About Bob Seawright

Robert P. Seawright is the Chief Investment & Information Officer for Madison Avenue Securities, a boutique broker-dealer and investment advisory firm headquartered in San Diego, California.

Too Many Variables and Too Much Randomness

My NCAA basketball tournament bracket is a mess and your bracket is too. Despite nearly 12 million entrants, the first week-end of the tournament wasn’t even over and there were no perfect brackets left in the ESPN bracket challenge. And the last man standing was hardly an expert either — he admitted not to have even seen a full game all season.

It seems like it ought to be easier than that to pick winners. There is no spread involved and a full season of games has been played, allowing us to evaluate the teams with a significant amount of data. But the short answer is that there are simply too many variables.and too much randomness involved to think that we can succeed in picking all those winners.

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Michael Covel Podcast

Covel PodcastMichael W. Covel is the bestselling author and entrepreneur who founded TurtleTrader.com, which was later expanded into TrendFollowing.com. His Trend Following podcast is among the most popular of its kind, with guests having included Daniel Kahneman, Harry Markowitz, Michael Mauboussin, James Altucher, Gerd Gigerenzer, Dan Ariely and Barry Ritholtz and listeners approaching 3 million. Mike is slumming today as I make an appearance. We spend a good deal of time discussing A New Kind of Investment Outlook, a piece I wrote earlier this year. I hope you’ll listen in.

Follow the Money

Hedge funds per CarlHal Holbrook had a wonderful supporting role in the Watergate saga All the President’s Men, a 1976 Alan J. Pakula film based upon the book of that name by Pulitzer Prize winning reporters Bob Woodward and Carl Bernstein of The Washington Post. Holbrook played the conflicted, chain-smoking, trench-coated, shadowy source known only as “Deep Throat” (over 30 years later revealed to have been senior FBI-man Mark Felt). Woodward’s meeting with his source when the investigation had bogged down is a terrific scene.

Sadly, Holbrook’s iconic line – “Follow the money” – was never spoken in real life and doesn’t appear in the book or in any Watergate reporting. Still, Woodward insists that the quote captures the essence of what Felt was telling him. “It all condensed down to that,” Woodward says. More importantly, it provides a profound truth. Indeed, when asked 25 years later on ”Meet the Press” what the lasting legacy of Watergate was, legendary Post editor Ben Bradlee replied with the words of screenwriter William Goldman, if not Mark Felt: ”Follow the money.” It provides good guidance for reporters generally and really good guidance when one is looking at the financial advice business.

With this important touchstone at the forefront, it’s crucial to recall that the financial advice business generally builds products and portfolios for marketing purposes rather than investment purposes. For the industry as a whole, “results” relate to sales far more than to what investor-clients end up getting. Accordingly, the idea is to play to people’s hopes, fears and prejudices rather than speak the (less marketable) truth. Moreover, if something can be positioned as new, novel or complex — and thus offering a plausible justification for a high fee — so much the better.
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“The Americans” teaches confirmation bias

The AmericansThe Americans, the 1980s Cold War spy drama from FX about two Soviet spys living as Americans in suburban Washington, DC, is the best show on television, even if not a lot of people are watching. Of course, what it is really about is life, family, and the intersection of role-play and reality to each. As Emily Nussbaum of The New Yorker explains, it’s “a show about human personality as a cruel performance, even (and sometimes especially) with the people we claim to love. It’s about marriage as much as it is about politics.” In any event, on a recent episode, the FBI agent played by Noah Emmerich is asked about his backstory — three years undercover with white supremacists — by another agent.

“What did it take to fool them?”

“Telling them what they wanted to hear over and over and over again.”

“That’s it?”

“People love hearing how right they are.”

People love hearing how right they are

How right he is.

For further (related) reading:

Should We Pay the Shakedown Artists or Not?

Before being closed down by the Federal Trade Commission, a revenge porn site called “Is Anyone Up” came up with a creative but disgusting twist on the sleazy genre by including a link to a phony “independent third party team” that would get the offensive pictures taken down for a fee.1 In other words, the site and its proprietor horribly violated peoples’ privacy and then extorted them for money to stop violating them. That sick scheme provides a perfect lead-in to a discussion of the San Diego Chargers and the recently announced joint stadium proposal made by the Chargers and the Oakland Raiders that would involve both teams leaving their current cities and moving to the Los Angeles area.

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Wealth, Poverty and Keeping Perspective

0315annuityanalyticsmi600-resize-600x338My column in the March issue of Research magazine is now available online. I’m proud of it and hope you will read it in its entirety. Here’s a taste.

I’m simply thinking about people like that poor mother, wondering how she might provide for her kids and hoping against hope that things might get just a little bit better. Nearly all of us in this business have been blessed beyond reasonable expectation and almost surely beyond our talent and effort (raises hand). We need to do more, be more and give back more. It’s simply the right thing to do.

