresses are sort of hanks of thick hair — like, you know, Lorelei or Rapunzel had tresses. And I think that’s what I meant.

Trusses are like jock straps [for the treatment of hernia].

And I looked at what I had written, and it suddenly looked strange and clunky and wrong. And I said, “Well, so let’s say I meant tresses, because I think that’s what I meant. But how could you be pinioned in tresses? And that’s not what I wrote. I wrote ‘trusses.’ And I think those are jock straps. And how come she doesn’t know this?” And the more I read it, the more awful it became.

And that night, when I got home, I showed it, I showed it to my parents, who had been newspaper editors and publishers. And my dad read it and burst out laughing. And because he immediately said, “Jock straps? And why are the jock straps fluffy?”

And she had just liked that it was figurative language that was pretty advanced for a sixth grader to use. But that was, I think, the moment I woke up as somebody who could become a writer and was able to be self-critical.

It was like, “I’m being praised for something that’s actually bad.” And that’s not good. That’s really bad! Because I’d much rather be criticized for something that’s good than be praised for something that’s bad.

That is something I’ve always tried to be open to and try to welcome. It’s not easy: Being criticized is hard. But the ability to go through a writing life with a thick skin is I think the only way you can get better.

Now, one thing that you seem to do is to save investors from themselves. I’ve seen you write that before. And it reminds me of this Benjamin Graham quote, “The investor’s chief problem, and even his worst enemy is likely to be himself.” Talk about that.

Well, you know, what Graham understood, I think, better than probably anyone who had written about investing before him is that there’s a big difference between what people should do and what they can do.

Another way to think about this is that distinction between what’s optimal and what’s practical. And we pretty much know how people should invest. Investing is – as Warren Buffett likes to say – “It’s simple, but it’s not easy.” And dieting is simple, but not easy. In fact, a lot of things in life are simple, but not easy. And investing is a very good example. I mean, if all you do is diversify, keep your costs low, and minimize trading, that’s pretty much it. It’s like eat less, exercise more. Investing is just about as simple, but it’s not easy. And so Graham understood that people are their own worst enemy, because when they should be cautious, they tend to take on risk. And when they should be taking on risk, they tend to be cautious. They are much too influenced by what other people are doing. And they have an enormous fear of looking foolish. So on the way up, you will have FOMO, fear of missing out. And then on the way down, you’ll have fear of sort of taking a worst loss and looking ridiculous in front of people. So all of those pressures come together, and they tend to make people get in their own way, really to their detriment.

Well, it kind of reminds me of some religious fasting rules, where a lot of religions will say fast one day a week. Actually, I think Ramadan begins today, where you can’t eat during the day [until] after the sun falls for a whole month. And as one of my friends who’s a wealth advisor says, behavior trumps math, and it gets back to what you were saying where, yes, there are optimal ways of doing things. But if that behavior is really hard, there actually might be easier practices to implement, that people can actually follow. And therefore kind of in this weird, backwards way, that’s actually the way to invest. Is that the right way to think about it?

Yeah, I think so. I guess once you recognize that you are your own worst enemy, then a lot of successful investing becomes about putting handcuffs on that don’t feel like binding constraints. So, you know, there’s a few classic techniques.

You can do what’s called dollar-cost averaging, where you buy a fixed amount of diversified mutual funds or ETFs, something cheap, once every month, so that it’s automatic, it’s an electronic funds transfer, you never touch the money. Another is, you can use auto-rebalancing, where when one asset goes way up in price, you automatically sell some of it. And the more you can do to automate how your investments behave, the more effective you can be in eliminating your own behavior from the equation.

How much do you think about the role of entertainment in your writing? And so I guess that question is twofold. The first one is, of course, you’re providing factual information. You’re teaching people how to save investors from themselves. But also there’s a role of entertainment because people have to say, hey, there’s a Jason Zweig column today. I can’t wait to read this. But then there’s another role where you want to make sure that the facts get slotted in there. And so it’s obviously not then pure entertainment, you’re doing a mix of both. So how do you think about that? And is it a trade off? Or are they symbiotic?

I think it’s all one. And certainly, like all writers, no matter what the medium or the style or the content, I want people to read what I write. And if all I did was just tell them, “eat your investing vegetables,” 50 times a year, then I don’t think anybody would read it. So part of the challenge in what I do in my day job is just getting people to feel that when they read this, they will be encountering something they didn’t know or they hadn’t thought of quite that way.

Well, it reminds me of why writers shouldn’t use cliches. I was with a writing teacher a couple months ago. And he said, the problem with the cliche is that by definition, you are saying something, at least a phrase, a way of thinking that the reader has already heard before. And so it sounds like what you’re trying to do is take the cliche to the next level of there can actually be entire pieces that are cliches that have zero element of surprise, and therefore it loses entertainment value. It’s boring. And none of it sticks in the readers mind.

I think that’s absolutely right. There’s an infinite number of clichés, but clichés also take a variety of forms. Words can be clichés, phrases can be clichés, ideas can be clichés and approaches can be clichés. And so for example, as we’re talking, it’s May, I am not going to write an article about “Sell in May and go away,” which is this incredibly tedious, uninteresting, completely hackneyed concept that people on Wall Street like to trot out this time of year. It’s the idea that, you know, between — the stock market’s returns between May and the end of October are less attractive than the returns from November to April. So you should get out of stocks in the summer and get back in in the fall. It’s been done to death. And the problem with it is not only is it stupid, not only is it not borne out by the data. But at this point, everybody’s talked about it a million times. And that’s the kind of thing I just can’t bear to go near unless I have to at gunpoint. That’s a cliché.

“Don’t write cliches” actually didn’t make sense to me until a couple months ago. So can you walk me through the problem with cliches because I don’t think it’s intuitive. And this isn’t really just about writing, I actually think it’s about how to actually convey and communicate interesting to people, which helps everybody whether you’re in conversation, whether you’re writing an email, whatever it is. It feels like a cliche is the death of communicating an interesting idea.

I completely agree. I think somewhere I defined a cliché as words that hijack your hands, so that your fingers type the words without your brain even sending any signals, which isn’t, of course, literally true on a neurological level, but it’s what it feels like. If you’re sitting at your keyboard, isn’t it you write by typing? And you just find the words sparking out of your fingers spontaneously. What feels to you like spontaneity is probably just clichéd language. We could actually conduct this interview entirely in clichés as you realize, if you say, “Oh, you know, the room was filled to the rafters.” There’s a zillion clichés and anything that you can say without thinking is a cliché. And what I do when I write, but also when I edit what I just wrote, is I just go through it, and I say, “Why did I use those words?” And typically, at this point, I’ve stopped most of them before I even get to the editing phase, but it’s a constant battle.

We’ll get back to writing. But I want to know when in your career was the most invigorating moment, and we can start maybe with an inflection point in your life, your career, somebody you met, an experience you had – maybe it was the trip to Africa that you were alluding to earlier? Let’s talk about the inflection point. And then we’ll get into a moment more specific to financial journalism, where there were something that happened at the spirit in the air that was really exciting and just fascinating to navigate through.

The inflection point I would mention is probably the thing that turned me into a writer. And at that point, I didn’t know what kind of writer I would be. But when I was 13 years old, I read a novel called Look Homeward, Angel by Thomas Wolfe, who, many, many decades ago was considered the equal of Faulkner, Hemingway, and Fitzgerald. Although today, he’s not quite so well-regarded. But it’s a wonderful novel. And it’s also a great novel for impressionable bookish teenage literary boys. And I read the book, and I just said, I want to be a writer like this guy. And from that moment, I was probably halfway through the book, I just started writing all the time. And I grew up on a farm in northern New York State. And whenever I wasn’t doing chores, I was sitting in my room writing non-stop.

And then what was the moment in your career that was exciting, invigorating to you?

