Birthday Luck

birthday-luckI had been fitfully and uncomfortably sleeping, dreaming of a small dog licking my leg and stealing my snack. I awoke to find an escaped boxer with a cute face avoiding my eyes and licking her lips. Once the flight attendant found her rightful owner, who was not nearly as embarrassed as she should have been, I reassess my situation.

I’m still more than an hour behind schedule and said to be losing even more ground on account of intense headwinds. I’m still scrunched into a long metal tube with the seat-back in front of me compressing my kneecaps into my hips while hurtling cross-country, still several hours from arrival home in San Diego. I’m tired from lots of planes and being away from home for too long. I’m not in the most conducive spot I can imagine for counting my blessings.

But count them I shall, as part of this birthday reflection. “Birthday luck” describes a nuclear explosion of luck that is supposed to happen inside you on that day, giving you the ability to do anything. I don’t really have birthday luck, of course, but my luck is so good that it’s hard to tell the difference.

We are self-serving creatures to the core, of course, and self-serving bias is our ongoing tendency to attribute our successes to skill and our failures to very bad luck. Being an early investor in tech stocks was really smart while being long and wrong in 2001 was really unfortunate. But the reality is that luck (and, if you have a spiritual bent, grace) plays an enormous role in our lives – both good and bad – just as luck plays an enormous role in many specific endeavors, from investing to poker to winning a Nobel Prize. In fact, if we’re honest, we’ll recognize that many of the best things in our lives required absolutely nothing of us and what we count as our greatest successes usually require great skill and even more luck.

That my birth, which I celebrate tomorrow, was into a loving and stable family that valued education and industry was not my doing. That I was born into a land of freedom and opportunity that would allow and even provide the means for a child of working class parents with just one high school diploma between them to pursue and secure a world-class education was not my doing. I merely had to provide sufficient effort. That I was blessed with some ability and interest in a field that provides a good living and constant stimulation was not my doing. I merely had to provide sufficient industry. That I have a boss who supports and encourages me in work I love is not my doing. That I married extremely well and have three terrific and productive children who have also married extremely well is only partly my doing (and surely less my doing than I’d like to think). The wonder of delightful grandchildren is grace personified.

I could have been born in the 7th Century. I could have been born in North Korea. I could have been born into a family that abused me. I could have had to struggle for even minor educational advancement. My boss could be a jerk. My children could be disdainful. My wife could be a little less wonderful (though I doubt it). My grandchildren might never visit. As the great Frederick Buechner puts it, “all moments are key moments and life itself is grace.”

So truly – happy birthday to me. For much of it – verily, for most of what’s happy about it – I have luck (and grace) to thank.

__________

This post initially ran on October 14, 2013.

Underestimating the Density of the Fog

The story has essentially attained the level of holy writ, at least to those committed to data and evidence, such that it now seems almost too good to be true. The quick-and-dirty version of the tale is that stats geeks with computers, like those former player and broadcaster Tim McCarver called “drooling eggheads,” outsmarted and outmaneuvered the stupid yet arrogant “traditional baseball men” who ran our most traditional sport at the professional level and who thought they knew all there was to know about the game. Thus, it is said, everything the old-time baseball men thought they knew about evaluating players and teams has been found wanting, not that those whose day has passed, committed to wizardry and witchcraft as they are, have recognized it.

This revolution – as shocking as it has been comprehensive – is said to have brought about the ultimate revenge of the nerds. The geeks now run the baseball show, having moved the level of analytical precision involved in running teams and evaluating players from zero-to-sixty in a flash. The new breed of “baseball men” aren’t grizzled scouts looking for “five tool guys” but, rather, Ivy League educated experts in computer modelling and statistical analysis who use those skills to determine who to scout, who to sign, who to play and how to play. The prevailing narrative describes this new contingent as dominating professional baseball at every level, down to the depths of the independent minor leagues.

Is the analytics overhaul of baseball proper as complete and comprehensive as the telling claims? No. The real story is much more interesting and enlightening than that.

Baseball is particularly amenable to the use of statistical analysis because it offers large sample sizes, discrete individual-performance measures (such as plate appearances, pitches, and the like), and ease of identifying positive results (such as winning, home runs, and the like). However, when humans are involved – and baseball is as human as can be – interpretation of the underlying data is highly complicated.

