Cool News

NEAL_MedallionThe Jesse H. Neal Awards were created in 1955 to recognize and reward editorial excellence in business publications. Unbeknownst to me, ALM (publisher of Research magazine, for which I write a regular column) nominated me in the Best Commentary category using three of my columns (see below). My editor now tells me that I have been named a finalist. I am deeply honored. Other finalists include CIO, Investment News, and Crain’s. The awards ceremony is April 1 in NYC.

The three submitted and thus nominated columns are linked below. I hope you will read them (or read them again).

Finding What We’re Not Looking For

We all suffer the ongoing delusion that we’re the center of the universe. We focus first and foremost upon ourselves and tend, most often, to focus on everything and everyone else only as they relate to us, both literally and figuratively.

The great writer David Foster Wallace spoke eloquently, movingly even, about this egocentric delusion in a fantastic commencement address he delivered at Kenyon College in 2005 in a way that just might help to loosen the hold of this delusion on those of us able to hear what he had to say. The speech is delightfully summarized and excerpted in the short film from The Glossary embedded below. Please take the time to watch it in full. Please. The voice you hear is Wallace’s.

According to Wallace, if I don’t make a conscious decision about how to think and what to pay attention to, I’m going to be miserable a lot of the time. That’s because our natural default setting is that everything is self-centered. And that everybody else is in my way. And it isn’t even a choice (it’s a default setting). Continue reading

The Great Myths of Investing

GreatMythsAs the great Mark Twain (may have) said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” That’s particularly true in the investment world because we know, to a mathematical certainty, that avoiding errors provides more bang for the buck than making correct calls and generating outperformance. Fixing what we “know for sure that just ain’t so” provides a remarkable opportunity for investment success.

On the other hand, it simply doesn’t make a lot of sense to spend enormous amounts of time and energy looking for a strategy or a manager that might (but probably won’t) outperform by just a little bit. As the great Spanish artist Pablo Picasso put it, “Every act of creation is first of all an act of destruction.” What we want to do is to find the next great investor, the terrific new strategy, the market sectors that are about to heat up or the next Apple. But what we should do is eliminate the things that make it so hard for us to get ahead. Accordingly, I will highlight some of the great myths of investing — ideas that lots of people, alleged experts even, claim to be true and act as as though are true “that just ain’t so.”

There are lots of myths at work in our lives, of course, falsehoods that are often believed and which are used to further a favored narrative. But George Washington didn’t really cut down a cherry tree and wax eloquent about not telling a lie as a consequence. Isaac Newton didn’t come up with his theory of gravity because an apple fell on his head. Columbus didn’t discover that the earth was round (that had been established centuries before). Ben Franklin didn’t fly a kite in a storm and discover electricity. And Einstein never flunked math. If any of these are news to you, I’m sorry to have had to break it to you.

Such myths persist because they “work” in some way. Their story elements — ease of recall, readily adaptability, explanatory power — make them useful and even important.  But utility and truth are hardly the same things and neither are utility and helpfulness.

So here is my list of the top ten great myths of investing. Since they aren’t true and are indeed damaging, if you can eliminate them from your mind and your investment process, your results will necessarily improve. Continue reading

Bear Territory

After every football victory, the California Golden Bears declare that the ground on which they stand is Bear Territory. “You know it! What? You tell the story! What? You tell the whole damn world this is Bear Territory!” Watch this particularly lively rendition after a win in The Big Game over Stanford (starting about 1:20 in; my youngest is at the top of the screen and was number 46 for Cal).

Lots of experts and alleged experts in recent days have been declaring that we’re in a different sort of “bear territory” as the market has gotten off to perhaps its worst start to a year ever. Continue reading

Trumping Truth with Stories

trackingtrump

One of the few consistencies of a wild 2016 presidential campaign thus far is that Republican frontrunner Donald Trump is willing to spin, obfuscate, exaggerate, misdirect, deflect, lie outright and double-down when called out for having done so. And, so far at least, it’s working. Truth – literal factual accuracy – just doesn’t seem to matter to him or to his supporters (who recently shouted “Sieg Heil” and “Light him on fire” at a black protestor in Las Vegas). If it feels right to them and fits into their favored narratives, from their perspective it is deemed true. What actually happened could not be less relevant.

This post-truth worldview isn’t a new-found tactic now that the Donald has entered the political world. For him, it has been a consistent way of life designed to benefit the Trump “brand.” He has thus routinely inflated his supposed net worth, often by billions of dollars, to make himself appear far more financially successful than he actually is. And he keeps claiming that his campaign is self-funded (because he’s really rich, donchaknow) when it demonstrably isn’t. But his Pinocchio-like behavior hasn’t been limited to things that, if believed, offer an obvious benefit to the Donald. Continue reading

Here We Go Again: Forecasting Follies 2016

Forecast 2

Image from xkcd

In a great scene from the classic film, The Wizard of Oz, Dorothy and her friends have — after some difficulty and fanfare — obtained an audience with “the great and powerful Oz.” When, during that audience, Dorothy’s dog Toto pulls back a curtain to reveal that Oz is nothing like what he purports to be, Oz bellows, “Pay no attention to that man behind the curtain,” in an unsuccessful effort to get his guests to focus their attention elsewhere.