Well, I think there were two moments. And I guess I would say they both took place when I was working at Forbes magazine, where I worked from the late 1980s to the mid 1990s. And I would say the first was the first big investigative reporting project I had ever done. I identified a guy who was big in the toxic waste business in New Jersey. And he was also doing all kinds of really strange accounting and questionable business practices at his company. And I spent months researching the story and I went trudging across all these landfills in southern New Jersey, including at least one where some people thought Jimmy Hoffa was buried. It was absolutely fascinating. And I, at that point, I was like, “Well, why would anybody ever want to do anything but this?” And, you know, in the end, the story that we published was good. I don’t know that it changed his practices or the industry as a whole. But it really sort of launched me as somebody who realized that I can put my curiosity to work. And try to uncover things that can make a difference.

So that is interesting because it was surprising to me, that’s not what I think expected you to say. Because that had a more investigative tint than many of the things you do now. So how did you make that transition?

Well, the other moment I was going to mention, after about a year after that, was when I was having so much fun doing this kind of work, I could barely believe anybody would pay me to do it. I got called into Jim Michaels’s office, and Jim was the editor of Forbes magazine, and, and, sort of an absolute legend in journalism. He was brilliant, and it could be terrifying if you were on his bad side. And he said, “I want you to be the next mutual-funds editor.” And I knew only two things about mutual funds. One, I was pretty sure it was boring. And two, I knew that the first job he had when he came to Forbes in 1950s was mutual-funds editor. I immediately said, “Oh, that sounds great!” And walked back to my office just kicking the carpet in frustration. I was like, “Out of all the jobs, I got to do this.” Then, I spent a couple days and I quickly realized there was a trillion and a half dollars in mutual funds at that point. And I said, “If there’s that much money there, there must be some stories worth telling.” And sure enough, there were.

So you begin to dive into understanding mutual funds but how do you then make the pivot to where you are now really writing more about the personal finance and stuff like that? It’s interesting, and quite frankly, surprising to me to follow this transition. And it’s not entirely clear to me how that path was paved.

Well, it’s not entirely clear to me either. But what I will say is that I noticed something which is, at that point, I had worked at Forbes for five years. And in the first five weeks that I was the mutual funds editor, I got more letters — because in those days, that was what people did, they wrote letters, not emails or tweets or something — more letters in five weeks than I had gotten in the previous five years combined. And I said to myself, “Whether people should care as much about their investments as they do is an open question. But the fact is, they care. People really care about this.” And I decided, “If it matters that much to people, then there’s got to be a good way of doing it and a bad way of doing it. And I’m going to try to pick the good way.” The other, I guess, guidance that I got on that was from Jim Michaels himself, because I said to him, “I know, I know that this was the first job you had when you came here. Do you have any advice for me?”

And I thought he was going to say something like, “Read this book or interview this person, or maybe go take a class in something in night school.” And he looked out the window for a while. And then he turned back and he looked at me: “Don’t get anybody’s blood on your hands.” What it means is: Don’t pander. Don’t tell people what they want to hear just because they want to hear it. Tell them what’s good for them. Often, the advice that sounds good for people is bad for them.

I have a theory. And I want you to tell me if this theory is totally crazy, or somewhat smart. And I’ve heard it sort of circling and other parts of the internet. And so good to kind of bring it all together for you here. But you grew up on a small farm in northern New York, middle of nowhere. We have to zoom in for 30 minutes on Google Maps just to find the name of the place. And when I look at my own personal experience, my intellectual curiosity didn’t peak when I was living growing up in the big city of San Francisco, it actually peaked when I was in the middle of nowhere, North Carolina. And I had to turn to books and ideas to keep my mind activated and stimulated. So my question for you is, does growing up in a place that maybe isn’t so stimulating fuel that intellectual curiosity? And how does your experience growing up on that full farm now inform your worldview?

I think there’s a couple of answers to that. I think, first of all, growing up in the middle of nowhere is stimulating. But in different ways. I grew up very sensitive to the natural world. When you grow up on a farm, I think it gives you a much better sense of the cycles of life than you get in a city, where something always seems to be new and different. It’s about the cycles of the seasons, and the weather and crops and animals and vegetation. And I wouldn’t say it made me cynical, but it made me skeptical of arguments about “this time is different”, or here’s this incredible new thing that nobody has ever thought of before.

And also, I think maybe there’s two more levels. One is that social interactions were a little complicated for me. My family was Jewish, everybody else was not. My brother and I were a little bit on the outs. And I think that gave me a natural sympathy for the underdog. That has stayed with me. And skepticism about sort of power structures and hierarchies and whether the people or organizations that are on top really belong there. And then I think the final thing is that having a lot of chores in farm country keeps you very busy. But when you’re off duty, you’re off duty. So I was able to indulge my bookishness. And I just read and, in my spare time, all I did was read and write.

What’s interesting is when you were talking about investing, you’re talking about regression to the mean. And so as you began that answer, the first thing that popped in my head was if what you’re saying is true, moving to the country actually might make you a better investor, because seasons and temperature and nature operates with its own kind of regression to the mean.

Certainly getting away from the conventional sort of gossip mill and social pressures of being surrounded by people who think the same way is definitely not good for anyone who wants to succeed as an investor. There’s two obvious examples of people who escaped the sort of the hamster wheel of New York or some of the other financial capitals like Boston or San Francisco or London or Hong Kong. The first is Warren Buffett who, who spent several years in New York, working on Wall Street as a professional investor, and then just left and went back and founded an investment fund in his bedroom in Omaha. Now, Omaha isn’t really the country, but it is very far from Wall Street. And the second great example of that is John Templeton, who was one of the great global stock investors starting really in the 1920s, and 30s up until he died a few years ago. And he left and moved to an island in the Bahamas and used to sit out on his veranda watching the waves and thinking about investing.

So if I came to you I want to do roughly what you’re doing in 30 or 40 years? What would you say to me in terms of things that would be the same and things that would be different? I’m particularly curious about how much would you use the internet? Would you kind of try to build your own brand and do a Ben Thompson and go launch your own Jason Zweig Stratechery? Or would you say go find a publication or go find a publisher? How would you think about incorporating the internet? But then also, what are the timeless principles of writing and publishing, especially online?

Well, I’m not much of a futurist. And I think the challenge is knowing how the delivery platforms are going to develop over the next few decades. Certainly there are people who have monetized their names into brand names and have been enormously successful doing that. I’m quite happy being associated with The Wall Street Journal, and having people think of me that way first. But not everybody can work in a major media organization, or wants to. I think probably the key is to figure out what you want to stand for. There’s a wonderful a line from Abraham Lincoln, where he said, important principles should be inflexible, because someone was criticizing him for being too sort of stuck in his ways. And his point was, I don’t mind compromising on the little things. But the big things, I’m not going to compromise on. And I think it doesn’t matter what you stand for, as long as it’s something positive. But when you figure out what you stand for, then don’t let anybody move you. I think that will help build an audience no matter what medium you choose, or how information is delivered in the future, that will help people find you, and it will help them be loyal to you.

Absolutely. Reminds me of a line from the Robert Caro biographies on Lyndon B. Johnson, where Lyndon B Johnson gets elected to the Presidency and he wants to pass the Civil Rights Act. And they say, Well, we can’t do this, the Republicans in the south are never going to help you. And he says, “If I’m not going to focus on this, then what the hell is the Presidency for?” And it was his moment, his time in power. And Caro always says “Power doesn’t corrupt. Power simply reveals.” And he said in this moment, this was one of the good parts of Lyndon B. Johnson really stood up and got that act passed. So it follows an idea that I think is fairly important in writing online. And this is what I call it building a personal monopoly. And I never thought of it around principles and values. But I find that so many of the people who do well online, either have a very unique way of thinking, a very unique, principled stance that they stick to, and a style and a sensibility that they have, that nobody else has, or they combine certain disciplines in a way that nobody else does.

I would completely agree. You know, I think just getting back to what I was saying earlier, I was being a little tongue-in-cheek when I said that it doesn’t matter what you stand for, as long as it’s positive. There are there are lots of ways to take a stand for what’s right in whatever your field or your specialty is. And people can arrive at their viewpoints and look at it from any number of different perspectives, but once you figure out what you believe in, I think the trick is to leave yourself open, completely open to challenge and changing your mind. But in so far as you continue to believe that you’re right, then that’s the stand you should take and the principle you should fight for.

