The third annual volume of The Best Investment Writing series has now been released. After books in 2016 and 2017, the publishers decided to make the entire 2018 volume available via audio format, with the authors reading their winning selections. I was honored that my “Dear Future Me” was selected for inclusion. The audio version lasts about 10 minutes and is available here.
Note: This post is a much re-worked and expanded version of prior posts.
Exactly eighteen years ago, on another day that lives in infamy, at a little before 6:00 a.m., Pacific Time, I was sitting in front of my Bloomberg terminal in downtown San Diego when the first, cryptic hints of trouble at the World Trade Center crawled across the bottom of my screens (I think). As the day’s events unfolded, I recalled having been on the phone on the cavernous Merrill Lynch fixed income trading floor at the World Financial Center, connected to WTC by underground walkways, doing a STRIPS trade with a client (really, an institutional “account”) who was sitting high atop the World Trade Center (2WTC), when I heard and felt the February 26, 1993 World Trade Center bombing.
I had been scheduled to fly to New York on business on September 10, 2001 and had reservations for the week at the Marriott World Trade Center (3 WTC), which would be destroyed when the Twin Towers collapsed later that day. Instead, I decided to stay home and go to “Back to School Night” at my kids’ school.
I am really glad I didn’t get on that plane to New York.
My little story is insignificant within the context of the tragic losses, terrible evil, and timeless heroism of the “American epic” to which that day bore inexorable witness. But it is what happened to me. It was my story. It provides context and a framing device to help me remember, 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 above is central to several converging stories from that dreadful, terrible day. Continue reading
We humans, assuming our basic physical needs are met, want meaning most of all. We want our lives, our choices, and our ideas to matter. And we want them to matter today. We want the relentless now to be crucial, to be vital, to overturn the evils of the past, to be a lynchpin of history. Even when it’s none of those things.1
After half a century of intermittent debate and protest (because, after all, it’s San Francisco), the San Francisco Board of Education voted unanimously in June to spend at least $600,000 to whitewash away “The Life of Washington,” 13 murals2 of the first president that adorn the halls of a local high school named for him. One of the frescoes depicts Washington’s slaves, hunched over, working in the fields of Mount Vernon. In another, Washington points westward over the dead body of a Native American. The art was deemed ripe for destruction because it was said to traumatize students. Continue reading
I have been writing Above the Market for eight years. Wow. That’s hard to write and harder to believe.
I began in August of 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 anything I thought possible, much less likely. I appreciate every reader. Anyone who writes wants to be read most of all.
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 advice whenever I ask. Tadas Viskanta provided my first distribution (exactly one month in) to the expert community he serves via his crucial blog, Abnormal Returns, which remains the standard for its type. I have now appeared there approaching 300 times, 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. Brian Portnoy, Nir Kaissar, Corey Hoffstein, Jack Vogel, Peter Huminski, Rick Ferri, and “Jake” have offered friendship and much very good counsel. My apologies in advance for those I have foolishly omitted.
Thank you all.
I think the following five are my best posts. I list them in no particular order. I would love for you to read them again or read them for the first time.
I had a blast writing this recent post and love it even though almost nobody read it: Behavioral Finance: a (Mostly) Musical Revue.
In order to celebrate this blogiversary and as a way of expressing my gratitude to readers, everyone who comments on one of my posts linked above in the comments below or on Twitter will be entered into a drawing for a new Kindle. Good luck.
To everyone who has read, supported and helped me with this effort: Thank You! I hope eight years leads to many more.
I made guest appearances on two excellent podcasts recently. I discussed the subject of my post, How’s Your Aim?, with Tadas Viskanta on Josh Brown’s podcast, The Compound Show. You may listen to it here. Tadas created the indispensable finance aggregation site, Abnormal Returns. I also discussed behavioral finance with Daniel Crosby on his Standard Deviations podcast. You may listen to it here. Dr. Crosby’s most recent book is The Behavioral Investor. He is the founder of Nocturne Capital.