Like the Wizard, the great and powerful on Wall Street would have us pay no attention what is really there — “behind the curtain.”  Yet once in a great while the Street rats itself out so that we get to find out, beyond a shadow of doubt (if you still had any), what the big investment houses really think about what they do and who they do it to.

The now-defunct Bear Stearns won a noteworthy 2002 legal decision involving former Fed Governor and then-Bear Chief Economist Wayne Angell over advice he and the firm gave to a Bear Stearns client named Count Henryk de Kwiatkowski (really) after the Count lost hundreds of millions of dollars in a just a few weeks (really) following that advice by trading currency futures on margin. The Count had been born in Poland, escaped invading Nazis, been banished to Siberia by the Soviets, escaped and travelled across Asia on foot to Tehran, talked his way into the British Embassy, became a renowned RAF pilot, moved to Canada, became an engineer, and made a fortune trading used airliners, most famously selling nine 747s to the Shah of Iran over a game of backgammon in the royal palace (really). He also became the owner of the famous thoroughbred racing institution, Calumet Farm (really).

Bear offered the Count “a level of service and investment timing comparable to that which [Bear] offer[ed its] largest institutional clients” (which is not to say that they were any good at it). The key trade was a huge and ultimately disastrous bet that the U.S. dollar would rise in late 1994 and early 1995. At one point, the Count’s positions totaled $6.5 billion nominally and accounted for 30 percent of the total open interest in certain currencies on the Chicago Mercantile Exchange. The jury awarded a huge verdict to the Count but the appellate court reversed. The appellate judges determined, quite conventionally, that brokers may not be held liable for honest opinions that turn out to be wrong when providing advice on non-discretionary accounts.

But I’m not primarily interested in the main story. Instead, I’m struck by a line of testimony offered at trial by then-Bear CEO Jimmy Cayne that does not even show up in subsequent court opinions, despite extensive recitals of the facts of the case. The generally “cocksure” Cayne apparently thought that his firm could be in trouble so he took a creative and disarmingly honest position given how aggressive Bear was in promoting Angell’s alleged expertise to its customers. Cayne brazenly asserted that Angell was merely an “entertainer” whose advice should never give rise to liability. Continue reading

Investment Advice That Will Pass Time’s Test

The January issue of Research magazine is now available onxx-investment-advice-test-of-time-res-0116-aboveth73-resize-600x338-line and, with it, my Above the Market column. Here’s a taste of the column.

We all want “high leverage” ideas — the ideas that will make the biggest impact on our portfolios and our lives. But the best ideas available are not still more investment recommendations about hot sectors, hot funds, hot strategies and hot managers. There is no reason to think anybody can do that anyway.

The best ideas I can offer relate to our besetting mistakes, mistakes we make over and over again. My high leverage idea for 2016 and beyond is to get off the merry-go-round of the next new thing and to eliminate obvious mistakes first and foremost. As Charley Ellis famously established, investing is a loser’s game much of the time, with outcomes dominated by luck rather than skill and high transaction costs. Thus if we avoid mistakes we will generally win.

To paraphrase the philosopher Immanuel Kant, the first task of reason is to recognize its limitations. Every rational person acknowledges having made many errors. Even so, nobody offers current examples. We all want to think that our mistakes are in the past, that we’ve learned from them and that now we’ve set things right.

We desperately want to believe that our new approach, new strategy or new portfolio will — finally — be the magic elixir that will make us very good, if not great, investors (or at least that we can find those great investors).

I hope you will read the entire piece and the full issue.

Investment Advice That Will Pass Time’s Test

Why Critical Thinking Is in Short Supply

critical-thinking-res-1215-annuityanalytics-mi600-resize-600x338My December Research magazine column is now available. Here’s the lead-in.

Like essentially everything under the sun, our business is bursting with very strong yet varied, sometimes contradictory viewpoints. Ken Fisher hates annuities. John Bogle is committed to passive money management. Dave Ramsey thinks that people should expect 12% annual returns. Eugene Fama says that markets are efficient. Seth Klarman views that as crazy talk.

Intuitively, we tend to believe that we can bridge the gaps between people and ideas using reason and careful analysis. Unfortunately, the evidence suggests that doing so is far harder than we’d like to think. We simply aren’t very good at looking at the available evidence for a given viewpoint with any degree of objectivity. Maybe all this has something to do with America’s declining math scores, but I think the causes are much more insidious.

While information is cheap and getting cheaper, meaning is increasingly expensive. We are beset by confirmation bias, our tendency to look for and accept evidence that supports what we already think we know and ignore the rest. Per motivated reasoning, we tend to reject new evidence when it contradicts our established beliefs. Sadly, the smarter we are, the more likely we are to deny or oppose data that seem in conflict with ideas we deem important. Finally, bringing true believers together in a group tends only to compound the problem.

I hope you’ll read the whole article and the entire issue.

Why Critical Thinking Is in Short Supply