I want to get into writing because you wrote a three part series on writing. I now have a writing course called Write of Passage. And actually, a lot of that course is built off many of the things I learned from you. A lot of my own writing practice is built from parts of that essay. And I just want to read my favorite quote from that essay. Because I think that this idea of treating every word like it matters and this line of so true, most people handle words as if they were pennies, light, cheap, dispensable, instead, I want you to handle them as if they were manhole covers, or 45 pound weights in the gym. Why that line?

Well, because I’m unless you’re a 98-pound weakling, you probably can pick up a 45-pound weight. And I see people, men and women alike in my gym doing that every day. But you don’t do it casually. And if you’re putting 45-pound weights on a bar, you’re going to put them on carefully. You’re going to take them on, you’re taking them off carefully, you’re going to lift them and put them down carefully. And you’re going to count how many you put on. You’re going to make sure that you know what you’re doing.

And this gets back to what we were saying earlier about using clichéd language. It’s all about the effort to use words, instead of having words use you. As the writer, you need to be in control of what your sentences, your essay or poem, your book, your blog post, your tweet has to say, and not the other way around. And all too often people are being driven by their words. They’re in the backseat, and the words are driving them instead of the other way around. You have to take charge. You have to make words do your bidding instead of the other way around.

I want to ask you about a couple people who have influenced your own writing process.

So I did not do much writing for my college newspaper. In fact, I didn’t like it. I didn’t like the newspaper. I didn’t like the the inbred management structure where there were a handful of people who ran it. And if you were in, you were in, and if you weren’t, you couldn’t contribute. But I did write a couple things for one of our newspapers. When I was very young – in my teens and early 20s – I was extremely conceited about my writing abilities. I often think back and I actually visualize myself as a peacock, sort of strutting around saying: “Everybody, look at me, aren’t I great? And isn’t what I just wrote great?”

So something I had written had gotten published in the campus paper. I walked into this guy’s dorm room, or maybe it was the lounge on our dormitory floor. And I had the paper and I said, “Look at this, I wrote this.” And his name was Steve Landauer and, of course, I was watching his face very carefully. And his eyebrows kind of went up and down a little bit. And he got a couple paragraphs in, he looked up at me, and he said, “‘a paucity of persons‘?” And I couldn’t tell you what the article was about today. I couldn’t tell you what the rest of the sentence was. But that phrase was in there. I sort of stammered, and I said, “Well, alliteration is part of what makes writing good.” And he said, “It’s what makes this writing suck.” And, you know, at first, my feelings were really hurt. And I think I sort of stood there with tears in my eyes. And he just went back to whatever he was doing. And I walked back to my dorm room. And as I walked, I looked at it. And I said, “You know, he’s right, it does suck. Why did I do that? And I guess I really like it — I like alliteration, but maybe I like it too much.”

I don’t know why, at an early age, I was able to accept criticism of my writing and learn from it. But I think that may have had something to do with growing up in farm country too, at least in my case. But certainly being able to take criticism and immediately impound it, and turn it around and sort of tackle the problem, learn from it and fix it, is one of the greatest skills a writer can have. And it’s also, even among great writers, it can be rare.

Absolutely. There’s an interesting parallel here with investing where when you have criticism, we were talking about principles earlier. And these themes are really beginning to come clear in this conversation as we were talking about principles earlier and investing and every now and then I’m sure you read something that might defy one of the principles. And so there’s always a tension between how much do I accept this idea. And it must be the same thing. When you receive criticism, you have a system of writing, you have a style of writing, you have a voice, you have a way of being on the page, and then you hear criticism and some of it you want to take and you want to absorb you want to then have those words spoken to writing. And other times you want to give the old Heisman stiff arm to that criticism and say, Nope, that is not what I’m going to do. I’m going to be principled, because this is something I believe in. And you know what, it might just not be good for you.

Yeah. Well, so that’s a great point, David, and it reminds me of something that might be helpful, which is that there are different ways to respond to criticism, because there are different kinds of criticism. When people criticize the messenger, I usually discount it. I don’t really care if people tell me I’m wrong, unless they appear to be arguing on the basis of evidence. If they say, “You misinterpreted that: It wasn’t 43, it was 2048, and you’re wrong,” then I stop everything. Because if somebody is questioning the factual or the intellectual basis of something I wrote, that’s like a three-alarm fire in my world. I just immediately drop what I’m doing. And I go back, and I try to re-report or read all the research, go through my notes, and make sure that I didn’t make a mistake.

But if people don’t like how I said something, or they don’t like that I said something, then they can say anything they want. I mean, I’ve been called all kinds of things, which I wouldn’t repeat on a family podcast. But on the flip side of all of that is if one of my editors criticizes the way I’m saying something before — obviously, this is in the editing process — then typically, what happens is — this happened a few weeks ago. Actually one of my editors said, “You know, I like what you did, I think it’s really good. But you kind of waited five paragraphs to tell us what this is really about? Is there a way you could just say it?” I stood there in the door of his office for probably 30 seconds without saying anything. I said, “Yeah, probably, let me go try.” And it took me 20 minutes, and I rewrote the whole thing. And I sent it back to him. And he said, “Yeah, that’s it!” and then he just sent it through.

But you have to be wide-open to the possibility that what you’ve done isn’t nearly as good as it can be. I mean, my only agenda is to try to convey what I believe to be and the facts as I’ve learned them in a way that’s useful to people. And that’s all what I’m about. But other people think I’m writing about Obama versus Trump or some other nonsense that is just not on my list.

I think the other thing that all writers have to be aware of, is that everything we do, everything I write, everything you write, everything, all the writers we admire, right? Everything is a palimpsest. I don’t know if you know that word. So palimpsest is a really unusual, but wonderful, word. A palimpsest is tentative. I believe it’s originally a Greek, ancient Greek, term: Palimpsest comes from the time in the ancient world where paper was very hard to come by, in fact, in most cultures, paper didn’t exist. And people wrote on animal skin, or tree bark, or cloth or other paper substitutes. And what they would do is they would reuse things that already had been written. So if I wrote something on vellum, which is cured sheepskin, and then you needed a writing surface, you would take what I had written maybe 400 years earlier, or 1000 years earlier, or four days earlier and you would write your essay or your poem or your epic novel over what I had written literally physically over it.

And so I mean, when I say everything is a palimpsest, what I really mean is everything I write – my columns for the Wall Street Journal, my blog posts I do, the books I’ve written – it’s all a palimpsest, because I write one thing and each reader reads something else. And sometimes it’s a lot like what I wrote. And sometimes it’s nothing like what I wrote. But what’s interesting is it often is better than what I wrote. And you know, when you have dozens or hundreds or thousands or millions of readers, that collective intelligence and perception can bring things to what you wrote that you didn’t even realize were there.

I love that word, collective intelligence. And I want to hear about how that’s evolved. Because there must have been a time when you were receiving letters for what you wrote. And now you probably receive more emails for what you’re writing. How does publishing and getting your ideas into the world make you more intelligent? And how do you use this collective intelligence that we can tap into? How do you use that collective intelligence to improve your own thinking?

Well, we touched on this a little bit earlier. I think that there’s just, there’s only one critical factor, which is that when you get negative feedback, you have to sort it. You can’t just take all negative feedback and throw it in the “I’m not reading this” bucket. You have to go through it. And you have to say: “Is this person, who says I’m wrong, right or wrong?” Because if the person says you’re wrong, and is wrong, then how does that hurt you? But if the person who says you’re wrong is right, it’s devastating to you if you don’t listen. And I can’t sit here and promise that I always fall on the right side of both of those dividing lines. But I try. And so, when you, when you write a column for The Wall Street Journal that is called “The Intelligent Investor,” you get a lot of email and other forms of feedback questioning your intelligence. And, you know, the first few hundred times it happened, I thought it was funny, often It made me a little angry. But anytime somebody says I’m [empirically] wrong, I have to take it seriously, instead of taking it as an insult, or an invitation to a pissing match. It’s not about winning. It’s about learning.