Airport men’s rooms are among the most disgusting places on planet Earth. For the benefit of squeamish readers, I won’t relay any of the horrors I’ve seen, but nobody who has experience in this area will deny its reality. The problem begins with the empirical fact that males generally are not very tidy around the toilet. And if the restroom is of the public variety, look out, especially when it concerns our “aim.”
In Seinfeld’s “The Butter Shave” episode, Kramer sees Jerry working on his shoe and asks what he’s doing. Jerry replies, “Oh, I’m taking this lace out. It came undone and touched the floor of a men’s room. That’s the end of that.”
With people rushing to and from flights, airport toilets are especially at risk. An ingenious economist named Aad Kieboom, who worked for Schiphol International Airport in Amsterdam, provided a clever mitigation technique for the problem in the 1990s based upon an idea from the airport’s cleaning department manager. The idea was to etch an image of a fly onto the bowls of airport urinals.
The rationale was simple. If you give males a target, most of them will aim for it. “Guys are simple-minded and love to play with their urine stream, so you put something in the toilet bowl and they’ll aim at that,” explained Klaus Reichardt, inventor of the waterless urinal. Parents of boys, who have seen target practice all too often and in a wide variety of settings, can only nod in agreement.
As a result, “spillage” (I’m surprised that Seinfeld never did a “spillage” episode) declined significantly in the airport and a business was born. The “Tinkle Target” idea is considerably older than Kieboom’s iteration and was previously American, although the Victorians seem to have been first. They used a bee design at the bottom of chamber pots to serve as both a target and a play on words. Apis in Latin means bee so they had, quite literally, a piss pot.
The urinal target is Nobel laureate Richard Thaler’s favorite nudge, which Thaler and Harvard’s Cass Sunstein define as a choice “that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.” I have seen this technique used many times, including just last week at a high-end winery restaurant (see below).
A fly isn’t required, of course. The possibilities are endless. Some spiffier places today use a golf flag. Images of bankers began appearing in Icelandic urinals during the Great Financial Crisis, shortly after the country’s three main commercial banks collapsed. The University of Louisville uses the emblem of arch-rival University of Kentucky as its urinal target in some changing rooms.
The moral of this story is obvious. We all do better when we have something to aim at. That’s why proper benchmarking is so important. In the investment world, it means a standard or measure that can be used to analyze the allocation, risk, and return of a given portfolio. Most often it’s an index or a combination of indexes (narrow, broad, or even custom), but it can also be a specific monetary target, a goal, or some set of goals.
Whatever you may decide is the best benchmark or set of benchmarks to use, be sure you have them in place. A clear benchmark is the best means we have for determining how good one’s investment “aim” is.
Most of us don’t suffer from “Brain Damage.”
We aren’t “Insane in the Brain.”
As the great Jason Zweig says, “people are neither rational nor irrational. We are human.”
Unfailingly and frustratingly human.
Naturally the dying man wonders to himself
Has commentary been more lucid than anybody else?
And had he successively beaten back the rising tide
Of idiots, dilettantes, and fools
On his watch while he was alive
…And it occurs to him a little late in the game
We leave as clueless as we came
For the rented heavens to the shadows in the cave
We’ll all be wrong someday
Our being flawed isn’t a mere propensity. It is our default setting. It’s not intentional but rather an inherent condition. We are much less than perfect, even if those who love us will (knowingly!) overlook our imperfections.
The study of our humanity in relation to money is known as behavioral finance. Getting a decent handle on our dangerous thinking is a lot like trying to make sense of Ulysses, Jackson Pollack, or In a Gadda Da Vida.
For those scoring at home, our frequent and consistent bouts of irrationality explain both why markets aren’t efficient and why it is so incredibly difficult to beat the market. Josh Brown explained why: “People can’t be accurately modeled. And it’s people who work and vote and invest and trade and make deals and stick things into themselves that require a trip to the emergency room.” Even though we like to think that what we see and learn drives what we believe, the sad truth is that it is usually the other way around.