Wealth, Poverty and Keeping Perspective

Recency Bias, as demonstrated by Lawrence O’Donnell

LincolnAmong the effects of recency bias is our tendency to overvalue and overemphasize the recent past as compared to more distant events and then to extrapolate it into the future. Lawrence O’Donnell was guilty of it to a remarkable extent this week during a discussion on his show relating to President Obama’s approach to radical Islam and a particular speech he had delivered that day that O’Donnell thought pandered to the religious (critics, of course, thought the President was trolling). Notice how he prefaced his criticism (my emphasis; you can watch this segment of O’Donnell’s show here).

President Obama, who is the most gifted writer and speaker in the history of the American presidency, today delivered the worst speech of his presidency.

Even allowing for the possibility that O’Donnell was using hyperbole to make his criticism seem more pointed, the claim that the current president — who undoubtedly is exceptionally gifted — “is the most gifted writer and speaker in the history of the American presidency” is, frankly, absurd. Continue reading

A New Kind of Investment Outlook

Outlook212015 Outlook2014-2015

Forecasting Follies

Nobody’s perfect.

That universal truth is easy to prove, of course, and no sane person would deny it. Indeed, even the smartest of us are far from immune even in our areas of expertise when we’re actively trying to do our best. A famous study by the U.S. Institute of Medicine concluded that up to 100,000 people die each year due to readily preventable medical errors. Since physicians are among the smartest and most highly trained professionals imaginable, being stupid is obviously not a prerequisite for making mistakes, even horrible mistakes.

It’s also easy to prove how error-prone we are in the investment world. Every year I take a look at various predictions for the year that’s ending and they are uniformly lousy in the aggregate. Moreover, when somebody does get one right or almost right, that performance quality is not repeated in subsequent years.

2014 provided more of the same in this regard. The median S&P 500 forecast among 50 top-end investment experts called for a year-end level of 1,950, up 6.44 percent on the year. As noted above, the actual closing level was 2,059, up 11.39 percent, essentially five full percentage points higher. That’s a miss of monumental proportions.

Last January, analysts called for far higher oil prices, firmer inflation, a worse jobless rate and higher interest rates. The exact opposite happened in each of those areas. The consensus crude oil price forecast was nearly $95 per barrel (up a bit) and 72 out of 72 economists were anticipating higher interest rates and lower bond prices. Advisor magazine reported that bond market sentiment was utterly bearish, leading pundits to recommend that investors limit their bond holdings to the shortest maturities in 2014. Meanwhile, 30-year U.S. Treasury bonds returned nearly 30 percent. Last April, Peter Schiff of EuroPacific Capital made the bold prediction that the “Federal Reserve’s quantitative-easing program will push gold to $5,000 an ounce.” The shiny yellow metal closed 2014 at just under $1,200, 80 percent or so lower than Schiff’s target.

Alleged experts miss on their forecasts and miss by a lot. Let’s stipulate that these alleged experts are highly educated, vastly experienced, and examine the vagaries of the markets pretty much all day, every day. But it remains a virtual certainty that they will be wrong often and often spectacularly wrong. On account of hindsight bias, we tend to see past events as having been predictable and perhaps inevitable. Accordingly, we think we can extrapolate from them into the future. But the sad fact is that we can’t buy past results. Continue reading

Signing Day and the Investment Process

davidYesterday – the first Wednesday in February and thus the so-called National Signing Day – was the first day that high school seniors could sign letters of intent to accept an athletic scholarship to play Division I college football in the fall. It’s the culmination of a long recruiting process and crucial to the success of teams and coaches. It can get more than a bit ridiculous.

Some players announced their intentions using live animal props, or worse. One recruit picked Texas over Washington based on a coin flip. At least it wasn’t for the gear, officially anyway. And Snoop Dogg will be giving up his support for USC to cross-town rival UCLA because his son picked the Bruins, where he’ll join P. Diddy’s kid on the team. Cornerback Iman Marshall, a big-time USC signee, has a self-styled “commitment video” that’s particularly absurd.

But the coaches and the media outlets that cover college football recruiting (of which there are an astonishingly high number) take it all very seriously indeed. As the parent of a DI player (at Cal, see above), *I* took it very seriously.

These various publications generally rate high school players being recruited via a “star system” of from two to five stars, with five stars being reserved for top 50 players, four stars for the next 250 (numbers 51-300), three stars for the next 500, and two stars for players who are considered “mid-major” and thus not good enough for the top conferences and teams. Alabama’s current recruiting class is usually reputed to be the nation’s best, for the fifth straight year, averaging out to 4.08 stars. And while it’s not much ado about nothing, it’s much ado about a lot less than you’d think, and in a different way than you probably think. Continue reading