Absolutely. I want to talk about one more idea and a couple more questions of writing and then we will conclude. But you have this idea that people are actually too good at learning lessons. When people keep making mistakes, it’s not always because they didn’t learn their lesson. It’s because they learn too precise a lesson. And that I think is the most dangerous kind of learning.

So again, this is something that I originally applied to the investing world, but I think it probably has much broader implications across people’s lives. And I was up close and personal to the internet stock bubble in 1999, and 2000, which is ancient history to a lot of people at this point. It was 20 years ago. You were five years old. My kids were very young. And what I saw over and over again, because I got into a back and forth with people in email telling me I was stupid because I told them that they shouldn’t speculate on dot-com stocks — but the lesson people learned from that was not, “I should never speculate on overvalued financial assets.” The lesson they learned was, “I should never speculate on internet stocks.” And so the same people who lost 90% or more of their money day-trading internet stocks ended up flipping homes in the mid 2000s. And getting wiped out doing that.

And it’s dangerous to learn narrow lessons. And I guess, the point is, you should try to invert the funnel. Instead of gathering a wide base to a narrow point and concentrating the lesson at the narrow point, you should turn it upside down, start from the narrow point and try to make the lesson broader. People who have kids, I think you have confronted the same kind of problem where your kid does some wrong thing and you chastise the kid or you discipline the kid. And the kid won’t do that again. But the kid will do the similarly wrong thing again and what you’re trying to do is you’re trying to convey a general lesson from a specific kind of misbehavior. And that’s a difficult principle to convey. But I think with experience, people can learn it.

Tell me about the quote, “What did you get on the AP test?” This goes back to an old memory. And I want to hear what that quote, “What did you get on the AP test?” What does that mean?

Well, so this is a this is a lesson about intellectual arrogance. As I mentioned, earlier, I was a very cocky young writer. When I was 17 or 18, and people would say to me, “What do you want to do?” I would just say, with a perfectly straight face, “I’m going to be the first person to win the Nobel Prize in Literature before the age of 30.” And I meant it, and I had no idea how absurd and ridiculously egotistical and wrong it was. But I meant every word of it.

When I got to college, I found out during Freshman Orientation Week that there was a requirement. And in those days, it was called Freshman Composition. Today, people call it University Writing. As I found out about it, I decided “I’m not taking this stupid class.” And I marched straight to the head of the department’s office. And I still remember he had the very unusual name of Cyril Knoblauch. I waited until he was free. And I went in and I sat down and I just clomped this huge manila envelope on his desk. And he said, “Why are you here and what is that?” And of course, it was the collected oeuvre of Jason Zweig. It was my poems, my short stories, my unfinished novel. “Well, that’s my writing. I don’t want to take Freshman Comp, I want to, I want to get placed out.” And I’ll never forget what he said. He looked at me, stared at me for a few seconds. And then he said, “Why should I do that?” I was completely taken aback by the question. I said, “Because I’m a great writer.” And he burst out laughing. And he said, “What did you get on the AP test?”

And so here I was, I’d grown up on a farm in northern New York state, in a very economically poor school district. I didn’t know what an AP test was. I’d never heard of it. And not only did I not know what it was, I couldn’t even figure out what it was. And I just sat there in a panic. And finally, I said the only thing I could think of, which was, “I don’t know, maybe they had a bureau in Albany, but that’s an hour-and-a-half from my house.” [In my desperation, the only thing I could think of that ‘AP’ might stand for was Associated Press.]

He just said, “Leave my office now and go sign up for Freshman Composition.” And he just shoved my stuff back across his desk at me. And I stood up and I walked out. I remember walking across campus, and it was raining. I got back to my dorm room and I said to my roommate, who was a year older than me, I said, “Mark, what the hell is an AP test?” He explained it to me after saying to me, “You idiot,” and I said, “I never heard of it.”

And I still remember that to this day, because whenever in any field of life, whenever I encountered people who are really cocky about what they do, I just think about what I was like when I was 18. And I just say, “You’re a lot older. Why haven’t you outgrown that yet?” I mean, I don’t say it out loud. At least not usually. But that’s what’s going through my head. But people who are that arrogant about their abilities are really hurting themselves, because that’s not the way the world works. The world doesn’t anoint one of us as the genius who’s going to win the Nobel Prize before the age of 30. It just doesn’t unfold quite that way.

So I had kind of the opposite thing going in through my head as you are telling that story. Because when you talk to a Silicon Valley founder, they run with bullhorn intensity towards their goal. And they chant and shout, we are going to change the world. And they’re arrogant, but some do. And so when you were first beginning writing, I speak to so many up and coming writers who have the opposite problem. They don’t think that their ideas have any value no worth. They’re scared to publish. So my question to you is, even if you had no business being that arrogant kid who was going to be the youngest person and win the Nobel Prize in Literature, was there a virtue to it? Because maybe it gave you the activation energy to turn potential energy into kinetic energy and to start running?

Well, what I would say is that I was obsessed. I would say, from the age of 13, probably until I was 23, or 24, I must have spent an average of two hours a day, every single day for a decade, just writing. I filled dozens of notebooks. And I was obsessed. And I was delusional about how good I was. But I think you made an useful observation that maybe – I mean, psychologists talk about positive illusions. Overconfidence is a positive illusion, for example. None of us are as good or as knowledgeable as we think we are about almost anything. But if we had a realistic assessment of our abilities, we might not do anything. And so certainly, a lot of my drive came from that level of ambition and whether the ambition was delusional or not, it certainly contributed to that drive.

Absolutely. Jason Zweig, thank you so much for coming on the North Star podcast. This has been a phenomenal conversation.

My pleasure, David, thank you.

Further reading

Graham Greene, The Tenth Man: This short novel by one of the greatest storytellers of the 20th century is a haunting parable of money, honor, sacrifice, and redemption. It feels as if you’ve known the main characters your whole life and as if you know every turn the plot will take — and then the story unfolds with another surprise, and another. As always with Greene, you will be left wondering how you would have behaved had you been thrust into the same situation. Weeks after reading the book, I’m still troubled by the suspicion that I would have done no better.

Marc Flandreau, Anthropologists in the Stock Exchange: A Financial History of Victorian Science: I bent my rule of never reading about finance in my spare time for this book, because it looked so intriguing. Flandreau, a leading economic historian, follows his curiosity wherever it takes him — and it is an intellectual thrill to go along with him for the ride. With uncompromising rigor and strict devotion to original sources, he shows that modern anthropology emerged to serve the overlapping interests of British imperial power and the European investment banks that financed speculative international stock and bond offerings in the 19th century.

Flandreau focuses on wild schemes to build railroads, canals, and other infrastructure in Central and South America, which bilked investors of what would today be billions of dollars. He shines a startling klieg light into previously undiscovered dark corners of racism, insider trading, and the corruption of science. Even a century and a half ago, research wasn’t “funded”; it was bought, just as it often is today.

Samuel Beckett, Proust (and Three Dialogues): I was hesitant when my friend Vipal Monga foisted this book on me. I’ve always loved Beckett, the great poet and comedian of despair, but he seemed a most unlikely commentator on the associative arpeggios of Marcel Proust, author of the massive novel Remembrance of Things Past (or In Search of Lost Time). Beckett put words into place as sparingly as if they weighed 80 pounds apiece; he notoriously called the act of writing “disimproving the silence.”

Proust, on the other hand, goes on for thousands of filigreed pages that I’ve never quite managed to finish.

But in this little book Beckett meditates profoundly on the meaning of time and memory, habit and curiosity, and the aims and limitations of art. I’ll admit I couldn’t follow all the references, because I’m not a hardcore Proustian. But Beckett’s presence is hypnotic, and almost every sentence he writes makes you want to go back and read it again to see what you are missing in the space between the words and the ideas. I’m still pondering this phrase: “the only true Paradise is the Paradise that has been lost.” The more I think about it, the more I suspect Beckett is right and the more I hope he is wrong.

