Madison Weekly Market Wrap 1.14

madisonmarketwrap-2This week’s Market Wrap is now available at the link below. A preview follows.

Madison Weekly Market Wrap 1.14

At the big Wall Street firms and the big money management houses, pension funds and insurance companies they serve, the two weeks leading up to Labor Day are famous for being staffed largely by junior people. The bosses and anyone remotely close to them are off to the Hamptons or, failing that, hanging out at the U.S. Open tennis tournament in Queens. The guidance to those minding the store is pretty much always the same: try not to do anything (nothing much is likely to happen anyway) and don’t screw up.

Ironically, that’s almost always the best advice for the vast majority of investors who have a well-constructed diversified portfolio. Errors – excessive trading, trying to time the markets, paying excessive fees, performance chasing and the like – tend to come from impatience and foolish action rather than simply staying the course. We should think less “Don’t just stand there, do something!” and more “Don’t just do something, stand there!”


Failing to Remember

It was 51 years ago, on August 28, 1963, that Rev. Dr. Martin Luther King, Jr. delivered his famous “I Have a Dream” speech on the steps of the Lincoln Memorial in our nation’s capital as part of the March on Washington for Jobs and Freedom.

Even with the easy availability of the full video of the speech, we readily misremember both the speech and its context. Continue reading

Hiding in Plain Sight

Phil SmithOver a career that has spanned four decades so far, concertgoers have routinely paid a lot of money to hear Phil Smith play the trumpet. The long-time principal trumpet of the New York Philharmonic retired this summer after 36 years in the orchestra. In his first professional audition, while still a student, he won a place in the Chicago Symphony. While still in his 20s, Phil came to New York following just his second professional audition. According to New Yorker magazine, “For the past thirty-six years, Smith has presided over orchestral trumpet playing, with a resonant, clarion sound and a reputation for never missing a note.” He has been, inarguably, one of the world’s great performers. Continue reading

Financial Planning and Hiking on Half Dome

res0914annuityanalyticshikepicsMy latest column in Research magazine is now available on line. A small taste follows.

The truth is much more prosaic. Retirement planning—indeed, all financial planning—is very tough and is difficult at every level. It takes significant personal sacrifice and being psychologically strong when our emotions are screaming at us to do otherwise. Thinking about a future that is years or even decades away is exceedingly challenging for most of us, for whom lunch is a long-range plan. But good retirement planning isn’t “perfectly inaccessible.”

I hope you’ll read it all.

Financial Planning and Hiking on Half Dome


with-stupidNoah Smith (@Noahpinion on Twitter) made an interesting assertion yesterday about the purpose of argument. Smith began by noting Boston University economist Laurence Kotlikoff’s op-ed in Forbes in which he acts as a concern troll toward New York Times columnist (and noted economist himself) Paul Krugman because Krugman allegedly called Congressman Paul Ryan stupid. To be clear, Krugman’s primary point was not that Ryan is stupid, but that he is crooked, especially as it pertains to his budget proposals. Smith uses this context for looking at arguments in general, and he makes an excellent point.

[A]s a society, we use arguments the wrong way. We tend to treat arguments like debate competitions — two people argue in front of a crowd, and whoever wins gets the love and adoration of the crowd, and whoever loses goes home defeated and shamed. I guess that’s better than seeing arguments as threats of physical violence, but I still prefer the idea of arguing as a way to learn, to bounce ideas off of other people. Proving you’re smart is a pointless endeavor (unless you’re looking for a job), and is an example of what Stanford University psychologist Carol Dweck calls a “fixed mindset.” As the band Sparks once sang, “Everybody’s stupid — that’s for sure” [even though nobody wants to be called stupid]. What matters is going in the right direction — becoming less stupid, little by little.

But I think Smith’s ideal isn’t all that practical. To begin with, as Megan McArdle emphasizes, by calling one who disagrees with you stupid (even implicitly) “you have guaranteed that no one who disagrees with you will hear a word that you are saying.” Thus “calling people stupid is simply a performance for the fellow travelers in your audience” as well as a means of asserting superiority.

My sense is that the key element to this discussion is that most partisans see “their side” as not just true, but obviously true. It’s a by-product of bias blindness, or selective perception.  We tend to see bias in others but not in ourselves. Therefore, our strongly held positions aren’t really debatable — they’re objectively and obviously true. After all, if we didn’t think our positions were true, we wouldn’t hold them. And (our thinking goes) since they are objectively true, anyone who makes the effort to try should be able to ascertain that truth. Our opponents are thus without excuse.  Continue reading

Robin Williams: In Memoriam

williams-coverThe great comedian and actor Robin Williams was found dead on Monday afternoon of an apparent suicide. The loss is an enormous one. The tributes have been many and appropriately so. I’d like mine to be relevant to the usual objects of discussion here. I trust you’ll not find it forced.

In the film Dead Poets Society, Williams brilliantly plays John Keating, an unorthodox teacher who rejects the strictures of the elite Welton Academy and implores his students to search for meaning in their lives. In a crucial scene, Williams tells his students that “we don’t read and write poetry because it’s cute, we read and write poetry because we are members of the human race.” He goes on to quote Walt Whitman’s “O Me! O Life!,” a poem that ends by speaking directly to its readers: “the powerful play goes on and you may contribute a verse.” Williams repeats that great line again and then turns to his students to ask the telling question: “What will your verse be?”

But this powerful climax matters more when considered in context with what happens just prior. Take a look.

Continue reading

Trouble in Paradise

troubleIt’s a problem that is now — finally — discussed and sometimes dealt with. Increasingly, investors of various type are questioning high-cost, high-risk strategies (often purveyed by hedge funds) because they have performed so poorly. Indeed, hedge funds as a class have performed much worse even than U.S. Treasury bills. As a consequence, few can expect to achieve success in that market, as I have argued repeatedly (see here, here, here and here, for example). Calpers, the public pension giant here in California, is a leader in this trend that is demanding accountability, putting new investment proposals on hold while weighing whether to exit or substantially reduce bets on commodities, actively managed company stocks and hedge funds.

The general problem is well illustrated right here in San Diego and outlined in a terrific column in the San Diego Union-Tribune yesterday by Dan McSwain. Many cities have a pension crisis. San Diego’s is particularly bad, as outlined definitively by the great Roger Lowenstein in While America Aged. McSwain’s piece does an excellent job of examining how the City is responding to the problem in terms of investment management and contrasting the City’s efforts with what the County of San Diego is doing with its pension dollars.  Continue reading

“So you’re telling me there’s a chance”

As I pointed out in my previous post, we can only advance scientifically indirectly — via falsification — rather than by confirmation. Correlation does not imply causation. And that rankles us. We want certainty.

But, to be clear, some things are so well supported that we can assume them to be true even while acknowledging that falsification remains possible, as the clip below so humorously illustrates.

Part of the problem is that we are so bad at math and at probability. Another part is that we misunderstand what theory means in science and, as in the video, overstate the amount of hope our discredited ideas truly justify.