Reddit reviews The Essays of Warren Buffett : Lessons for Corporate America

It's OK to put in 1% as a learning experience.

A professional investor would typically put in a somewhat larger amount if there is a real edge.

One approach is the Kelly criterion, which says that if you want to maximize the growth rate of your portfolio over the long run, the amount to invest is edge/odds. In other words, if you have a big edge you invest more, if the risk/volatility around that edge is high you invest less.

However, even assuming you actually know the edge and odds accurately, the Kelly criterion position size takes a LOT of risk and volatility to maximize your growth rate. In general you would have an x% chance of losing 1-x% of your entire stack at some point in the future, ie a 50% chance of losing 50%, a 10% chance of losing 90%. Nevertheless, if you lived forever, that's the risk you would want to take to maximize your growth rate.

On the one hand, the Kelly Criterion, the long run persistence of an edge in equities in the form of the equity risk premium, and an understanding of human psychology all suggest that people don't really take enough risk.

There are 2 very good and a few not-so-good reasons to take less than the Kelly-optimal risk.

The first is you don't live forever, and it's perfectly rational to give up a big chunk of the growth rate for a MUCH lower risk of blowing up and impacting your lifestyle and opportunities of your loved ones.

The second, which is most important, is that you never really know the edge and the odds, best you have is a guesstimate. And if you take even a little more risk than Kelly-optimal, you will fall prey to the gambler's curse. Consider what happens if I give you a coin-flip where I give you 5x on your money when you win. If you bet all your money on each flip, you are guaranteed to go broke. Bet even a little too much, and you magically turn a huge edge into a guaranteed big money-loser.

But most people never even approach Kelly-optimal betting. They are risk-averse, and extremely loss-averse. Pro money managers could never tolerate the swings involved.

Warren Buffett put something like 40% of his portfolio into American Express in 1963. His view of value investing is to invest as if you have a lifetime 20-hole punch card. Every decade-ish long market cycle, you will have a few really great opportunities. Invest so at the end of your lifetime investing career, you'll have accumulated 20-odd meaningful positions in really great companies.

It's worth pointing out that EVERY time Buffett has underperformed, there has been a litany of articles about how he has lost his touch. Partly it's because it makes interesting copy, and people love to build heroes up and tear them down. But partly it's because the game involves taking risk and sometimes pain in the short run. And non-investors don't get that. You're an idiot if you underperform in the short run. Value investing works in the long run because it's hard and inflicts pain in the short run.

For the apprentice investor, it's even harder. So it's important to keep bets no larger than your personality can comfortably withstand. If 1% is it, that's what it is. Don't look for approval from anywhere else. It's good that you are erring on the low side...a lot of people get overconfident and then blow up, or blow out a good position because they can't stand the pain when they are down.

Over time, you want to get more comfortable trading closer to a Kelly-optimal size, without going over the edge of your personal pain threshold. As a small investor, you have some disadvantages in information flow, resources to apply to investing, but you have a big edge: the only person you need to please is yourself. You don't need to do a goddamn thing if you don't want to, you can be opportunistic and you can take as much or as little risk as you like. Personally, playing poker helped me a lot ... you get an intuitive feel for how often you're going to lose when you have the edge, and get comfortable betting big when you have that edge, because you know in the long run it's going to work out.

Also recommend William Poundstone's Fortune's Formula, which is an awesome read on Bell Labs' Kelly and Shannon, who invented information theory, and applied it to investing along with MIT colleague Ed Thorp, who invented blackjack card-counting and started one of the first, most successful hedge funds, and the occasional mafioso and degenerate gambler.

And you won't go wrong reading all of Buffett's essays and letters.

http://www.amazon.com/Fortunes-Formula-Scientific-Betting-Casinos/dp/0809045990/

http://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984.pdf

http://www.amazon.com/The-Essays-Warren-Buffett-Corporate/dp/0966446119

[TL; DR] Bet small while you're learning. Get comfortable with taking risk when you really know what you're doing and have an edge. Learn the Kelly Criterion. Read Warren Buffett. Play some poker.

"Security Analysis" by Ben Graham.

Also this is one of my favorite books. I've read it many, many times.

Never gets old.

If you want some tips on investing long term Warren Buffett-style, read "The Essays of Warren Buffett".
http://www.amazon.com/Essays-Warren-Buffett-Lessons-Corporate/dp/0966446119

>Why hasn't Buffet written a book explaining business to amateurs? Why doesn't he talk about his methods for picking stocks?

He has.

And his "method" for picking stocks is probably the best-documented in the world among fund managers, since he describes nearly every decision, good and bad, in his public reports to shareholders. He also does follow-up reports, explaining why something made or lost money, which decisions he regrets and why, and which ones he got lucky on.

He has been describing exactly what he does for some 50+ years, and anyone at all can read his shareholder reports. He is the inverse of proprietary trading models and fancy mathematical indicators. He famously does not even have a computer in his office, claiming "if he can't do the math in his head, then he can't understand it." If you have a business to sell that meets his criteria, he famously offers to give you a decision on whether he will buy it, usually in five minutes or less.

He has been an acid and merciless (although always witty and pleasant) critic of loose corporate ethics.

The person you are criticizing is an imaginary construct, not Warren Buffet.