Edward C. Johnson II. Kontrariansky approach to the stock market

Edward C. Johnson II. Kontrariansky approach to the stock market

In 1946, Edward C. Johnson and founded the "Fidelity Management & Research Company" (Fidelity Management and Research Company) and ran that company until 1971 and then handed the reins to his son. In that year the company had managed 14 funds and approximately two billion dollars today is the largest mutual fund company. He began his investment career in the 20s, and all these years, he relied more on intuition than on science. "Iswallowed and absorbed in business since 1924 - he said - and I know it's not science. It is an art. Now we have computers and all sorts of statistics, but the market was something the same, and to understand the market and not become easier. "

Johnson primarily concerned with satisfying their customers, and he always put their interests first. He experienced a painful bout of guilt, if he considered that his firm had made too much money. Take one year in the mid-60s reptiles as "Fidelity" made 5.5 million home. "Company like ours should never make much money," - he said. He believed that because "Fidelity" is not produced nothing, and she was "just business ideas." When it comes to investing, Johnson called attention to two things: "First of all ... Take only those investment decisions that you have a reasonably high level of confidence. This is a simple but often overlooked lesson: you can not make a profit, if themselves all the time myself reconsider .... Second, cut losses and cut quickly, do not delve into the reasons or emotions, just say goodbye. "

According to his son Edward III, Johnson has always supported the unorthodox thinking. "He believed that too high a security leads to problems. From the beginning of the company, he encouraged us to speak out against orthodox thinking." But you should also have respect for drivers. "My father instilled in me a healthy respect for markets - respect that comes from his own experience of observing how a whole generation is losing money at the end of the 20s and 30s." The key to success was Johnson kontrarianstvo, it adjusts to market forces, and when people were fearful, he was brave, and vice versa. In "Kontrarianskom approach to work in the stock market," he explains why you should pay attention to the "tuning fork" inside your own body.



We approach the problem of investing primarily in terms of making money. We are not interested in fashion ideas and theories, we are interested in what works. You could call us the empirical pragmatists. While these words are somewhat too heavy to read, I hope they convey the right picture. We almost religious faith in this analysis. The past is dead. We can learn from him, trying not to succumb to "the past" success, which we could achieve. The future - a dream. He can come true, maybe not. If you think about it, it turns out that only now (now I am speaking as a Zen Buddhist) - is that you can actually use. Many people spend their lives so much thinking about the future that lies ahead, that just feel real. But now you can do with little future. You can not love him, you can not try it, you can only dream about it. This is our approach, we are not trying to predict. We can not buy or sell securities at a distance of months from now, we can only do so today. The question is, what do we do now? Know that for us is enough.

But now we are trying to use is not static. It is dynamic, full of movement. It is the analysis of the dynamics and movement is an absolute essential. Proper analysis of this is from this position ... means to obtain benefits in the future without the risk elements inherent in successful prediction.

We approach the problem of practical investment from two perspectives. First, the so-called fundamental research. Let's look at myself kontrariansky approach. Last night I thought about it. I began to wonder what makes the approach useful kontrariansky and what kind of approach we are interested in kontrariansky. For example, the sun will rise tomorrow. I think the general consensus is that the sun will rise tomorrow, and it is obvious that this is not a view that we want to contradict it. The same applies to the opinion of the weather. Why? Because the opinion itself has no impact on fact. The general opinion that the sun will rise, of course, has no influence on the rising of the sun, nor does it have any impact on the state of the weather any opinion about the weather. Therefore, we can not say that the test of the usefulness of the approach is kontrarianskogo extent to which the opinion or that affects the reporting fact. For example, consider the stock market - the situation is quite different from that of the sun and weather. Obviously, the general opinion as to whether increases or decreases the stock market has a profound influence on the behavior of the market. What is the unanimous opinion, the more that could be called the opposite effect on prices.