It’s surprisingly easy to want to give up. We feel what we feel, and feelings can’t be fact-checked, even if we wanted to. Let’s try anyway, mostly with music…just for the fun of it…and because artists often understand humanity and the human condition better than scientists…and the rest of us too, as “poetic dreams can foreshadow empirical reality.” So let’s get it started.
The very first broadcast of “Saturday Night Live,” on October 11, 1975 (I was watching – George Carlin hosted with Janice Ian and Billy Preston as musical guests) included a mock commercial featuring future senator Al Franken, presciently, as a caveman, for the “Triple Track,” a three-bladed razor, with “not just two blades in one system, but three stainless, platinum teflex-coated blades melded together to form on incredible shaving cartridge.” It featured the slogan, “Because you’ll believe anything.”
It wasn’t so very long before three-bladed razors became a real thing.1 More importantly, our thinking would be greatly improved by employing a three-bladed – “Triple Track” – razor of a different sort.
William of Ockham is best known for the famous slogan known as “Ockham’s Razor,” often expressed as “Don’t multiply entities beyond necessity.” In practical terms, it means that other things being equal, simpler theories are better. As Einstein said, “more complicated systems and their combinations should be considered only if there exist physical-empirical reasons to do so.” Newton’s iteration was, “We are to admit no more causes of natural things than such as are both true and sufficient to explain their appearances.” And, as Arthur Conan Doyle’s Sherlock Holmes expressed it, in reverse, “If you eliminate the impossible, whatever remains, however improbable, must be the truth.”
Hanlon’s Razor is another related and useful heuristic which can be best summarized as, “Never attribute to malice that which can be adequately explained by neglect, incompetence, or stupidity.” As Hume noted, we are much too eager to ascribe malice (and goodwill) to natural objects and phenomena.
Our third razor is a new one. As the great Charlie Munger said, just last week, “more damage to the world comes from the cognitive glitches than does from malevolence.”
As I’ve dubbed this “Munger’s Razor,” we now have three helpful, good, and related “razors” to aid our thinking. They aren’t ironclad rules, but they are effective rules of thumb – heuristics to guide our thinking.
Conspiracy theorists illustrate the power of such heuristics nicely. A conspiracy theory is a purported explanation for an event that invokes a conspiracy by powerful actors when other explanations are much more probable, held onto tenaciously, irrespective of evidence. Whether it’s the conviction that the Apollo moon landing was faked, 9/11 was an inside job, vaccinations cause autism, climate change is a Chinese-invented hoax, or something else (“They’re turning the freaking frogs gay!” Alex Jones famously screamed), conspiracy theories all invoke highly complex explanations for events better and more simply explained in other ways.2
There are good, practical reasons for refusing to fall for every alleged conspiracy. Watergate has been the biggest conspiracy in my lifetime. It was undertaken by a small group of the most powerful men in the world with enormous incentives to keep their actions secret. That they failed, quickly and comprehensively, provides strong evidence that conspiracies are exceedingly hard to maintain.
One prominent “cognitive glitch” that empowers conspiracy theories is our inherent overconfidence, even as our conspiracy theories are often totally bizarre and getting more far-fetched all the time. Conspiracy theorists see themselves as having privileged access to special knowledge or a special way of thinking that separates them from the unfortunate masses.
We tend to think that our own refuse smells delightful and that those who disagree with us aren’t merely wrong, but are rather some combination of delusional, stupid, or evil. Thus, discussions turn into nasty arguments, disagreements turn into ideological scrums, and serious disputes become white-hot with rage, invective and ad hominem (basically Twitter’s raison d’être).
My sense is that the key element here is that most partisans see “their side” as not just true, but obviously true. It’s a by-product of our inherent self-aggrandizement and our bias blindness. Therefore, our strongly held positions aren’t truly debatable — they’re seen as objectively and obviously true. After all, if we didn’t think our positions were true, we wouldn’t hold them. And (our thinking goes) since they are objectively true, anyone who makes the effort to try should be able to ascertain that truth.