Great interpretation of difficult data sets, especially those involving human behavior, involves more sculpting than tracing. It requires great skill, imagination and even a bit of whimsy as well as collaboration as to whether the various interpretive choices are acceptable (not to say the right) ones. That’s why we understand reality better with respect to the natural sciences than in the social sciences. As ever, information is cheap but meaning is expensive.

To lead off, let’s recall that if it seems too good to be true, it usually is. To see what I mean by that in the context of our story will require some in-depth analysis of its own, starting with more than a bit of background information and history.  Continue reading

A Time of ‘Financial Repression’

res-1016-coverMy latest column for Research magazine is now available online. Here’s a snippit. I hope you will read it and the entire issue.

“As I write this, the yield on the long-bond is roughly 2.25%; the yield on U.S. Treasury 10-year notes is just over 1.5%. That’s a long way from 15.32% and 14.68% [1981 levels]. There isn’t much room for further price appreciation today, and yields are anemic at best.

“Starting from such low yields means that, after adding a reasonable inflation forecast, the real expected return on U.S. Treasury paper is effectively zero. Bond yields, which are roughly equal to their expected nominal return, are so low that the current environment has been characterized as one of ‘financial repression’ by Larry Siegel of the CFA Institute Research Foundation and Tom Coleman of the University of Chicago in that current rates are depriving the economy of one potential growth area via income from savings.”

A Time of ‘Financial Repression’

Just Win, Baby

Al Davis, the late owner and general manager of the Oakland Raiders, had a famous motto for his team, “Just win, baby.” Nothing else mattered, or so he claimed. The Raiders did that on the opening week of the season Sunday, beating the New Orleans Saints, 35-34, when Derek Carr hit Michael Crabtree on a fade route for a two-point conversion in the last minute of the game.1

“We came here to win,” Raiders coach Jack Del Rio insisted. “I thought, ‘Let’s win it right now. Every part of our strategy was focused on getting the win.”  Continue reading

Horrid Facts, Stubborn Facts

September 11.

Two words. Powerful emotions. Searing memories. Evocative stories. Fifteen years.

Fifteen years ago, on Tuesday, September 11, 2001, I was sitting in front of a Bloomberg terminal when the first, cryptic hints about trouble at the World Trade Center crawled across the bottom of my screens (I think). I had been scheduled to fly to New York the day before and had reservations at the Marriott World Trade Center (3 WTC), which would be destroyed when the Twin Towers collapsed. Instead, I decided to stay home and go to a “Back to School Night” presentation at my kids’ school. As the day’s events unfolded, I recalled having been on the Merrill Lynch fixed income trading floor at the World Financial Center doing a STRIPS trade when I heard and felt the February 26, 1993 World Trade Center bombing. I was really glad I didn’t get on that plane to New York.

My little, not so evocative story is insignificant within the context of the tragic losses, horrible evil and incredible heroism of the “American epic” to which that day bore inexorable witness. But it is what happened to me. It provides context and a framing device to help me remember and think about what transpired and what it means. It is emotional to think about still. But many other stories are far more important.

The image reproduced below is central to several other converging stories from that dreadful day.

9-11-1

Continue reading

Evidence is Not Enough

Note: I will be attending the terrific Evidence-Based Investing Conference on November 15, 2016 in New York. You should too.Evidence Isn't Enough 1.pngThere 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!” Then again, investors of every sort – those with a good process, a bad process, a questionable process, an iffy process, an ad hoc process, a debatable process, a speculative process, a delusional process, or no process at all – all think that they are evidence-based investors already. They may not describe it that way specifically. But they all tend to think that their process is a good one based upon good reasons. Nothing to see here. Move right along.

Nearly as problematic is the nature of evidence itself. The legal profession has been dealing with what good and relevant evidence is for centuries. According to the Federal Rules of Evidence (Rule 401): “Evidence is relevant if: (a) it has any tendency to make a fact more or less probable than it would be without the evidence; and (b) the fact is of consequence in determining the action.” That’s a really low bar, which explains why so much more than merely evidence is implicit within the rubric of evidence-based investing.