Rainer Maria Rilke, Auguste Rodin: This short biography of the greatest sculptor of the 19th century, written by the greatest German poet of the 20th century, is an extraordinary meditation on the meaning of art. I hadn’t realized that Rilke, as a young man, had been Rodin’s secretary; few great writers have ever known a great artist better.

Rilke captures what makes Rodin’s work so powerful: the ability to take objects and people in motion through space and time and fix them in one place and one moment for eternity. His sculptures of the human form have the same effect as a full-length motion picture that is somehow, miraculously, distilled into a single photograph that holds all the action and emotion of the entire movie.

A Rodin sculpture doesn’t just represent a person as he is at the moment, but as he was and as he will be. “Even stillness, where there was stillness, consisted of hundreds and hundreds of moments of motion that kept their equilibrium….There was no quiet even in the stones.” When Rodin looked at a person’s face, “he saw that it was as full of motion, as full of unrest as the dashing of waves.” (Full text also available at Google Books.)

Dennis C. Rasmussen, The Infidel and the Professor: David Hume, Adam Smith, and the Friendship That Shaped Modern Thought: Hume had the dubious distinction of tying with Hegel for my least favorite philosopher when I was a college sophomore: His insistence that love is only a form of the selfishness he called “sympathy” enraged me. Almost 40 years later, my copy of his selected works still has a bonk in the spine from the time I flung it against the wall of my dorm room in frustration. But as I have grown older, Hume has grown greater in my eyes. His central principle — you should believe nothing unless you have systematically evaluated the evidence for and against it — laid the foundation for modern science and is a model for how to think.

As for Smith, he not only created the intellectual framework for capitalism but further developed Hume’s ideas about how people should live and societies should organize to promote human decency. These two brilliant men were also lifelong best friends. Rasmussen chronicles the debt each owed to the other’s ideas and their personal devotion to each other. The book is well-written, but it feels a bit long; I wanted to hear less from Rasmussen and more from Hume and Smith themselves. Do you remember the scientific experiment we all did as young children, when we took a piece of paper outside and set it on fire by holding a magnifying glass up to the sun? This book is like that: Whenever Rasmussen quotes Hume or Smith, their words burn a hole in the page. It isn’t Rasmussen’s fault, of course, that his subjects are so much more quotable than he is; what makes this book fun is reading them first-hand. Of being extravagantly praised in France, Hume wrote:

I eat nothing but Ambrosia, drink nothing but Nectar, breathe nothing but Incense, and tread on nothing but Flowers. Every Man I meet, and still more every Lady, wou’d think they were wanting in the most indispensable Duty, if they did not make to me a long & elaborate Harangue in my Praise.

Or consider Smith’s remark:

The disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition [is] the great and most universal cause of the corruption of our moral sentiments.

In fact, the best part of the book is the appendices, each written by one of the great philosophers himself: Hume’s brief autobiography, which he wrote from his deathbed, and Smith’s description of the dignified way Hume faced death. (If you don’t want to buy the book, you can read Hume’s “My Own Life” here and Smith’s recollection, the “Letter to Strahan,” here.)

Scott Saul, Becoming Richard Pryor: As the only Jewish kid in my high school in remote rural New York state, I found a cultural hero in Richard Pryor: He turned the anger and pain of being a minority into comedy as sharp and glittering as broken glass. (I’m not trying to get away with not “staying in my lane” here: I don’t mean to imply I could ever understand the depths of the prejudice Pryor suffered, only that he spoke to me as no other comic did.) I never had the thrill of seeing him perform in person, but to this day I consider him — especially in the spellbinding video Richard Pryor: Live in Concert — the greatest comedian of my lifetime. Pryor knew, like all comic geniuses, that pain is the deepest mine of laughter. And what pain he went through! Born in a whorehouse, abandoned by his mother, sexually abused as a child, surrounded by poverty and crime, corruption and addiction, Pryor dropped out of high school, got thrown out of the Army after a racist confrontation, and failed as a performer over and over again. But the demons of his childhood and the evils of racism wouldn’t let him quit, and he kept digging deeper into himself and into society until he turned all that pain into performances that were — and still are — like revelations.

Saul put more than eight years of research into retracing the steps of Pryor’s life in granular, gut-wrenching detail. Like all overnight successes, Pryor’s was decades in the making — but, along the way, he had to overcome obstacles most people (especially most white people) couldn’t imagine in their worst nightmares. Many people who say with a wave of the hand that “the truth hurts” probably haven’t thought much about how deep the truth can be buried, how hard it is to dig it out, and how scalding the pain of handling it can be.

Alfred Lord Tennyson, In Memoriam: In this long series of short poems, Tennyson grieves over the death of his beloved friend Arthur Hallam. The wild English countryside and the nearby sea echo with love and loss, faith and hope, as Tennyson observes the natural world and senses his dead friend everywhere. Crafted with such perfect mathematical precision that you can’t imagine changing even a syllable, these poems nevertheless are seething with emotion. (Full text also available at archive.org.) Consider my favorite, Canto LIV, which insists that hope is possible — no, that it is imperative — no matter how imperfect the world or we ourselves may seem:

O, yet we trust that somehow good

Will be the final goal of ill,

To pangs of nature, sins of will,

Defects of doubt, and taints of blood;

That nothing walks with aimless feet;

That not one life shall be destroyed,

Or cast as rubbish to the void,

When God hath made the pile complete;

That not a worm is cloven in vain;

That not a moth with vain desire

Is shrivell’d in a fruitless fire,

Or but subserves another’s gain.

Behold, we know not anything;

I can but trust that good shall fall

At last — far off — at last, to all,

And every winter change to spring.

So runs my dream: But what am I?

An infant crying in the night;

An infant crying for the light;

And with no language but a cry.

G.K. Chesterton, The Innocence of Father Brown: I regard Chesterton (1874-1936) as one of the great artists of the English language. You can open any of his books to a random page, start reading aloud, and people around you will stop whatever they are doing, transfixed by the precision and vividness of his prose. Someday I hope to write one-25th as well as Chesterton did. He never overlooked the poltergeists who perennially stash tiny monkey wrenches in the gearboxes of the laws of nature. To be rational, Chesterton argues, you must accept the irreducible irregularities of the world. I often think of him whenever a quantitative money manager claims to have “solved” the relationship between risk and return in the stock market. Consider this paragraph from “The Blue Cross,” one of the tales in this collection of short stories featuring the unassuming Catholic priest whose insights into evil make him one of the most astute detectives in all of literature:

The most incredible thing about miracles is that they happen. A few clouds in heaven do come together into the staring shape of one human eye. A tree does stand up in the landscape of a doubtful journey in the exact and elaborate shape of a note of interrogation. I have seen both these things myself within the last few days. Nelson does die in the instant of victory; and a man named Williams does quite accidentally murder a man named Williamson; it sounds like a sort of infanticide. In short, there is in life an element of elfin coincidence which people reckoning on the prosaic may perpetually miss. As it has been well expressed in the paradox of Poe, wisdom should reckon on the unforeseen.

John Maynard Keynes (ed. Robert Skidelsky), The Essential Keynes: John Maynard Keynes (1883-1946) was not only one of the most influential economists who ever lived, but also one of the world’s greatest investors and a brilliant writer as well. Keynes is almost universally despised by conservatives for advocating the modern welfare state, but this anthology of his writings on an encyclopedic range of topics offers a more nuanced view, showing that Keynes deeply distrusted central authority, hated communism as much as fascism, and believed in government intervention only as a last resort. This collection is also primarily not about economics, but rather about what it means to be engaged in all the intellectual aspects of the world around you. In one of my favorite books (although not one I read this summer), The Autobiography of Bertrand Russell, Russell — himself one of the most brilliant minds of the past century — said of Keynes, “When I argued with him, I felt that I took my life in my hands, and I seldom emerged without feeling something of a fool.” Reading Keynes here, in short selections chosen by one of his biographers, you sense his intelligence powering every sentence like an immense waterfall driving a turbine. It feels as if Keynes permits himself to use a word only after he has defeated all its opponents in logical combat. That’s equally true in his ruminations about probability, poetry, Sir Isaac Newton, friendships in college, human suffering in the Soviet Union, or the future of humanity and the quality of life. I often found myself reading him forensically, trying to pick the sentences apart to reconstruct how he put them together so persuasively, to see if I could detect any flaws in his reasoning. You don’t have to agree with Keynes to benefit from reading him.

