Always Invert

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Larry Walters always wanted to fly. When he was old enough, he joined the Air Force, but he could not see well enough to become a pilot. After he was discharged from the military, he would often sit in his backyard watching jets fly overhead, dreaming about flying and scheming about how to get into the sky. On July 2, 1982, the San Pedro, California trucker finally set out to accomplish his dream. Because the story has been told in a variety of ways over a variety of media outlets, it is impossible to know precisely what happened but, as a police officer commented later, “It wasn’t a highly scientific expedition.”

Larry conceived his “act of American ingenuity” while sitting outside in his “extremely comfortable” Sears lawn chair. He purchased weather balloons from an Army-Navy surplus store, tied them to his tethered Sears chair and filled the four-foot diameter balloons with helium. Then, after packing sandwiches, Miller Lite, a CB radio, a camera, a pellet gun, and 30 one-pound jugs of water for ballast – but without a seatbelt – he climbed into his makeshift craft, dubbed “Inspiration I.” His plan, such as it was, called for him to float lazily above the rooftops at about 30 feet for a while, pounding beers, and then to use the pellet gun to explode the balloons one-by-one so he could float to the ground.

But when the last cord that tethered the craft to his Jeep snapped, Walters and his lawn chair did not rise lazily into the sky. Larry shot up to an altitude of about three miles (higher than a Cessna can go), yanked by the lift of 45 helium balloons holding 33 cubic feet of helium each. He did not dare shoot any of the balloons because he feared that he might unbalance the load and fall. So he slowly drifted along, cold and frightened, in his lawn chair, with his beer and sandwiches, for more than 14 hours. He eventually crossed the primary approach corridor of LAX. A flustered TWA pilot spotted Larry and radioed the tower that he was passing a guy in a lawn chair with a gun at 16,000 feet.

Eventually Larry conjured up the nerve to shoot several balloons before accidentally dropping his pellet gun overboard. The shooting did the trick and Larry descended toward Long Beach, until the dangling tethers got caught in a power line, causing an electrical blackout in the neighborhood below. Fortunately, Walters was able to climb to the ground safely from there.

The Long Beach Police Department and federal authorities were waiting. Regional safety inspector Neal Savoy said, “We know he broke some part of the Federal Aviation Act, and as soon as we decide which part it is, some type of charge will be filed. If he had a pilot’s license, we’d suspend that. But he doesn’t.” As he was led away in handcuffs, a reporter asked Larry why he had undertaken his mission. The answer was simple and poignant. “A man can’t just sit around,” he said.

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The Prediction Game

chess-board-closeupIn chess, there are 400 different possible positions after the opening two moves. There are 72,084 move combinations after each player has made two moves and over 288 billion scenarios after four moves each. The Shannon Number, which represents a conservative lower bound of the game-tree complexity of chess (the total possible move variations), is thought to be between 10^111 and 10^123. By comparison, there are 10^81 atoms that make up the known universe. I think we can all agree that national and global markets and economies are far more complex than chess. So tell me again why you think you can predict what will happen next in the markets or in the economy….

The Apocalypse is (Always) Nigh

A Christian radio network called Family Radio began spreading “​the word of God to the world” in 1958 in a mundane way, featuring hymns and conventional – albeit very conservative – Bible teaching. Despite many years of growth and financial health, founder and retired engineer Harold Camping became increasingly enamored with a personal brand of doomsday Bible prophecy suffused with numerology and eventually began pushing Family Radio toward that focus. After a more tentative prediction of 1988, the Berkeley-educated Camping thought that the world would end (he wasn’t absolutely certain, but was “more than 99 percent sure“) in September of ​1994​. He actively advocated that view on his popular daily, nationwide call-in show on the network in the months leading up to the predicted date.

Once September of 1994 had come and gone, things returned mostly to normal…for a while. However, Camping was still crunching numbers (to obtain “infallible, absolute proof”) and eventually decided that the correct date was ​May 21, 2011. He was really sure this time. First would come a massive earthquake, powerful enough to throw open all the world’s graves, followed by the heathen dying off until the end of the world in October. At Camping’s urging, Family Radio spent over $100 million (donated) dollars proclaiming Judgment Day to the masses over its roughly 140 stations and with billboards, fliers and more. The network’s website featured a “countdown clock” under the banner headline: “Judgment Day: the Bible guarantees it.”

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Like far too many others, Peter Lombardi, a 44-year-old contractor from Jersey City, N.J., took an “indefinite break” from his work to warn others about this coming end. He plastered his Dodge minivan with stickers proclaiming the “awesome news” of Judgment Day and paraded through Manhattan to spread the word and hand out fliers.

When May 21, 2011 came and went, Camping went back to his studies and soon “clarified” that the May 21 date was “an invisible judgment day” he had come to understand as a spiritual, rather than physical event. The actual day of apocalypse would not be until October 21.

Camping was wrong yet again. On October 22, Peter Lombardi was peeling stickers off his minivan. Family Radio was trying to decide what to do next. Its website was not immediately updated and the countdown clock was stopped at zero and holding. Harold Camping was attempting to figure out what had gone wrong, saying he was “flabbergasted” and “looking for answers.”