And therein lies the problem. Committing to an evidence-based approach is a great start, a necessary start even, to sound investing over the long-term. But it’s not enough…not by a longshot. As philosophers would say, it’s necessary but not sufficient. Most fundamentally, that’s because:

  • The evidence almost always cuts in multiple directions;
  • We don’t see the evidence clearly; and
  • We look for the wrong sorts of evidence.

I’ll examine each of these related issues in turn.  Continue reading

Happy 5th Blogiversary to Me

WowI have been now been writing Above the Market for five years. Wow. That’s hard to write and harder to believe.

I began on August 1, 2011. I started and still write largely to clarify my own thinking and to force and enforce commitment on my part. Actual readers are a lovely bonus I didn’t expect when I started and that I never take for granted. After many hundreds of thousands of visitors from nearly 200 countries, I remain astonished at the level of interest Above the Market has received — it is far beyond what I thought possible, much less likely. I appreciate each and every reader. Anyone who writes wants to be read most of all.

As always, a few people deserve special mention and thanks.

Tom Brakke (his terrific blog is The Research Puzzle) generously offered outstanding help and guidance before I even had any readers to speak of and continues to offer wise counsel whenever I ask. Tadas Viskanta provided my first distribution (exactly one month in) to the expert community he serves via his blog, Abnormal Returns, which remains the standard for its type. I have now appeared there well over 200 times — essentially once a week — and am extremely grateful for having done so. Joe Calhoun upped my exposure tremendously via Real Clear Markets, in which I have appeared almost as often. I am grateful and humbled to be featured often at these and other excellent sites, including Cullen Roche’s outstanding Pragmatic Capitalism, the indispensable The Big Picture from Barry Ritholtz, Bill Zimmer’s The Prudent Trader, Charles Kirk’s The Kirk Report and Josh Brown’s wonderful The Reformed Broker. Other regular linkers include the CFA Institute, Ben Carlson’s fantastic A Wealth of Common Sense, Michael Kitces (the authority on financial planning), Wade Pfau (the authority on retirement income planning) and the previously mentioned Mr. Brakke. Jason Zweig and Morgan Housel — giants in financial journalism — have provided much help and inspiration. And finally, but in no way least, I greatly appreciate Research magazine publishing my regular columns. Thank you all.

My “top ten” posts this year, based upon reader numbers, follow in order of popularity. I hope you will give them a look (or another look).

  1. Here We Go Again: Forecasting Follies 2016
  2. The Great Myths of Investing
  3. A Hierarchy of Advisor Value
  4. Complexity, Chaos and Chance
  5. Mean Reversion, Small Sample Size and the Mets
  6. Financial Gaslighting
  7. Alternatives to Being an Evidence-Based Financial Advisor
  8. Bear Territory
  9. Chris Rock Explains Bias Blindness
  10. The Jewelry Effect

My all-time “top ten” posts, again based upon reader numbers, follow in order or popularity. I hope you’ll check them out (or check them out again).

  1. Investors’ 10 Most Common Behavioral Biases
  2. Financial Advice: A Top Ten List
  3. Establishing Your Top 10 Investment Default Settings
  4. My Investing Checklist
  5. Math Suckage and Dave Ramsey
  6. Top Ten Ways to Deal with Behavioral Biases
  7. Investing Successfully is Really Hard
  8. Here We Go Again: Forecasting Follies 2016
  9. Saving Investors From Themselves
  10. The Great Myths of Investing

Finally, I’d like to focus on the following “not top ten” posts that didn’t get nearly as much attention — sometimes because they appeared before I had many readers — but which I think are worth reading. I encourage you to check them out.

  1. Beguiled By Narrative
  2. Financial Products are Sold, Not Bought
  3. It’s Not You, It’s Me
  4. Just Put the Ball in Play
  5. Gaming the System
  6. The Semmelweis Reflex
  7. Bias Blindness and Political Polarization
  8. Demand for Hitmen and Yield
  9. Luck, Skill and Jim Harbaugh
  10. Librarius Booker, Confabulation and Choice Blindness

I have enjoyed a nice holiday from blogging this past month and a vacation to boot. Now I’m ready to get back to it. To everyone who has read, supported and helped me with this effort: Thank You! I hope five years leads to many more.