Getting Busy on the Proof


Source: Tom Gauld

On our best days, when wearing the right sort of spectacles, squinting and tilting our heads just so, we can be observant, efficient, loyal, focused, assertive truth-tellers. However, on many days, all too much of the time, we’re delusional, lazy, short-sighted, partisan, arrogant, easily distracted confabulators. It’s an unfortunate reality, but reality nonetheless.

And a remarkable number of us are downright crazy.

Behind the Curve, now available on Netflix, is a recent documentary about the surprisingly large community of people throughout the world who believe that the Earth is flat.*

As shown in the film, a true believer named Jeran Campanella devised a simple experiment designed to prove that the Earth is flat.

Much to Campanella’s surprise, his experiment proved the opposite of what he expected. His reaction was not even to question his preconceived notion, much less repudiate it. “Interesting. Interesting. That’s interesting,” is the best he could manage.

Nobody thinks they have joined a cult, as both research and real-world experience demonstrate.

Continue reading


Worried Faces

io19.02Television producers love shots of nervous and worried fans during big sporting events. They convey the drama of the moment and the importance of the game to everyone watching. But I wasn’t expecting to see my daughter’s face in that context. That’s a screenshot of her on the right, with her husband, from the national broadcast of an MLB play-off game in 2017.

Emily and her husband Josh are big baseball fans and have partial season tickets for the Washington Nationals. In 2017, the Nats were in the play-offs. My wife and I were home in San Diego, watching them on television in a tense match-up when we saw, over and over again, our daughter’s worried face on the screen. Our phones (and hers) lit up with texts from people who recognized her. Everyone who knew Emily, especially in a sports context, is familiar with “Emily worried face.”

She’s expressive and, well, she worries. Continue reading

Forecasting Follies 2018

The Philadelphia Eagles won the Super Bowl last January by defeating Bill Belichick, Tom Brady and the New England Patriots. They were coached by Doug Pederson, a remarkable young leader in just his second season as head coach, whose aggressive style and forward-thinking approach, driven by analytics, led the Eagles to their first Super Bowl championship ever. Pederson’s leadership style is epitomized by his daring fourth down goal line call just before halftime of the championship match-up.

Quarterback Nick Foles set up in shotgun formation and moved down the line of scrimmage to his right, talking to his linemen in hopes the defense wouldn’t be set when the ball was snapped. Running back Corey Clement took a direct snap, moved left, then flipped the ball to Trey Burton on a reverse. Rather than running the ball, Burton flipped a pass to an uncovered Foles, who had leaked out toward the end zone. Touchdown, Eagles. Foles became the first quarterback to throw and catch a touchdown in the Super Bowl, and Pederson’s reputation as an aggressive and successful play-caller became legendary.

Yet another fourth down conversion late in the fourth quarter kept a drive alive and allowed the Eagles to score what would become the game-winning touchdown.

Doug Pederson. Innovator. Super Bowl winner. Great coach.

Two years earlier, Doug Pederson was a punch line. Continue reading

Fear Not

When I was a ninth-grader, my high school showed Alfred Hitchcock’s classic horror film, Psycho, in the school auditorium on a snowy Friday night. I desperately wanted to be and look cool, but when Martin Balsam’s Detective Arbogast climbed the stairs in the old house behind Bates Motel to meet Mother, I dove under my seat in terror. Warning: The clip below is still scary.

We all face fear. We. All. Face. Fear. “Forty-five on the back of the jersey upon your soul.”

Investors have to face fear every day, although more so on some days than others (nobody complains about volatility to the upside), and don’t often face it very effectively. To quote Jason Zweig paraphrasing Mike Tyson, “investors always have a plan until the market punches them in the face.”

Real fear comes with names, faces, and a story. And oh how we want deliverance from our fears. Now that downside volatility is back with a vengeance, market commentaries are full of fear stories, since markets are driven by narratives much more than they are driven by data. As Morgan Housel has cautioned: “The business model of the majority of financial services companies relies on exploiting the fears, emotions, and lack of intelligence of customers. The worst part is that the majority of customers will never realize this.” Continue reading

Flirting with the Disinterested

Critics of the financial services industry frequently remind consumers that financial products are typically “sold” rather than “bought,” and implore them not to fall into that trap. The idea is that there is no enormous outcry on the part of consumers demanding to buy financial products. Instead, they are “sold,” pushed upon a consuming public that doesn’t understand them or – perhaps – even want or need them. Instead, the alleged basis for their continued vibrancy and ongoing usage is that financial advisors get paid big bucks to sell them.

Flirting with the Disinterested

It’s like flirting with the disinterested.

Sometimes those critics are right and consumers should remain disinterested. Indeed, it’s healthy for consumers to remember the interests of advisors they may be working with and – carefully! – to check their work and analysis. Far too many of them do not look out for their clients’ best interests.

However, the claim that because people don’t naturally flock to buy something on their own means that it’s dangerous and bad for you simply doesn’t hold up. People buy all kinds of terrible-for-you junk food in record amounts, while the fresh vegetable section of my supermarket is never crowded. Literary classics are a tough sell (Marilynne Robinson’s classic Pulitzer Prize-winning Gilead sold only 345,000 copies), while “popular” fiction sells exponentially more (The DaVinci Code sold 60 million copies), and porn is a multi-billion dollar business. Local symphonies are struggling to stay afloat while Justin Beiber could support several many times over.