Well, let's take this rule and consider the so-called fundamental research. What we are doing at this? We send people to different parts of the country, and they communicate with senior and other employees of the company, especially with its competitors. Here, as it relates to basic research, I do not see that kontrariansky approach was especially important. What people think of IBM's intentions with regard to their income and dividends, has probably a relatively small impact on the performance of IBM - of course, there is some impact, because if people think well of you, you may be able to do things that you would not do so well, if they were not very good opinion of you. But this is not such a big factor. Next, recall the one thing that we focus on, our people pay visits to competitors, which should go first when you want to find out something about this company. We get a general consensus that a particular company capable, well-managed, and so on and so forth. We do not act contrary to it, and we use it to [achieving] our conclusions. So kontrariansky approach, apparently, there will not be useful.

Next I would like to discuss a rather subtle aspect of the principle of kontrarianskogo approach. Consider the special case that might be called emotional involvement. Emotional involvement is very broad. Oonah always comes in many forms. For example, the analyst becomes an emotional involvement with the company, which he studied, the psychiatrist gets emotional involvement with his patient, and individuals of different sexes acquire an emotional involvement with each other (to put it mildly). This thing that we must consider. When we find that the analyst becomes an emotional involvement - and you can tell that this is almost the tone of his voice and the expression of his eyes when he talks about this company - we can not afford to satisfy a deep human instinct of loyalty and trust underlying emotional involvement. Because of the nature of our business, we must follow the principle of "if you love to part."

What is a manifestation of natural instinct, when in the future some of looming trouble? You want to roll up our sleeves and together with its leaders to tackle the problems. But, unfortunately, this is not our business, which consists to make dollar invested in the most productive work places. People running this company, of course, remain with her in good times and bad, but we must always ask, not whether other pastures appear greener. We have the ability to change the company, what ordinary people in a particular company can not do. This is one reason the IE, which makes our business so unnatural, but at the same time, oddly enough, so satisfying. Our business is so charming that we are very hard to keep good employees, because people that can consistently enough to make up considerable money on securities, rare, and they are welcome to the rest of the world. One of the circumstances, able to hold such a person, I think - this is the charm of the investment business and its versatility. The stock market is all that any man skin - or hoped had feared, hated or loved that. It (the market) is full of life. And if you leave it and go to "some bottled company," the rest of your life will be alone with bottles.

This emotional involvement, I think one of the problems that we are fighting, using kontrariansky approach. Namely, we are acting contrary to the deep seated in every instinct, makes not take positions and fight, so to speak, until the end. To paraphrase a famous statesman, who spoke about foreign countries, we can say that we have no loyalty, no friends, only interests. Maybe this kontrariansky element of our business increases its charm, but for family members, this often means more inconvenience because we love the business, which tend to stay at work unreasonably long.

Returning to kontrarianskomu approach: why it pays? Take the 20s as an extreme example of how this works in the stock market. In 1929, almost everyone who may have bought as many shares as permitted his cash and credit, and in those days was a lot of operations with a 5-percent margin. This can probably be regarded as a highly extreme example of the general opinion that the stock will rise. Therefore, the whole country was full of potential sellers. At that time the purchase was fully completed and exceeded. Therefore, the natural result was the Panic of 1929. This example clearly shows how kontrariansky approach. Crowd, when adjusted to the idea of ??normal is often silly extremes, tend to seek to commit suicide. Ideally, the courses of the securities in the stock market should reflect the averaged opinion of a fair evaluation of probabilities, as a rule, the way it is. In other words, every price itself is a healthy manifestation of a kind kontrarianskogo approach. I mean the part of stock exchange transactions, which you might call voluntary, not caused by necessity. Each transaction represents the opinion of the buyer, the price is wrong, that it should be or become higher. And the opinion of the seller, the price is wrong, that it should be or become lower. If you continue on, you get an opinion on the shares from the public, and there appears a new element. The crowd tends to suck in new members themselves. It turns out that "A" thinks so, because I think the same "B" and "B" - because just thinking "C" and so on. The basis of consensus tends to work on itself and create new views are similar, like a thunderstorm, generating its own wind. Mass opinion tends to grow on its own, and here, I believe the heart and soul doctrine kontrarianskogo approach. That is artificially generated by the common assumption allows "namyvat grandmother," because in fact this is not opinion - is the phenomenon of crowd psychology. Each of us has inside himself a particle of the crowd. I always wondered how Humphrey earns what is the general opinion. I never have to go outside my room. Each of us has inside himself a tuning fork, to a greater or lesser extent, vibrating at a single note with the crowd. He works so universally, that when sometimes I talk to sellers of mutual funds, I give them the following rule: the more painful they perceive the market and the more they struggle with each other to make it the better it is for the client, and for of the seller. It simply means to act contrary to their innate instinct of the crowd.

