What I Read

Stuff I ReadThe start of a new year is a good time to list the resources I find most valuable on a day-to-day basis, especially because I am asked about them so often. I resist “best of” lists both because I have my own (better!) tastes and because I have my own needs, outlooks and preferences.  I also cannot claim to have read or seen anything like everything that might be relevant to any given topic.  So instead of claiming that these are the best, the following 25 are my personal favorites — the financial websites and blogs I used the most and found the most indispensable during 2013.

Your mileage may vary. 

  • The Monoliths. There are lots of (probably too many) huge and would-be comprehensive sites covering the financial world.  My favorites are ThinkAdvisor (formerly AdvisorOne), which is geared toward retail advisors and other professionals as well as The Wall Street Journal‘s MarketWatch and the Financial Times, which are more broadly focused.
  • The Aggregators. Having reliable sources to sift through everything and point me to what I need to read is absolutely crucial to my day.  For my money, the best are Tadas Viskanta’s Abnormal Returns and Real Clear Markets.  Tadas focuses on the blogosphere and is especially good at finding terrific stuff I wouldn’t otherwise have seen, often from new and off-the-beaten-path voices.  Real Clear does some of that while providing more must-reads from traditional journalistic sources. A number of other excellent bloggers provide some of this as well (Barry Ritholtz, Lauren Foster, Michael Kitces and Josh Brown are prominent examples, but they will be cited elsewhere).
  • The Commentariate: Lots of people comment a lot on the markets and our industry. In my view, three stand out above the crowd: Barry Ritholtz’s The Big Picture, Josh Brown’s The Reformed Broker and Cullen Roche’s Pragmatic Capitalism.  Each is prolific as well as insightful and each has a powerful and unique voice.  If you don’t read them every day already, what are you waiting for?
  • The SpecialistsDoug Short‘s market analysis and charts are invaluable.  For eclectic, data-based takes on politics and finance, Political Calculations is a must-read. Michael Kitces is the best financial planner I know and his blog is great. Tom Brakke is the best investment analyst I know and his blog (in three parts) is wonderful. David Merkel is really, really good, too. For retirement planning, Wade Pfau’s Retirement Researcher Blog is unbeatable. Rick Ferri is my go-to on indexing.  Mark Buchanan’s The Physics of Finance is a brilliant look at economics and finance through the lens of physics.  James Osborne is a newer voice I really appreciate. Ed Yardeni’s Dr. Ed’s Blog is fabulous for investment strategy. Shane Parrish’s Farnam Street is always fantastic and regularly speaks to some of my particular interests, including behavioral and cognitive finance. I really like The Psy-Fi Blog too, for similar reasons. The Enterprising Investor, from the CFA Institute’s Lauren Foster, is consistently helpful. I shouldn’t forget Carl Richards, either. And I try to read everything Morgan Housel writes.
  • The Conscience. As I see it, Jason Zweig of The Wall Street Journal is the conscience of our industry. If you don’t read everything he puts out, including his weekly column, The Intelligent Investor, you’re missing something really important.
  • The Platform.  I should particularly note StockTwits, which is my “home base” for dealing with the markets and seeing who’s who and what’s what. 

I have missed many excellent and valuable resources, of course.  I’d be happy for you to point out my errors and omissions, in excruciating detail if necessary.

2013’s Best

Best of 2013As 2013 drew to a close, I highlighted my most popular pieces of the year as determined by total readership. Here’s the full list. I am most grateful for every reader who popularized these and many other posts. Thank you for helping to make Above the Market far more of a success than I could ever have imagined.

  1. Establishing Your Top 10 Investment Default Settings
  2. Math Suckage and Dave Ramsey
  3. Financial Advice: A Top Ten List
  4. Top Ten Ways to Deal with Behavioral Biases
  5. 10 Classic Failed Tech Predictions
  6. We Suck at Probabilities
  7. Is the Yale Model Past It?
  8. The Tragedy of Errors
  9. Something Wicked This Way Comes
  10. Missed It By *This* Much

2013’s Best (#1): Establishing Your Top 10 Investment Default Settings

#1As 2013 has drawn to a close, I have been highlighting my most popular pieces of the year as determined by readership. My all-time #1 remains this piece on behavioral biases from 2012. This last one — #1 from 2013 — suggests using investment default settings to enhance the investment process. It received this “2013 Best of” honor.  Enjoy.

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I pay a lot of attention to the investment process. In that regard, every investor — personal or professional — ought to have a clear investment plan based upon appropriate personal considerations, goals and outlooks and every investor ought to stick to that plan unless and until something significant changes. But there is a crucial component of the investment process that gets surprisingly little attention: our investment default settings. We can use them when we aren’t sure what to do, when we’re deciding what to do, when our circumstances have changed but our plan hasn’t (yet), or when we’re just starting out.

