Do the Opposite

My friend Ben Carlson has a (typically) terrific piece up on how market action and sentiment impact us. It’s hilarious and true, especially on a day like today with oil and stocks desperately seeking a bottom. Here’s a taste.

Bull Markets: Fear of missing out.
Bear Markets: Fear of being in.

Bull Markets: I knew I should have had more of my portfolio in stocks.
Bear Markets: I knew I should have had more of my portfolio in bonds.

Bull Markets: That guy’s been calling for a crash for years — he’s an idiot.
Bear Markets: That guy just called the crash — he’s a genius.

I encourage you to read it in full.

I also encourage you to watch the video version below. Be careful out there.

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The Great Myths of Investing

GreatMythsAs the great Mark Twain (may have) said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” That’s particularly true in the investment world because we know, to a mathematical certainty, that avoiding errors provides more bang for the buck than making correct calls and generating outperformance. Fixing what we “know for sure that just ain’t so” provides a remarkable opportunity for investment success.

On the other hand, it simply doesn’t make a lot of sense to spend enormous amounts of time and energy looking for a strategy or a manager that might (but probably won’t) outperform by just a little bit. As the great Spanish artist Pablo Picasso put it, “Every act of creation is first of all an act of destruction.” What we want to do is to find the next great investor, the terrific new strategy, the market sectors that are about to heat up or the next Apple. But what we should do is eliminate the things that make it so hard for us to get ahead. Accordingly, I will highlight some of the great myths of investing — ideas that lots of people, alleged experts even, claim to be true and act as as though are true “that just ain’t so.”

There are lots of myths at work in our lives, of course, falsehoods that are often believed and which are used to further a favored narrative. But George Washington didn’t really cut down a cherry tree and wax eloquent about not telling a lie as a consequence. Isaac Newton didn’t come up with his theory of gravity because an apple fell on his head. Columbus didn’t discover that the earth was round (that had been established centuries before). Ben Franklin didn’t fly a kite in a storm and discover electricity. And Einstein never flunked math. If any of these are news to you, I’m sorry to have had to break it to you.

Such myths persist because they “work” in some way. Their story elements — ease of recall, readily adaptability, explanatory power — make them useful and even important.  But utility and truth are hardly the same things and neither are utility and helpfulness.

So here is my list of the top ten great myths of investing. Since they aren’t true and are indeed damaging, if you can eliminate them from your mind and your investment process, your results will necessarily improve. Continue reading

In Times Like These

“My Mama told me there’d be days like this.” – Van Morrison

Stock markets are in turmoil all over the globe. Monday was especially violent and what passes for financial television was awash in bluster, doom and gloom. Markets were gapping down in China, in London, in Japan and elsewhere. Emerging markets were getting crushed. Here in the States, the S&P 500 dropped about 4 percent, with the other major benchmarks performing similarly. The next day, on what appeared to be “Turnaround Tuesday,” a day-long rally was overcome by a major sell-off just before the close, pushing all the major indexes underwater for yet another day. Today has opened well, but (obviously) we don’t know what’s coming.

Over the previous six trading days, the benchmark S&P index has lost well over 200 points, or roughly 11 percent, putting it on track for its worst August in 17 years. But since the markets haven’t seen a significant correction (a loss of at least 10 percent) since 2011, we have been due for one. When financial markets are free-falling, and all correlations seem to converge on 1.0, analytically we move into the realm of the physics of landslides, where things are inherently complicated and unpredictable (which is not to say that more “normal” times are somehow simple and predictable). Continue reading

The Maleficent 7

Maleficent 7The Magnificent Seven is a terrific 1960 movie “western” about seven gunfighters hired to protect a small Mexican village from marauding bandits. A re-make is currently in the works and the “original is itself a re-make of Akira Kurosawa’s Japanese classic, Seven Samurai. Meanwhile, Maleficent is the “Mistress of All Evil” in Sleeping Beauty who curses the infant princess to prick her finger on the spindle of a spinning wheel and die before the sun sets on her sixteenth birthday. Today I’m offering up a mash-up from these movies to outline what I’m calling the Maleficent 7 – seven inherent human problems and limitations that impede our ability to make good decisions generally and especially about money. Continue reading

