Quote, Unquote

quote-unquote-records “[This is] the most important message taught by the history of science: the subtle and inevitable hold that theory exerts upon data and observation. Reality does not speak to us objectively, and no scientist can be free from constraints of psyche and society. The greatest impediment to scientific innovation is usually a conceptual lock, not a factual lack.”

Stephen J. Gould

The .400 Hitter and the Investment Superstar

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The May issue of Research magazine is now available on-line and with it my most recent column. A quick taste follows. But I hope you will read the full article and the whole issue of the magazine.

The hurdles that money managers must overcome to meet Samuelson’s challenge and beat the market are extremely high. The vast majority of managers who try to do so will fail, even though many of them are extremely talented and dedicated. Casual investors have no need or reason to beat the market, no matter what active manager marketing may suggest. Owners of an S&P 500 index fund generally own shares in 500 excellent companies. There is nothing inherently wrong with that. Nor is there anything wrong with utilizing market “factors” to try to improve investment performance. But investors in “smart beta” or similar strategies shouldn’t expect outsized performance.

Investors who want or need substantial outperformance need to look for and at smaller funds with concentrated portfolios of quality assets that are held a long time to have a plausible chance of success. But these investors ought to understand that most such attempts fail and that the desired success is getting harder to achieve each and every passing day.

The .400 Hitter and the Investment Superstar

Five Books

booksIf you don’t read it already, the Five Books series is well worth your while. Its premise is simple and profound. In new interviews published every Friday, various experts recommend the five best books on their areas of expertise. Some good examples are linked below.

Rather than simply stealing this idea and applying it to the investing world, I asked some influential people in the world of finance about the five books that most influenced them and didn’t limit their choices to a particular field or category. I hoped to get some broadening of our collective outlook.

My five books of this sort follow (in no particular order).

  1. The Black Swan, by Nassim Taleb
  2. Thinking Fast and Slow, by Daniel Kahneman
  3. Ubiquity, by Mark Buchanan
  4. Superforecasting, by Philip Tetlock
  5. Against the Gods, by Peter Bernstein

And since it’s my blog, I can add a novel because I think literature is so valuable and important. My choice is Lila, by Pulitzer Prize winner Marilynne Robinson, who I think is our greatest living writer. In fact, read the trilogy (which also includes Gilead and Home) and thank me later. And, since his back-story is similar to my own (in his case at Salomon; in my case at Merrill), I love Michael Lewis’s Liar’s Poker.

Here are the replies I got. If I missed you, please provide your five in the comments.

Continue reading

The Fiduciary Standard Is Far From Enough

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My April Research magazine column is now available online. Here’s a taste.

To repeat my assertion from last month’s column, proper financial advisor priorities begin with a recognition of what is important and what is achievable. Clients and prospects routinely have unreasonable expectations. But they are just as routinely egged on by financial advisors whose own claims and expectations are just as outlandish. The outrageously silly expectations of the consultants described above make the point beyond dispute.

No matter what the DOL and the SEC choose to do or not do in this regard, true success for both advisor and client will require carefully and truly doing the right thing, even when the client doesn’t see it that way. Doing so demands not just a higher standard of care, but also a much higher standard of practice. It should be axiomatic that a higher practice standard will require much higher training and educational standards. Fiduciary standards won’t hurt in that regard, but they aren’t nearly enough either.

I hope you’ll read it all.

The Fiduciary Standard Is Far From Enough

A Behavioral Finance Playlist

It isn’t “Weird Science” (Oingo Boingo)…

…or “Brain Damage” (Pink Floyd)…

…or even “Insane in the Brain” (Cypress Hill).

It’s utterly human (and I write about it often). We are all deeply flawed. We have inherent flaws and weaknesses that impede good judgment and good behavior. Behavioral finance has done a pretty good job outlining these foibles and music does a great job demonstrating them. So let’s get started with our Behavioral Finance Playlist.  Continue reading

Alternatives to Being an Evidence-Based Financial Advisor

Evidence-basedThere is a new and growing movement in our industry toward so-called evidence-based investing (which has much in common with evidence-based medicine). As Robin Powell puts the problem, “[a]ll too often we base our investment decisions on industry marketing and advertising or on what we read and hear in the media.” Evidence-based investing is the idea that no investment advice should be given unless and until it is adequately supported by good evidence. Thus evidence-based financial advice involves life-long, self-directed learning and faithfully caring for client needs. It requires good information and solutions that are well supported by good research as well as the demonstrated ability of the proffered solutions actually to work in the real world over the long haul (which is why I would prefer to describe this approach as science-based investing, but I digress).

The obvious response to the question about whether one’s financial advice ought to be evidence-based is, “Duh!” But since all too few in the financial world practice evidence-based investing, we ought carefully to look at the possible alternatives to being an evidence-based advisor. Here is a baker’s dozen of them for your thoughtful consideration. If I’ve missed any I’d appreciate your letting me know. Continue reading

Chris Rock Explains Bias Blindness

When the nominations for the 88th annual Academy Awards were announced this past January and for the second year in a row included no minority nominees for any of the major performance categories, my first thought was here we go again. But my second thought was that Chris Rock would be hosting the Oscars’ award ceremony and that there might be fireworks.

I was not disappointed. Rock quickly let it be known that he would not be boycotting the ceremony (as he quipped during his Oscar monologue, “How come there’s only unemployed people that tell you to quit something?”) but also that his opening monologue would be addressing the #OscarsSoWhite controversy in a big way.

He sure did.

Continue reading

Going Deep with Aaron Watson

Going DeepI am a guest on Aaron Watson’s excellent podcast this week. We talked over a range of issues that regular readers will find familiar but I think interesting. It was an engaging 30 minutes.

The show is available at the link below. I hope you will give it a listen.

Bob Seawright, Using Red Teams to Fight Cognitive Biases