Here is what you get in an area where there are overheated opinions, where things are moving on their own. Another analogy - the effect of chain letters. Are there any of you people are old enough to remember the conversation? It was a very, very interesting thing. I had a friend named Ponzi, who continued to work on the same principle. In other words, the idea of ??this game is good as long as you find new fools, acceding to and redeem old ones. The late Imrie de Weg called it a Big Duraka. "You buy for stupid prices, but hope that you will find an even greater fool who will pay you later, an even greater price. Dickson Watts was a prominent cotton speculator, I think, and he formulated certain principles of trade . He described them as follows, "Against the crowd act boldly. With the crowd proceed with caution. It may at any time to turn around and break you. "I think that in these very few words, he expressed otherwise the principle of working in this situation.

Strictly speaking, in the securities of reasoning - is not important. talented operators, which I know does not think through their actions (though they often pretend to do). They simply act instinctively, from experience. As a man playing golf or riding a horse. Our country - a remarkable phenomenon, as we Americans are a very interesting group of people, as seen in the light of history. We are essentially men of action. And there is nothing we can do about it! We are also men of science - great scientists. But when we turn to art, we find that it is illogical and unscientific, art, mainly a matter of personal emotions and feelings of universality, aimed at a particular mode of expression, such as painting, music or philosophy, because the latter concerns the understanding of the human soul. It really is the instinctive understanding of things which exist but are too complicated to explain it logically. In that Americans do not seem quite complete, up to a certain extent recalling the ancient Romans. Take today's psychiatrist - here you have an example of attempts to apply the scientific method to the human mind. And it just does not work, because the conscious and the subconscious human mind is so vast - the stock market, among other things, just a bunch of minds that do not find either a science or a machine IBM, nothing that could tame him. In practice this means for us: if we are able to do what Americans can do only with difficulty - that is, to some extent to understand themselves (and by others), we get a chance to really become efficient stock operators. This is a difficult and rare thing.

Now come down from the heights of the theoretical and look at the so-called technical aspect of the markets. I think it's the right word. The technical side of the stock market - it is an attempt to understand the situation of demand-supply in the field of securities means other than fundamental analysis, which, of course, is what I have already described: familiarity with the companies and industries and the consideration of the facts. There are many "technical indicators". In any of them there is nothing top secret (or such that should be used). There is nothing very complicated. In this business you can not complicate anything without getting lost, every complication produces ten others, and so on.

You have all these different tools: we have a series of "tubes" with which to discern and experimenting - for example, the most common with all, moving averages of stock prices. Take, say, a 12-month moving average of the Dow Jones industrial stock companies. If any of you people would want to close my mind to everything else - why take in your head all these predictions - if only to keep moving average and a few simple techniques, the moving average would have led you to all the great bull markets and kept on all the big bear markets. It would have been far from perfect, but workable. Have you heard of anyone who has ever implemented it in practice? I - no.

For clarity, lets think of the ancient Greeks. The Greeks have always been my big favorites, and as you know, they had many gods and goddesses, and the trick was to know what god or goddess to maintain. Remember how Paris had a choice, because he had to give a golden apple to the goddess better, and that before him there are three major goddesses - so who should he give the apple? Foolishly he handed it to Helen. If he gave it to Athena or Hera, it would be much better for everyone, including himself, because he already had a loyal friend, not ugly and a bad reputation. But he chose Helen and as a result killed his entire family and all his native city and country. As you can see and choose among the gods and goddesses is not easy.