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Financial Literacy

Leon Levy’s Investing Lessons: The Caribou Factor and Other Gems

 

Leon Levy’s Investing Lessons: The Caribou Factor and Other Gems

By Dr. Steve Sjuggerud, Chairman, Investment U
Thursday, February 6, 2003: Issue #211

“Caribou, or their equivalents, always have a way of turning up” — Leon Levy, 50-year Wall Street veteran

Atlantic Richfield was already mentally cashing the huge checks it was about to receive as the owner of the Alaskan pipeline. Then the company was hit by “The Caribou Factor”

Investing Lesson # 1: You Simply Don’t Know What You Don’t Know

“Pardon me, but will the pipeline affect the migratory patterns of the caribou?” Someone asked this fateful question, which ended up financially humiliating Richfield. The company went from picturing profits to having to delay the project eight years and reschedule its debts.

The Caribou Factor-or the idea that you simply don’t know what you don’t know when it comes to investing-is one of the many gems of investing lessons from Leon Levy’s fabulous book called The Mind of Wall Street.

In addition to all the other research and reading I do, I probably read a financial book a week. Truth be told, most financial books are junk. They’re either written by financial “experts” who can’t communicate with normal human beings, or they’re written by “writers” who don’t intimately know finance. In terms of the actual education value, there is maybe one good book a year. And 2002’s good book was Leon Levy’s The Mind of Wall Street: A Legendary Financier on the Perils of Greed and the Mysteries of the Market.

Levy is an outstanding communicator who has been a bigwig on Wall Street since the 1950s. The simple lesson of today’s Investment U E-Letter is to buy this book.

The Market Does Ultimately Reflect Value

While I can share more of the Levy’s lessons, it’s much better to let Leon tell them himself.

First he asks, how can we even hope to make money in the markets “If human nature makes markets inefficient and moody, and the Caribou Factor defeats the most exquisite analysis, it is natural to ask how anyone might hope to make money in the markets”

He answers his own question: “A good idea, a long-term perspective, and the creativity to implement a strategy to profit from your insight are necessary to prosper in finance. But they are not sufficient. None of these qualities will bear fruit unless you have the discipline to stay with your strategy when the market tests your confidence, as it inevitably will.”

He goes on to say: “In such circumstances, it is easy to lose sight of the fact that ultimately the market does reflect value, even if it may seem to lose its marbles for unbearably long periods. As the legendary value investor Benjamin Graham once put it, ‘In the short term, the market is like a voting machine, reflecting a company’s popularity, but over the long term, it more resembles a weighing machine, reflecting a company’s true value.’ This is the aspect of the markets that allows the great investors to outdistance those who are lucky.”

Human Emotions Are A Part Of Investing And We Need To Take Advantage

However, Levy’s book is much deeper than this. Yet it is still easy to read. The recurring theme is that human emotions drive stock prices as much as the investing “fundamentals.” This idea makes many academics cringe. But I believe Leon Levy is right. I think the lessons garnered in his experience of 50+ years in the investing trenches are as valuable as any educational study. And he says:

“Why should the market be any more perfect than the very human emotions and calculations that drive it? Investors overreact, and so do markets. Investors get swept up in moods, and so do markets. And this interplay creates investing opportunities.”

We need to recognize that human emotions are definitely a part of investing, and we need to take advantage of it. For example:

“Times of universal pessimism usually represent remarkable buying opportunities, and times of buoyant optimism are often a clarion call to sell. The simple reason is that in times of universal optimism, most potential buyers of stock are already in the market, whereas in times of deep pessimism, investors are out of stocks, or trying to get out.

“It sounds simple but it is not so easy to buy in a period of profound pessimism, even if your mind tells you [this] is the buying opportunity of the decade. For one thing all your friends are doing the opposite. For another, pessimism is based on plausible arguments.”

Interesting Ideas That Ring True In Any Market…

He brings up another interesting idea that rings remarkably true in markets…

“Basically, we all live three lives: our life, the life of our parents, and that of our children. Events within our experience remain the most visceral in memory. But events that lie beyond the horizon of these generations don’t have an immediate connection to our lives. I might warn a [new kid on Wall Street] incessantly about the horrors of a crash or a bad market. But I will not likely make an impression on one who hasn’t lived through that experience.”

I loved this book. These excerpts don’t convey the humility and grace of Leon Levy’s lessons and stories that bring you to these ideas. Amazingly, both novice investors and the most experienced investors will learn a great deal about how investing works by reading this book. Check it out.

Good investing,

Steve


Today’s IU Crib Sheet

  • As I said earlier, I believe Leon Levy’s 50-plus years of experience is a valuable resource for all of us to draw from. Levy’s point about having not only a strategy, but also the discipline to stay with that strategy, is perhaps one of the most important – and most difficult – lessons you can learn as an investor.

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