Michel Eyquem de Montaigne (translated by Donald M. Frame), The Complete Essays of Montaigne: To say I read Montaigne’s Essays this summer is misleading; I’m always reading them. This is the book that has been on my bedside (whenever I’ve had a bedside) for most of the past 40 years, ever since I read it as a freshman in college. It went with me to Jerusalem in 1979-80; it traveled more than 3,000 miles across West Africa in my backpack in 1985. I still have that same copy, and I open it at random, just before bedtime, every few evenings. (Note to publishers: Please consider printing books again the way you once did: built to last. My copy of Montaigne, which I bought in December 1977 or January 1978 and have spent countless hours reading, remains more supple and intact than several books I bought last year and read only once.) To me, Montaigne is the touchstone of what it means to navigate the world: You must never forget that what we know about everything, including ourselves, is no more than a mote of plankton in the middle of an ocean of ignorance. Honor and dignity and decency come from the relentless work of confronting how little you know, how much you never can know, and how hard you must work, every day, to light one more little candle to drive back the darkness the best you can. Montaigne’s imagery of ideas is unforgettable and, for me, unimprovable. Read the sentence below, from Montaigne’s “Apology for Raymond Sebond,” and ask yourself: Has anyone ever described better how learning more should make you feel you know less?

To really learned men has happened what happens to ears of wheat: They rise high and lofty, heads erect and proud, as long as they are empty; but when they are full and swollen with grain in their ripeness, they begin to grow humble and lower their horns.

Read the rest of the column

This article was originally published on The Wall Street Journal.

Read the rest

Further reading

“Watching Your Wealth,” with my Wall Street Journal colleague Veronica Dagher, on my column about what seeing the color red can do to the investing mind, “It’s the Little Things That Can Color Your Investment Outlook“

Watching Your Wealth

“Marketplace Morning Report,” on Public Radio with the excellent David Brancaccio, on the implications of the rise of index funds, which I’ve most recently written about here and here:

Marketplace Morning Report

“The Investor’s Field Guide,” Patrick O’Shaughnessy’s podcast, in which I tag-teamed with Morgan Housel of Collaborative Fund. Patrick is one of the best interviewers around, and Morgan never writes anything that doesn’t make me wish I’d written it myself. So don’t listen to this podcast because I’m on it; listen to it because they are.

Investor’s Field Guide

Enjoy!

Read the rest of the column

This article was originally published on The Wall Street Journal.

Read the rest

That’s 30 out of a grand total of 25,782 companies that were publicly traded over that period.

The search might not be completely futile, but many investors are going about it the wrong way. That’s because the average return of the stock market, and the return of the average stock in the market, are nothing alike. Even though the stock market generates positive average returns over time, more than half of all stocks lose money over their lives as public companies, and the number of stocks that make big money is astonishingly small.

As finance professor Hendrik Bessembinder of Arizona State University has shown, only 0.33% of all companies that were part of the U.S. stock market at any point over those nine decades accounted for half of all the wealth generated for investors. And fewer than 1.1% of all the stocks that existed created three-quarters of the stock market’s cumulative dollar gains — as measured relative to the returns on cash.

Without such “superstocks,” as financial adviser William Bernstein has called them, the stock market wouldn’t have been worth owning at all. The 1,000 top performers since 1926 — under 4% of all stocks — account for all the stock market’s gains, Prof. Bessembinder’s research shows. You could have matched the returns of all the other 96% of stocks combined by putting your money in one-month U.S. Treasury bills.

Amazon beat the return on cash by an average of 36% annually through the end of 2015, the highest rate among any of the superstocks, his research finds. (Altria Group grew at a lower rate but, because it was around for all nine decades, increased investors’ money more than 2 million fold.)

“How hard it is to envision how great a great company can become!” says James Anderson, a partner and senior investment manager at Baillie Gifford & Co., an Edinburgh-based firm that has owned Amazon stock since 2004 and is now the eighth-largest institutional holder of the shares.

All that time, he recalls, Amazon offered “no earnings and no guidance,” which ensured that even as the stock rose over time, “there wasn’t an excess of enthusiasts or an absence of shorts” who were betting against it.

What Amazon could become, says Mr. Anderson, was “unclear but underpinned” by the fact that its raw materials — silicon, electrons and computer storage — were getting cheaper every year.

To go along for that ride in that stock, however, required enormous patience and the willingness to withstand vast interim losses along the way.

In fact, the only thing harder than finding a superstock might be holding onto it long enough for it to become super.

Almost by definition, the stocks that go on to earn the highest returns in the long run stink the worst in the short run. Most institutional and individual investors get shaken out well before the long run can kick in.

Amazon itself lost 95% between 1999 and 2001 — but, instead of dying, it went on to thrive. And when companies thrive, their stocks can end up rising even farther than the hyperactive minds of investors can imagine.

That points to the most interesting wrinkle of all. Superstocks are so rare that building your investment strategy around the search for them is all but sure to end in heartbreak. But the rewards for finding a superstock are so great that even the tiniest gamble could pay off for those who can withstand the pain.

Traditional advice on diversification says you should own at least 15 to 30 stocks in order to reduce your risk. But, in a sequel to his new research paper, Prof. Bessembinder found that a portfolio of 25 stocks still has a 64% chance of underperforming the total market. Superstocks are so scarce that you need to hold hundreds, even thousands, of companies to be near-certain of matching the market’s return.

On the other hand, if you put the vast majority of your money into something like a total stock-market index fund, which holds essentially every publicly traded company, then you can afford to take a big risk with the small amount of money left over.

Say you put 99% of your equity holdings into a portfolio like iShares S&P 1500 Index Fund, Schwab Total Stock Market Index Fund or Vanguard Total Stock Market Index Fund. You could then take 1% and put it into one stock you feel you understand — and whose future fluctuations you can withstand.

If you turn out to be right and you end up with the next Amazon, the gains on that small stake could make a big difference to your ultimate wealth. If you turn out to be wrong and you end up with the next Enron instead, you’ve limited your loss to a small part of your portfolio.

Institutions can’t invest this way. Perhaps at least a few enterprising individuals should.

Read the rest of the column

This article was originally published on The Wall Street Journal.

Read the rest

Further reading

Resources:

WSJ.com podcast

Hendrik Bessembinder, “Do Stocks Outperform Treasury Bills?“

J.B. Heaton et al., “Why Indexing Works“

William J. Bernstein, “The 15-Stock Diversification Myth” (EfficientFrontier.com)

Jesse Livermore, “Diversification, Adaptation, and Stock Market Valuation” (PhilosophicalEconomics.com)

Michael J. Mauboussin et al., “The Incredible Shrinking Universe of Stocks“

Charlene C. Wu et al., “The Affective Impact of Financial Skewness on Neural Activity and Choice“

Willem A. Wagenaar and Han Timmers, “The Pond-and-Duckweed Problem: Three Experiments on Exponential Growth“

Oliver Renick, “The Math Behind Futility,” Bloomberg BusinessWeek

Introduction and Chapters Four and Five in The Intelligent Investor

Definitions of INVEST, LONG-TERM, PATIENT, and STOCK in The Devil’s Financial Dictionary

The Best Stock Over the Last 30 Years? You’ve Never Heard of It

Stock Picking for the Long, Long, Long Haul

How Huge Returns Mess With Your Mind

Even as evidence continues to mount that stock pickers have underperformed the market averages, active managers insist that they will make a comeback. Analysts at Bank of America Merrill Lynch found earlier this month that 63% of active fund managers investing in large U.S. stocks outperformed their benchmarks in April, the best since February 2015.