The idea here is that we all have default settings — known and unknown, acknowledged and unacknowledged — and that those defaults greatly influence how successful we are and become. Having the right default setting in defined contribution plans make a big difference (more here). I would examine and apply my default settings across and throughout the entire investment process and even suggest that we need to look at our default settings as carefully as we look at anything else.

What follows are my suggested default settings. Your mileage may vary.
Continue reading

2013’s Best (#2): Math Suckage and Dave Ramsey

As 2013 draws to a close, I have been highlighting my most popular pieces of the year as determined by readership. This one — #2 — gets “down and dirty” with big-time radio host Dave Ramsey’s investment advice. In short (and despite excellent advice from Ramsey in other areas), it’s dreadful. Not surprisingly, I got a lot of blowback (but also a surprising amount of support) from the Ramsey sycophants. Enjoy.

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Dave RamseyDave Ramsey has added further evidence to the pile already in place attesting to how bad we are generally at math and probability. Sadly, he’s no better than the mass of us.

Let me hasten to emphasize up-front that Dave has done some fabulous work by helping many, many people to get out of debt, stay out of debt, budget effectively, live frugally and save aggressively. But when it comes to investing and to doing math, he is simply out of his depth. Let’s start with the backstory. Continue reading

2013’s Best (#3): Financial Advice: A Top Ten List

As 2013 draws to a close, I have been highlighting my most popular pieces of the year as determined by readership. This one — #3 — takes a look at ways that a financial advisor can be of value to clients beyond investment performance. Enjoy.

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Dilbert - Index FundsYesterday, while I was otherwise engaged, Josh Brown threw some fuel on the active v. passive fire:

“Active investors, in the meantime, really can’t say anything. There isn’t a single empirical datapoint backing up the idea that an investor is financially better off paying someone to pick their stocks for them. There are other considerations in favor of active managers – mostly emotional ones involving elbow-rubbing, fancy lunches and alerts – but we’ll leave those aside for now.”

Putting aside the actual substantive argument (my views, including why I advocate some active management, are here and here), advisors routinely tell me that if they used index funds, their clients wouldn’t need their services, consistent with the Dilbert cartoon above. I disagree vehemently. Here’s my top ten list of reasons why. Continue reading

2013’s Best (#4): Top Ten Ways to Deal with Behavioral Biases

As 2013 draws to a close, I have been highlighting my most popular pieces of the year as determined by readership. This one — #4 — tries to get a handle on the extremely difficult chore of dealing successfully with our behavioral and cognitive biases.  This post was called one of the “Best of 2013” by the CFA Institute’s Enterprising Investor blog. Enjoy.

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Pretty much since the day I wrote it, my Investors’ 10 Most Common Behavioral Biases has been the most popular post on this blog. It still gets a surprising number of hits all these months later. Due to the pioneering work of Daniel Kahneman and others, nearly everyone in the financial world acknowledges the reality of cognitive and behavioral biases and their impact on people, the markets and life in general. It’s a very popular subject.

Unfortunately, we don’t think that we are susceptible to them personally.

As I have noted before, we all tend to share this foible — the bias blind spot, which is our inability to recognize that we suffer from the same cognitive distortions and behavioral biases that plague other people. As one prominent piece of research puts it:

We cannot attribute [our adversaries’] responses to the nature of the events or issues that elicited them because we deem our own different responses to be the ones dictated by the objective nature of those events or issues. Instead …. we infer that the source of their responses must be something about them.

In other words, if we believe something to be true, we quite naturally assume that those who disagree have some sort of problem. Our beliefs are deemed merely to reflect the objective facts because we think they are true. Our thought process goes something like this:

I’ve thought long and hard about it [biases leave no cognitive trace, after all] and I’m convinced I’m not a bigot. Some of my best friends are __________.

Of course, that line of thinking doesn’t convince anybody else. The research again:

We are not particularly comforted when others assure us that they have looked into their own hearts and minds and concluded that they have been fair and objective.

Of course not — they’re biased (but I’m not). It’s the same kind of thinking that allows us to smile knowingly when friends tells us about how smart, talented and attractive their children are while remaining utterly convinced with respect to the objective truth of the amazing attributes of our own kids.

The problem is even more acute when the “answer” is counter-intuitive, and good investing is often wildly counter-intuitive (it’s really hard to sell when we’re euphoric or buy when we’re terrified, for example). So what can we do to try to minimize our own behavioral biases? We can start, of course, by admitting what is obvious based upon the research and the data but so very hard to concede – we are all continually susceptible to cognitive and behavioral biases.

That’s great, so far as it goes. But even though there is a great deal of research into the reality of these biases, there isn’t a lot written about what we might do to deal with them and counteract their impact. That’s partly because there isn’t a lot we can do (as even Kahneman readily admits).