Our opponents are thus without excuse – they’re stupid, delusional, or evil. If they disagree with me, they are denying reality. Our highly polarized society, fueled by digital and social media (which serve as “crack for moralists,” in Alan Jacobs’s telling phrase), is ever more committed to seeing our opponents in this unflattering and dangerous light. The “triple track” of razors outlined herein offer a means of doing and being better. May it be so.
1 Gillette announced the Mach3 three-bladed razor in 1998. The Schick Quattro four-bladed razor debuted in 2003 and Gillette brought out a five-bladed razor in 2005. Dorco’s “Pace 7” razor launched in 2015, and boasts three-and-a-half times the shaving ability of your average two-bladed Bic disposable. The jokes today are about eight and 18-bladed razors.
2 To be clear, conspiracies exist. “Just because you’re paranoid,” Joseph Heller wrote in Catch-22, “doesn’t mean they aren’t after you.” But it should go without saying that we ought not accept conspiracies as fact without sufficient reason. Sadly, it can’t go without saying because surprisingly huge numbers of us believe them far too readily.
We have all heard the arguments about the flaws of active management and we all should have looked closely at the underlying data: active managers generally fail to beat their benchmark indices. Last year was the fourth-worst year for U.S. equity managers since 2001, as 69 percent of domestic equity funds lagged the S&P Composite 1500. Even more notably, as the period reviewed gets longer, overall performance gets worse. Over the fifteen-years through 2018, roughly 90 percent of all domestic and global equity and fixed income managers underperformed their respective benchmarks.
Institutional investors fare no better. On a risk-adjusted basis, 24 percent of funds fall significantly short of their chosen market benchmarks and have negative alpha, 75 percent of funds roughly match the market and have zero alpha, and well under one percent achieve superior results after costs — a number not significantly different from zero in a statistical sense.
Hedge funds – despite (and also because of) enormous fees – have badly underperformed too, and they are the most active of active managers. Indeed, if anything, their performance has been worst of all. Over the five years ended March 15, 2019, the HRFI Fund Weighted Composite has returned 2.81 percent, versus 11.03 percent for the S&P 500.
Meanwhile, and not surprisingly, assets are following performance. When it comes to mutual funds and exchange-traded funds that buy U.S. stocks, those that passively track indexes now hold 48 percent of assets. They’ll top 50 percent sometime this year if the current trend holds. Continue reading
Last month on CNBC, Warren Buffett announced his annual NCAA tournament bracket contest for Berkshire Hathaway employees. First prize is $1 million a year for life for any employee who picks a perfect Sweet 16 in the tourney. The odds of doing that are about one in 2-3.5 million, depending upon the year. Last year, none of the 17.3 million ESPN brackets had a perfect Sweet 16 and no Berkshire employee made it out of the first round (not Dayton’s “First Four”) alive.
NCAA basketball tournament bracket math isn’t an exact science. It is often said that the odds of picking a perfect NCAA tournament bracket are a staggering one in 9,223,372,036,854,775,808 (that’s 9.2 quintillion). That calculation assumes every game is a 50:50 proposition, which of course it isn’t (despite Virginia’s opening round loss to UMBC last year as a one seed).
According to Duke math professor Jonathan Mattingly, the average college basketball fan has a far better chance of achieving bracket perfection than that. According to Mattingly, adjusting probability based on seeding, the odds of picking all 65 games games correctly is actually more like one in 2.4 trillion. Using a different formula, DePaul mathematician Jay Bergen calculated the odds at one in 128 billion. Whatever the actual odds, if you are really lucky, your perfect bracket will last about halfway through Thursday’s games.
Whichever calculation you prefer, your odds of getting a perfect bracket are staggeringly small. For example, the following are much more likely than a perfect bracket. Continue reading