Stock pickers claim that the rise of market-matching index funds, along with artificially low interest rates, have driven all stock prices up, making it unusually hard to pick winners. But active managers, they say, will prove their worth again when the market finally goes down.

Unfortunately, that isn’t what history shows. The odds of finding a stock picker who can do better in down markets have long been less than 50/50. The brief periods in which active managers did resoundingly better than the S&P 500 have tended to be times in which small stocks outperformed large. If you or your financial adviser think stock pickers will prevail in the next downturn, the evidence isn’t on your side.

I asked Rui Dai, an analyst at Wharton Research Data Services at the University of Pennsylvania, to analyze mutual-fund performance since 1962. That’s as far back as it’s possible to go with the comprehensive data on funds compiled by the Center for Research in Security Prices at the University of Chicago’s Booth School of Business.

Over that long sweep of time, Mr. Dai found, active managers didn’t do significantly better than the market when stocks went down. On average, he says, the odds of finding a manager who will preserve your capital in a falling market are “slightly worse than the flip of a coin.”

During the financial crisis, from late 2007 through early 2009, the S&P 500 lost 50.2%; the average U.S. stock mutual fund fell 49.7%. In the bear market of 2000-02, as internet stocks imploded, the S&P 500 lost 43.4%; the average fund lost 43.2%. But funds fell worse than the market in the sharp declines at the beginning of 2016 and in the summer of 2015.

All these numbers include the income from dividends as well as changes in price. The average of fund returns is weighted by size, with bigger portfolios counting more.

Stock picking does cost money. Since 1962, mutual funds have incurred an annual average of about 1% in expenses and probably at least as much in trading costs, reducing their net returns.

The S&P 500, a hypothetical bundle of stocks that you can’t invest in directly, doesn’t bear the burden of those costs. Index funds based on the S&P 500 do incur expenses, although at a tiny fraction of 1%, since these funds simply own the underlying basket of stocks without trying to pick winners — and trade only when a stock enters or leaves the index.

What about the good old days, when swashbuckling fund managers could do as they pleased? In the crash of 1973-74 — which, until the financial crisis, was the worst drop since the Great Depression — the S&P 500 lost 37.3%. Stock funds lost 38.9% on average, even though they had almost a tenth of their assets in cash at a time when interest rates exceeded 7%.

As far back as the 1920s, the investing public was led to believe that portfolio managers could work miracles. “Investment trusts,” like today’s closed-end funds, issued finite numbers of shares that could sell for more than the underlying value of their assets.

To evaluate such a fund, The Magazine of Wall Street wrote on Sept. 21, 1929, “a simple rule is to add 30 percent to 100 percent, or more, depending on upon one’s estimate of the management’s worth,” to the value of the portfolio’s net assets. In other words, the brainpower of the manager could make the fund worth much more than its underlying assets.

A few weeks later, stocks fell 12% in a day, on their way to shriveling more than 80% in the Great Depression. Index funds, which didn’t exist then, would have done just as badly. Active stock pickers did worse on average; many of their funds went bust.

For as long as there have been funds, there have been fund managers who — sometimes with skill, often with luck — have beaten the market, at least for a while. But they have always been hard to find, and their performance has typically been highly perishable.

If you want to protect yourself against a bear market, keep more of your money in cash and other assets unrelated to stocks. Don’t believe the propaganda that says you can count on a stock picker to provide your parachute.

Read the rest of the column

This article was originally published on The Wall Street Journal.

Read the rest

Further reading

Resources:

WSJ Watching Your Wealth podcast

Definitions of ACTIVE, MUTUAL FUND, and PORTFOLIO MANAGER in The Devil’s Financial Dictionary

Consider the odd contortions that managed-futures mutual funds go through in disclosing their expenses to investors. If your hobby is translating Egyptian hieroglyphics, you might enjoy spending a weekend trying to decode some of these funds’ financial reports. Other people should remember the ancient maxim: Don’t invest in something you can’t understand.

The problem isn’t that these mutual funds are inherently bad. Managed-futures portfolios, which rapidly buy and sell anything from soybeans and cotton to rubles and rupees, can diversify the risk of a conventional stock-and-bond approach. Nor are these funds always expensive: AQR Capital Management charges as little as 1.2% annually, a fraction of what hedge funds and other managed-futures vehicles cost.

Other such funds, however, make it hard for you to figure out what they do cost. With financial advisers promoting the virtues of managed-futures funds ever since the financial crisis burned so many investors in stocks and bonds, you should hold back from investing unless the costs are clear.

Mutual funds specializing in managed futures have total assets of $29.7 billion; in 2016, for the second year in a row, they took in more than $8 billion in new money, estimates Morningstar, the research firm.

What you — and your financial adviser — might not realize is that many of these funds don’t report all their expenses directly.

Consider the $1.5 billion Equinox managed-futures funds, based in Princeton, N.J. Several of Equinox’s eight portfolios don’t invest all their assets directly in futures contracts. They also use what are called total-return swaps — instruments created by a bank to mimic the performance of a financial asset. That asset can be just about anything, including the stream of results generated by a portfolio manager.

But banks — and those portfolio managers — take fees out of total-return swaps. The $574 million Equinox Campbell Strategy Fund, for instance, paid 0.35% of its assets in 2015 to cover bank fees on its swaps. It also pays 1% of its total assets and 20% of any trading profits to the portfolio manager whose returns are captured by the swap, Campbell & Co. of Baltimore.

Equinox Campbell Strategy reports “total annual fund operating expenses” of 1.15% in its March 2016 prospectus. But that “total” doesn’t include the swap expenses.

Instead, those costs are subtracted from the fund’s gross return. “The performance of the fund is net of all such embedded management and incentive/performance fees,” the prospectus says in a bold-face footnote.

In 2015 such costs came to at least 1.35%, which would have more than doubled the fund’s annual expenses if they had been included in the “total.”

Equinox and Campbell didn’t respond to requests for comment.

Other mutual funds, including three offered by Altegris Advisors of La Jolla, Calif., also use swaps and exclude the associated costs from the “total” expenses they report to investors.

Altegris says in a bold-face footnote to its prospectus that the incentive fees it pays through the total-return swaps “cannot be meaningfully estimated but generally range from 15% to 25% of the trading profits” and that its funds’ returns are reported “net of all such embedded incentive/performance fees.”

“We bold-face the statement at the bottom because we want to make sure people see it,” says Matt Osborne, Altegris’s co-founder and chief investment officer. “We want people to understand what they’re buying.”

Altegris plans to use a flat-fee structure in more of its funds, Mr. Osborne says. “We are very aware that low cost is vital, and we are moving actively in that direction.”

Believe it or not, investment lawyers say fine-print disclosures like those of some managed-futures funds probably comply with rules set by the Securities and Exchange Commission. But do they tell investors what they need to know?

You would probably feel surprised, perhaps even exploited, if you went to a restaurant that promised you don’t have to tip the staff — only to learn that the waiters eat 10% or 20% of your food before they bring it to your table.

The way some of these firms report their expenses is “one of the worst practices in mutual funds,” says Jason Kephart, an analyst at Morningstar who follows managed-futures portfolios. “It’s completely non-transparent.”

Fees always matter, but they loom especially large in managed futures. An authoritative study of nearly two decades of performance, published in 2014, found that the average commodity trading adviser outperformed cash by an average of 6.1% annually before fees — but less than 2% after fees.

Such high expenses turn potentially attractive returns into chump change — and make it vital to determine exactly how much a given fund is charging.

If your financial adviser recommends that you invest in a managed-futures fund, ask him or her to prove to you that the fund includes all its costs — including on swaps and other offshore vehicles — in its total reported expenses. If you’re looking at such a fund yourself and can’t figure out how much you will have to pay to own it, don’t buy it.

Read the rest of the column

This article was originally published on The Wall Street Journal.