In his 1974 Cal Tech commencement address, the great physicist Richard Feynman talked about the scientific method — a careful and consistent process designed to root out error — as the best means to achieve progress. Even so, notice what he emphasizes: “The first principle is that you must not fool yourself–and you are the easiest person to fool.”

Even so, I am not eager to admit defeat. Therefore, I humbly offer the following ten suggestions to try to deal with our cognitive and behavioral biases. I hasten to emphasize that I offer them tentatively and without any assurance of success. Dealing with bias is extremely hard. Proceed with caution. But also bear in mind this insightful comment from Jeff Bezos of Amazon: people who are right a lot of the time are people who often change their minds. Much of dealing with our biases is simply being willing and able to change our minds when its appropriate. It’s hard, but the reward is huge — being right a lot.

  1. Focus on the Data. As I have said repeatedly (and I’m not alone in this), focus on the data. As my masthead proclaims, I strive for a data-driven perspective and a data-driven process. That isn’t easy to do, sadly. We relate better to stories and are all too willing to believe and concoct narratives of various sorts to support our latest nonsense, but it’s a worthy aspiration and commitment nonetheless.
  2. Actively Seek Out Contrary Data and Conclusions. A remarkable universe of discoveries in psychology and neuroscience demonstrate that our preexisting beliefs skew our thoughts and even color what we consider our most dispassionate and reasoned conclusions. This tendency toward so-called “motivated reasoning” helps explain why we find groups so polarized over matters about which the evidence seems so clear. In other words, expecting people (including ourselves) to be convinced by the facts is contrary to, well, the facts. Factor in behavioral biases (such as the ever popular confirmation bias, optimism bias, in-group bias and self-serving bias) and it’s easy to see (at least conceptually) why we can get it so wrong so readily. Our tendency is to look for and consider only those views that correspond to our own – which goes a long way towards explaining the popularity of Fox News and MSNBC, for example, while also explaining why the viewers of each of those networks tend to think that only the other side has it all wrong. If we are going to be able to see things a bit differently, we need to seek out and consider sources that look at things differently.
  3. Build-In Accountability Mechanisms. We need (relative) objectivity if we are going to succeed in investing and in life unless we are extremely lucky. Having an accountability partner or (better yet) a competent and empowered team is particularly important due to our great ability to spot what’s wrong with everybody else (if not ourselves). It also means taking and dealing with criticism seriously. Even welcoming and encouraging it. It shouldn’t be surprising to see so many people who experience great investment success suffer indifferent performance or even failure subsequently (Bill Miller and John Paulson, for example). The more success and power we achieve, the easier it is to believe the hype. Accountability mechanisms that are maintained and honored can help to undercut that.
  4. Focus on Process. Accountability is more effective when it’s part of a consistent, careful, clear and clearly defined process. We all recognize that the outcomes in many activities in life combine elements of both skill and luck. Investing is one of these. Especially troublesome is our perfectly human tendency to attribute poor results to bad luck and good results to skill. It’s a lead-pipe-lock that we’re going to err and err often in the investment world. If we are to succeed with any measure of consistency, we need carefully crafted plans with screw-up contingencies built-in together with a commitment to regular re-evaluation and a rescue plan in the event of major catastrophe.
  5. Test and ReTest. No matter how good our process is, we need also to assume that we have made errors and set out actively to find them by testing and confirming everything possible. Once we have decided that a given view is correct or committed to a particular course, confirmation bias has a tendency to take over. Planning to be lucky and believing that psychological realities don’t apply to us is a lovely (if arrogant) thought. But it’s not remotely realistic. Keep testing and looking for ways that you’re wrong.
  6. Avoid the Noise. Distinguishing signal from noise can be agonizingly difficult. Given the sheer amount of stuff competing for our attention, eliminating distractions unlikely to provide substantive benefit will improve the likelihood of our success. CNBC is fun and all, but how often does it make us smarter or better?
  7. Take a Tip from Attorneys. I often refer to myself as a recovering attorney, and there is a great deal about the practice of law that is frustrating and silly. But one excellent technique I learned from my time in that profession is to argue the other side’s case. Understanding and even appreciating a contrary point of view is helpful to our own thinking and can provide a good check on the coherence of our own viewpoints. Understanding and seeking support for the opposition’s best arguments is a powerful learning tool. We might even decide that – gasp – mistakes were made (almost surely by someone else, of course).
  8. Keep Track of Your Mistakes as Carefully as Your Successes. We all tend to trumpet our successes and downplay our failures. I highly suggest that, at least within your circle of influence and with those to whom you are accountable, you carefully track and analyze your failures, readily apparent or not. Sometimes these mistakes will be the result of bad luck. But often you will find correctable errors or even errors in your process. Doing so also helps with #10.
  9. Take Your Time. The more experienced and successful we are, the easier it is to take short-cuts. Experience is what allows us to apply useful short-cuts, of course, but it’s important to remember that all behavioral biases and ideologies provide mental short-cuts of a sort too. For big decisions, at least, make sure to take the time to connect each and every dot. When I was in law school I often refereed basketball games for extra money. Many situations were repeated time and again with the next action and the right call seemingly foreordained. It was always difficult to avoid anticipating the call — blowing the whistle based upon what was highly likely (perhaps almost surely) to happen rather than waiting to see what actually happened. Surprises happen on the basketball court with remarkable frequency. They happen in investing too.
  10. Try to Stay Humble (no matter how successful you are). Even though it takes a healthy amount of self-confidence to be an investment success, arrogance and certainty are frequent enemies of continued investment success. Your accountability partners can and should help here, of course. Spouses are especially expert at promoting humility. You will screw up and screw up often. Remind yourself of that reality often as you continue to look for where your most recent failings took place.