After this final, humiliating failure, in a letter to followers some days later, Camping apologized for getting it wrong and acknowledged that he had “no new evidence pointing to another date for the end of the world” and “no interest in even considering another date.” However, he found a silver lining to the confusion, noting that his “incorrect and sinful statement allowed God to get the attention of a great many people who otherwise would not have paid attention.” So there’s that. Camping thereafter largely disappeared from the ministry he had founded – it became a shell of its former self – and died in 2013 at age 92.

End 2Most end-times preachers do not make Camping’s mistake of offering a date certain. The cynical might suggest that offering specificity puts a sell-by date on both relevancy and donations. Yet there is a solid Biblical reason why preachers insist that it is not possible to know when Jesus will return. “But of that day and hour no one knows, not even the angels in heaven, but only the Father” (Matthew 24:36). What end-times preachers of every period and every ilk all agree on with unalterable conviction is a carefully crafted loophole. They insist that it is possible to know the season – if not the date – of the Lord’s return and that they are surely living in that season (I have never heard anyone try to define the length of “season”).

For a surprising number of people, it is perpetually the end-times. The apocalypse is always nigh.  Continue reading

“Worrying is a serious offense”

Q2.2017.2I was in Scotland recently for a wonderful holiday with my wife. We got up one morning and, quite typically, it was about 50 degrees and windy, with rain coming down sideways. In other words, it was beach weather in Scotland. Accordingly, my wife decided we would visit one of Scotland’s great beaches. (That sounded to me like visiting one of the great ski slopes at home in San Diego, but I digress.)

So off we went.

Happily, by the time we wound our way to the appropriate spot on the tiny roads of the Scottish Highlands, the rain had stopped. However, getting to our destination was going to require a three and one-half mile one-way trek across pasture, moor and dunes. But the end result was indeed a beautiful beach (above right).

Q2.2017.5My point relates to the pasture. There was a gate that allowed us to access and cross the pasture on our way to the beach, on which was posted a prominent sign (at left). The owner of the property was very clear that dogs needed to be kept on leads due to the threat of “worrying” the farm animals and that offending dogs would be shot.

Note the key final phrase: “Worrying is a serious offense.” That statement is similarly true in the investment world even though its meaning is slightly different.

When we worry about our investments, we tend to look at our statements more. When that happens, we see losses more often (only 53 percent of trading days are positive for stocks even though the S&P 500, for example, has returned in excess of 11 percent per year from inception) and thus trade too often because we are so loss averse (we feel losses roughly two to two-and-one-half times more strongly than commensurate gains). We chase performance to our detriment. The net result of this worrying is substantially lower returns.

For most of us most of the time, worrying will surely be counterproductive. It will lead to bad decisions and poor returns. So please, remember, worrying is a serious offense.

Investing Successfully is Really Hard

Research 7.17

My newest column for Research on Wealth magazine is now available. I hope that you will read it as well as the entire issue. The conclusion follows.

“Investing successfully is really hard. Even great investing is really hard to abide. But if you avoid stocks or do not find a way to abide stock market volatility, it will be really, really hard for you to meet your financial goals.”

Investing Successfully is Really Hard

I Hope This Doesn’t Describe You

The new issue of Research magazine is now available online. Its theme is evidence-based investing. I encourage you to read it in its entirety. My contribution is here and outlines some alternatives to evidence-based investing. A taste follows.

The providence-based advisor

An advisor who lacks convincing evidence will often claim that the advice he is giving comes straight from God. Sometimes the claim is implicit, sometimes explicit.

Sometimes the motivator is guilt, sometimes it alleged brotherhood. But the results are usually hellish.

I Hope This Doesn’t Describe You

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For those of you unwilling to register (it’s free), the full text is reproduced below.

 

There is a new and growing movement in our industry toward so-called evidence-based investing, which has much in common with evidence-based medicine. Given that it’s a relatively new concept — even though the best advisors have always practiced it — it might be helpful to look carefully at some possible alternatives to being an evidence-based advisor.

Here is a baker’s dozen worth of options for your thoughtful consideration. Many were adapted liberally from a piece on evidence-based medicine written by Dr. David Isaacs and Dr. Dominic Fitzgerald for the “British Medical Journal” in 1999. If I’ve missed any category, please let me know.

The eminence-based advisor

This (usually older) advisor wants you to believe that the more senior the practitioner, the less importance needs to be placed on anything so trivial as mere evidence. Apparent experience, it seems, is worth more than any amount of evidence.

These advisors have a touching faith in personal experience, which can be defined as “making the same mistakes with increasing confidence over an impressive number of years.” Such an advisor’s white hair and balding pate are often called the “halo” effect and act to trump substantive knowledge.

His (rarely her) well-appointed suite of offices featuring fine views and paneled wood are usually seen as the best available evidence of quality.

The fear-based advisor

This sort of advisor keeps on shouting from the rooftops that “the end is nigh,” over and over and over again, no matter what actually happens, in order to get you to respond. The idea is that if clients and prospects are sufficiently scared, they will run to the fear-monger for refuge. In other words, quite simply, fear sells.