Read the rest

Further reading

A broker on the floor of the New York Stock Exchange gave me one of those commemorative baseball caps back in March 1999, as the Dow Jones Industrial Average closed above 10000 for the first time.

I used to wear that hat while I worked in my garden. But it got muddy, and I haven’t seen it for years. I must have lost it.

As the Dow crosses 20000 for the first time—it opened above the mark Wednesday—that vanished hat is a reminder of an important message. In order to move forward, investors need to look back.

After the Dow hit 10000 back in early 1999, it seesawed above and below that milestone 33 times until it finally clambered back above 10000 for good on Aug. 27, 2010, says Howard Silverblatt, senior analyst at S&P Dow Jones Indices.

Yes, investors earned dividends along the way. And, yes, the Dow peaked at more than 14000 in July 2007.

But to get from 10000 in 1999 back to the same level in 2010, you had to survive the fall to 6547.05 in March 2009. In a little over a year and a half, the Dow fell by more than half.

And that was after it fell 38% from January 2000 through October 2002.

Looking further back, the Dow didn’t surpass its closing highs of 1929 until late 1954, just over a quarter of a century later.

That doesn’t count dividends, but most investors didn’t reinvest them in those days. Even if they had, that barely would have lessened the ghastly losses that followed the Crash of 1929.

So you may have to wait an exasperatingly long time for the risks of owning stocks to pay off. Another lesson is more subtle: Financial history looks more predictable than it is — or was.

The market often moves in long, sweeping cycles, sailing higher for years, even decades, and then stagnating or falling for years on end.

Think of 1966-82, when stocks went nowhere. Then came 1982 to early 2000, one of the greatest bull markets on record. Or think of the wrenching years from 2000 through 2009, with two epic crashes, followed by 2009 to this year, when stocks have tripled.

Those major cycles seem almost absurdly obvious when you look back at any chart of historical performance. It feels as if a child should be able to see such moves coming.

But the market has always mapped its future trajectory in invisible ink. The clarity of past cycles is an illusion, a luxury of hindsight.

No wonder, then, that academics, analysts and investors have long sought forecasting tools that could identify when the stock market will have high or low returns for years on end.

If you had such tools and knew they would work, you could ride the stock market’s gains and dodge its losses.

In a new study on the history of financial markets from the CFA Institute Research Foundation, Antti Ilmanen, a principal at AQR Capital Management in Greenwich, Conn., summarizes the extensive research in that field.

The findings show that when dividend yields are below their long-term average, future stock returns also tend to be below average.

With dividend yields about 2.5% for the Dow and 2% for the S&P, not far from historic lows, and stocks trading at almost 29 times inflation-adjusted multiyear profits, or well above their long-term average of about 16, it seems prudent to expect tepid — maybe even putrid — returns for years to come.

Unfortunately, no one seems to be able to make precise, or even practical, forecasts using dividend yields or multiples of long-term earnings. Those indicators, writes Mr. Ilmanen, “give relatively coarse signals and too often recommend buying or selling too early in a cycle.”

Stocks began to seem overvalued by such measures about 1992, at the latest. With the exception of a few months in 2008 and 2009, they’ve been at least as expensive for almost the entire quarter-century since.

Exploiting such signals, according to Mr. Ilmanen, is “so difficult that most investors are better off resisting the temptation to try.”

Reaching a notional milestone like 20000 isn’t some magical sell signal or an indication that the Dow is doomed to drift or go down from here.

But the index’s own history should remind us all that the good times don’t roll forever. So Dow 20000 should make you cautious, not euphoric.

Owning stocks is a long-term undertaking that doesn’t just require patience. It also requires higher tolerance for pain and uncertainty than many investors may realize.

Read the rest of the column

This article was originally published on The Wall Street Journal.

Read the rest

Further reading

Although it has slipped a bit lately, the S&P 500 stock index is up almost 6% since Election Day, and surveys show that investors are feeling sharply more optimistic.

It’s fine to bask in that good feeling if you wish, but you must also be on your guard. New research shows that the confidence of others can influence your decisions even more than your own experience can. At a time when stocks and bonds alike are expensive, investors need to be even more vigilant than usual against the risk of getting stampeded by other people’s emotions.

An article published this past week in the Journal of Neuroscience finds that a particular region in the human brain monitors how positive other people seem to be about their choices.

“We’re biologically equipped with the potential to allow more-confident people to have greater sway over our own beliefs,” says Daniel Campbell-Meiklejohn, a psychologist who runs the Social Decision Laboratory at the University of Sussex in the United Kingdom and who led this study.

Participants in the experiment guessed whether the next marble drawn from an urn would be red or green. They could rely on the colors of the last few marbles they had picked themselves. They were told they could also take account of what up to four other people were forecasting — and how confident the strangers were in those predictions after sampling a few marbles.

Naturally, the participants were more likely to predict that the next marble would be red if most of their recent draws from an urn had also been that color.

They were even more prone to pick red, however, when they learned that other people had confidently chosen it. Confidence, in the experiment, was represented simply by how fast the other people picked the color and whether they smiled as they did so.

Brain scans showed that the prefrontal cortex responded differently, depending on whether the participants relied on their own experience or on how decisive other people were.

“The human brain has evolved with neural mechanisms to handle the uncertainty that accompanies social sources of information,” says Prof. Campbell-Meiklejohn. That sensitivity to cues about how sure other people are “can operate independently of learning from first-hand experience.”

And confident investors suddenly seem to be everywhere.

Robert Shiller, the economist at Yale University who won a Nobel Prize in 2013 for his research on inefficient markets, has long measured the confidence of professional and individual investors. (“Confidence,” here, means the percentage of investors who expect stocks to have a positive return.) In December, the proportion of individuals in the survey expecting the Dow Jones Industrial Average to go up over the coming year rose from 68.5% to 75.8% — the sharpest increase since Prof. Shiller began reporting updates monthly in 2001.

A survey of more than 2,000 wealthy investors, released by UBS Wealth Management Americas this past week, found that 58% were optimistic about the economy over the coming year, up from 39% in mid-October. Even investors who had supported Hillary Clinton became significantly more sanguine.

And 42% of investors said they were likely to raise their exposure to stocks, up from only 9% before the election.

Regardless of how they might feel about Mr. Trump,​ ​says Paula Polito, client strategy officer at UBS Wealth Management Americas​, “the rally has made everybody who’s invested in the market more optimistic.”​​

But the history of such measures suggests that investors’ confidence is a poor predictor of how well markets will perform. In a paper published in 2000, Prof. Shiller showed that confidence varies over time, often going up after the market rises and falling after it goes down.

The confidence of individual investors rose by 4% in July 2008, for instance — right before the U.S. stock market got sucked into the black hole of the global financial crisis.

Conversely, from August 2012 through January 2013, the confidence of individual investors declined in five of six months; institutional investors became less optimistic in four out of those same months. Nevertheless, the S&P 500 gained 32.4% in 2013.

Overall, the confidence of professional and individual investors has a perverse quality. Sometimes high confidence is a bellwether of low returns and vice versa. But most of the time, what the market does next has nothing to do with how optimistic investors are about it; the results are disconcertingly random.

So you could visualize the stock market as a poltergeist or hobgoblin who takes a twisted delight in playing pranks on the expectations of the investing public.

Meanwhile, the more cocky those around you become, the more important it becomes to wall yourself off from their influence.

This bull market for stocks is 94 months old, making it the second-longest in modern history, according to S&P Dow Jones Indices. Now more than ever, you should take extra risk only because your own rigorous analysis leads you to conclude that it’s a good idea, not because other folks think it is.

Source: The Wall Street Journal

http://blogs.wsj.com/moneybeat/2017/01/20/dont-let-other-investors-make-up-your-mind/

Read the rest of the column

This article was originally published on The Wall Street Journal.

Read the rest

Further reading

Related WSJ podcast:

http://dcs.megaphone.fm/WSJ3723510592.mp3?key=83c4f573c57b6be5652294849a991d87