Hot Pants Investing

I watched Mike Krzyzewski’s first Duke win from the stands in Cameron Indoor Stadium as a student in 1980 and his fifth national championship victory earlier this month at home, on television, with my grandchildren. I’ve probably seen a majority of the games in-between one way or another. Coach K is an icon, and widely regarded as perhaps the best college basketball coach of all-time. He is the winningest college basketball coach of all-time. But when has hired 35 years ago, he wasn’t even generally considered to be in the running for the job. During the entire month-long coaching search, Krzyzewski’s name never appeared in any North Carolina newspaper as even a long-shot candidate for the job. No radio station nor any television station suggested him as a possibility.

Then Duke Athletic Director Tom Butters insisted that he was getting the “brightest young coaching talent in America” to lead his basketball program (video from the hiring news conference here – notice how “Krzyzewski” is repeatedly mispronounced in the report) when he hired Coach K. There was no live coverage of any kind. The local morning paper had reported that one of “three Ws” – Bob Weltlich of Ole Miss, Old Dominion’s Paul Webb or then top Duke assistant Bob Wenzel – was going to get the job. But Butters hired the West Point graduate, then just 33 years old and coming off a losing season at his alma mater. Butters had ultimately listened to Bob Knight, who told him that Krzyzewski had his own good attributes without the bad.  The headline in The Chronicle (Duke’s student newspaper) was “Krzyzewski: This is Not a Typo.” Ironically, the local afternoon newspaper got the scoop several hours before the press conference, but it was after deadline and there was nowhere to report it.

This story seems quaint today, with the idea that a major college basketball hiring could remain unreported and largely secret until the press conference and that the coach hired had not even been considered a candidate is appropriately presumed to be impossible in this digital age. Obviously, times have changed. To get at what that sort of change means to our culture and to the financial services business, we have to go back into ancient history, even before 1980. Continue reading

Everybody Plays the Fool (Sometimes)

Back when I was in high school, an R&B group called The Main Ingredient, fronted by Cuba Gooding, Sr., scored a big hit with Everybody Plays the Fool.

Everybody plays the fool (sometimes)
There’s no exception to the rule (listen, baby)
It may be factual, it may be cruel (I ain’t lyin’)
Everybody plays the fool

So, so true.

top10Everybody does play the fool at least sometimes, about love and money. So, in honor of April Fools’ Day, here is a helpful list of ways nearly all of us play the fool about money (sometimes). Remember, there’s no exception to the rule (listen, baby). Continue reading

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.
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

Kobayashi Maru and the Forecasting Follies

Kobayashi MaruIn the Star Trek universe, the Kobayashi Maru is a Starfleet Academy training exercise for future officers in the command track. It takes place on a replica of a starship bridge with the test-taker as captain. In the exercise, the cadet and crew receive a distress signal advising that the freighter Kobayashi Maru has stranded in the Klingon Neutral Zone and is rapidly losing power, hull integrity and life support.

The cadet is seemingly faced with a decision (a) to attempt to rescue the freighter’s crew and passengers, which involves violating the Neutral Zone and potentially provoking the Klingons into an all-out war; or (b) to abandon the ship, potentially preventing war but leaving the freighter’s crew and passengers to die. As the simulation is played out, both possibilities are set up to end badly. Either both the starship and the freighter are destroyed by the Klingons or the starship is forced to wait and watch as everyone on the Kobayashi Maru dies an agonizing death.

The objective of the test is not for the cadet to outsmart or outfight the Klingons but rather to examine the cadet’s reaction to a no-win situation. It is ultimately designed as a test of discipline and character under stress.

However, before his third attempt at the test while a student, James T. Kirk surreptitiously reprograms the simulator so that it was possible to rescue the freighter. Continue reading