The crooked advisor

This category of advisor is both self-explanatory and far bigger than generally assumed. For these advisors, prospects and clients are merely opportunities to be exploited by the best available means. They actually do care about evidence, but it’s a very different sort of monetary evidence (cha-ching).

The vehemence-based advisor

This sort of advisor sets out to substitute volume and passion of transmission for actual evidence so as to pummel, cajole and harass prospects, clients and adversaries into believing that he (rarely she) is really good.

The eloquence-based advisor

Proponents of this approach are always smoooooth. They feature year-round tans (even in New York), power ties, fine suits from Barneys, and (especially) a silken tongue. Sartorial elegance and verbal eloquence are deemed powerful substitutes for mere evidence.

The novelty-based advisor

This specimen emphasizes what’s new and unique, the less transparent the better. They always have the latest and the greatest.

Black boxes and hedge funds are prominent in this space — because he (again, rarely she, as is true in most other advisor categories) is so smart, don’t cha know?

The providence-based advisor

An advisor who lacks convincing evidence will often claim that the advice he is giving comes straight from God. Sometimes the claim is implicit, sometimes explicit.

Sometimes the motivator is guilt, sometimes it alleged brotherhood. But the results are usually hellish.

The intuitive advisor

Alleged common sense is often more attractive than real evidence, especially because good investing is often counter-intuitive. Therefore, this sort of advisor will go with his gut about stocks, funds, managers, styles, timing and forecasts.

He will rarely just stand there. He’ll usually be doing something.

The diffidence-based advisor

Some advisors see a problem and look for an answer. Others merely see a problem. The diffident advisor will often do little or even nothing out of a sense of paralysis or despair.

He will do nothing, because he has no good evidence-based idea what to do. This, of course, is most often better than doing a non-evidenced series of somethings. But that’s a really low bar.

The self-righteous advisor

This advisor hoses his clients while remaining utterly convinced that they are doing what’s best for them. He’s often wrong but never in doubt.

No one should be surprised that, in this instance (as well as others), “what’s best” is often really, really good for the advisor. It doesn’t usually work out so well for the clients.

The nervous advisor

Fear of clients being upset and the potential consequences thereof are powerful stimuli for excessive and repeated portfolio changes. Counterintuitively, this sort of advisor is often quite afraid of offering reasonable expectations, because unreasonable expectations are so much more attractive. Plus, they can be counted on to tell clients and prospects what they want to hear rather than what they need to know.

The ideology-based advisor

This sort of advisor is unalterably committed to his market ideology, contrary facts and evidence notwithstanding. They know what’s True (with a capital T) and will stick with that come hell or high water (and beyond).

The publicity based advisor

This category sets out to convince clients of his bona fides via media appearances, publicity shots and name recognition rather than real client service. That’s because he had to become so well known for a reason, right?

As British journalist Robin Powell puts it, “All too often we base our investment decisions on industry marketing and advertising or on what we read and hear in the media” or on something else altogether.

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 (often academic) research, as well as the demonstrated ability of the proffered solutions to work in the real world over the long haul (which is why I would prefer to describe this approach as science-based investing). It means changing one’s mind, approach and strategy when the evidence demands it.

The obvious response to the question about whether one’s financial advice ought to be evidence-based is, “Duh!” Then again, advisors and 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 practitioners 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.

But the bald fact remains that all too few in the financial world practice evidence-based investing. Take a good look at the alternatives and carefully consider how evidence-based your advice and your practice really are. Test and re-test your purported evidence for errors, holes and unsupported conclusions.

Investing successfully is really hard. Adding a client component makes it harder still. Even the best advisors are going to be wrong far more often than they would like.

If you want to do right by your clients, keep checking and re-checking your work, your assumptions and your conclusions. The evidence demands no less.

Carolina Crazy

Tonight Duke University and the University of North Carolina will play a basketball game on the Duke campus (ESPN, 8pm ET) and thus renew the best rivalry in all of sports. As ESPN reports, for the 78th time, both teams will be ranked while over the last 96 meetings, each team has won 48 games and scored exactly 7,437 points.

As a freshman, Jay Bilas (now of ESPN) lined up for a foul shot in his first rivalry game next to then All-American and future NBA All-Star Brad Daugherty (and also a current ESPN-er), who looked over at him and said, “I’m going to beat you like a rented mule.” Even so, that comment was astonishingly mild as these things go. Every Duke home game, irrespective of opponent, includes multiple iterations of a single chant cascading down from the rafters of venerable, old Cameron Indoor Stadium: “Go to hell, Carolina, go to hell! [Clap. clap].”

That’s about as close and as serious as it gets.

CraziesI first sat in Cameron as a student in 1978 and didn’t miss a home basketball game while I was enrolled at Duke. Every game was special – and wild. NBC came to Cameron to do the first national telecast from the arena on January 28, 1979 for a game against Marquette (I was there, of course) and insisted on a time-delay so the crowd could be censored if necessary. But Duke v. Carolina was and is something else entirely. The “Cameron Crazies” will be fired up tonight, of course. As legendary Hall of Fame Duke coach Mike Krzyzewski puts it, the game is a “national treasure.” Continue reading