It’s really hard to deal with (much less overcome) our cognitive and behavioral biases. These tentative steps are offered to try to do so but I don’t promise anything like success. Yet these steps (or an ongoing commitment to implement the concepts behind them) should put you well ahead of most everyone else.

And that’s a pretty good thing indeed.

2013’s Best (#5): 10 Classic Failed Tech Predictions

As 2013 draws to a close, I have been highlighting my most popular pieces of the year as determined by readership. This one — #5 — surprised me with its popularity because I was able to construct it so quickly. But I shouldn’t have been since we all love to hear about other people’s screw-ups. Enjoy (again, I hope) these classic failed predictions.

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internetToday’s Quote of the Day at Abnormal Returns (from Dustin Curtis): “The future is extremely hard to see through the lens of the present. It’s very easy to unconsciously dismiss the first versions of something as frivolous or useless. Or as stupid ideas.”

Indeed. It’s remarkably easy to miss the boat entirely. As a consequence, flawed predictions abound and aren’t limited to the economy or the markets. Enjoy these ten from the tech world…. Continue reading

2013’s Best (#6): We Suck at Probabilities

As 2013 draws to a close, I have been highlighting my most popular pieces of the year as determined by readership. This one — #6 — notes how bad we tend to be in dealing with probability and how that impacts our investing. Enjoy.

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I have often noted (for example, here) that we generally suck at math, to our great detriment. I have also noted that we are especially poor at dealing with probabilities. If a weather forecaster says that there is an 80 percent chance of rain and it remains sunny, instead of waiting to see if it rains 80 out of 100 times when his or her forecast called for an 80 percent chance of rain, we race to conclude — perhaps based upon that single instance — that the forecaster isn’t any good. Data trumps our lyin’ eyes, but we don’t routinely see it. Continue reading

2013’s Best (#7): Is the Yale Model Past It?

As 2013 draws to a close, I have been highlighting my most popular pieces of the year as determined by readership. This one — #7 — examines the so-called “Yale Model” of investing and considers whether that “trade” has become overcrowded. It suggests that smart investors (and especially those without Yale’s access and expertise) should consider looking elsewhere today. It’s another long one. Enjoy.

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Yale Key

It is axiomatic in the investment world that as an asset class becomes more popular, it suffers from both falling expected returns and rising correlations. In other words, good trades get crowded and their advantages tend to disappear. This crowding happens because success begets copycats as investors chase returns. Mean reversion only tends to make matters worse. In effect, it results in “investing while looking in the rearview mirror” or, as per the title of William Bernstein’s fine new book, Skating Where the Puck Was.

The evidence suggests that this overcrowding is precisely what has been happening with respect to the Yale Model. Continue reading

2013’s Best (#8): The Tragedy of Errors

As 2013 draws to a close, I have been highlighting my most popular pieces of the year as determined by readership. This one — #8 — takes a look at the incredible story of a guy we might call “Lawnchair Larry” and how easy it can be for us to screw things up, despite our best intentions. It’s a long one, even for me. Enjoy.

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Lawn Chair LarryLarry Walters had always wanted to fly. When he was old enough, he joined the Air Force, but his poor eyesight wouldn’t allow him 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. But things didn’t turn out exactly as he planned.

Larry conceived his project 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 and a pellet gun, he strapped himself into his lawn chair (see above). His plan, such as it was, called for his floating lazily above the rooftops at about 30 feet for a while and then using the pellet gun to explode the balloons one-by-one so he could float to the ground.

But when his friends cut the cords that tethered the lawn chair to his Jeep, Walters and his lawn chair didn’t rise lazily. Larry shot up to a height of over 15,000 feet, yanked by the lift of 45 helium balloons holding 33 cubic feet of helium each. He did not dare shoot any balloons, fearing that he might unbalance the load and cause a fall. So he slowly drifted along, cold and frightened, 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 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.” Continue reading