What is good for you and things that have enduring or intrinsic value are sometimes a tough sell. But they are still good and good for you. Sometimes the stuff we want would be better avoided and the really good stuff needs to be sold. If you don’t believe me, maybe you will believe Steve Jobs.

“A lot of times, people don’t know what they want until you show it to them.”

Or how about the Nobel laureate, Daniel Kahneman? In one of the more influential papers of all-time, Kahneman and his colleague Amos Tversky developed “Prospect Theory” as a way to make sense of decision-making. The summary of the paper is, in short, that humans do not make optimal decisions, which normative (“should”) frameworks suggest.

All too often, we don’t do the things we should and do things we shouldn’t.

This doesn’t mean, of course, that businesses should not listen to their customers or that advisors should not listen to their clients. In the financial world, not listening to clients is a huge problem. Too much financial “advice” is about pitching what a salesman wants to sell rather than listening for and to a client’s dreams, aspirations, goals, circumstances and problems, and then going about creating a way to get where they want and/or need to go. Sometimes the best advice won’t be what the client wants to hear. Sometimes it will include an approach that the client had never considered. Sometimes it will need to be sold.

Ultimately, a financial advisor’s job is to provide clients what they need – not just what they want – even if they aren’t interested in it. There are plenty of supposed “advisors” who will erroneously sell their clients what they want and be richly compensated for it. Sometimes doing what’s best for clients – providing them with what they truly need – takes a great sales job (and that’s not a bad thing at all).

In a New York Minute

On Saturday I went to a terrific concert at Petco Park here in San Diego. It featured a 90 minute set from the latest iteration of the Doobie Brothers (who played their many hits), a 90 minute set from the Zan Brown Band (who, to my surprise, played a fair number of songs I recognized), and two and a half hours of the Eagles, invigorated by the inclusion of Deacon Frye and the amazing Vince Gill after the death of Deacon’s father, Glenn. From the Seven Bridges Road opening to the Desperado final encore, they were interested, the music was sharp and the harmonies were tight.

My only disappointment was that this time they didn’t play Don Henley’s wonderful New York Minute.

In a New York minute
Everything can change
In a New York minute
Things can get pretty strange
In a New York minute
Everything can change
In a New York minute

“Everything can change in a New York minute” no matter how good things are right now. And, today, the overall economic picture for the U.S. seems very bright indeed, at least generally (and despite our fractured politics).

Both stocks and underlying economic fundamentals are looking pretty good. Multiple stock indexes are at or near record highs. The total net worth of U.S. households have risen farther into record territory, propelled by climbing home values and stock prices. New claims for jobless benefits hit a fresh half-century low. Most see this week’s (expected) increase in interest rates from the Federal Reserve as a testament to the strength of the economy. Accelerating economic growth has been a key factor in helping investors look past the trade sparring between the U.S., China and others. Most expect the stock-market rally to keep going. Unemployment remains under four percent while minority employment is at all-time highs. Inflation is modest.

Things are doing pretty well in the financial world, at least in the aggregate. Continue reading

Dear Future Me

Bob Dylan hit on a universal truth when he sang about his son and the attraction of remaining young.

May your hands always be busy
May your feet always be swift
May you have a strong foundation
When the winds of changes shift
May your heart always be joyful
May your song always be sung
May you stay forever young

Dylan’s voice was best described, famously by Joyce Carol Oates, as if sandpaper could sing. But he was, according to Time magazine, “the guiding spirit of the counterculture” and the voice of a generation. Today, that generation — my generation, the Baby Boomers — is no longer young. None of us is going to defeat Father Time, either. As Dylan’s friend John Mellencamp sang in Longest Days, “one day you get sick and you don’t get better.”

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Horrid Facts, Stubborn Facts

Note: This post is a much re-worked and expanded version of prior posts; here, for example.

September 11.

Two words. Powerful emotions. Searing memories. Evocative stories.

Exactly seventeen years ago, on Tuesday, September 11, 2001 and a little before 6:00 a.m., I was sitting in front of a 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). I had been scheduled to fly to New York on business the day before and had reservations for the week at the Marriott World Trade Center (3 WTC), which would be destroyed when the Twin Towers collapsed. Instead, I decided to stay home and go to “Back to School Night” at my kids’ school. 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, when I heard and felt the February 26, 1993 World Trade Center bombing.

I was really glad I didn’t get on that plane to New York.

My little, not so evocative story is insignificant within the context of the tragic losses, horrible evil and incredible 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 and 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 below is central to several other converging stories from that horrific day.


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Proof Negative

Everybody who gets married expects the marriage to work out. “You don’t ever think you’ll be apart,” Clueless actress Alicia Silverstone explained, after filing for divorce. Otherwise, why get married? As Robert De Niro proclaims in the opening voice-over to Martin Scorsese’s Casino: “When you love someone, you’ve gotta trust them. There’s no other way. You’ve got to give them the key to everything that’s yours. Otherwise, what’s the point?”

We stand in front of family and friends and willingly – eagerly – vow “forever” and mean it. In Casino, De Niro says his piece as he is seen climbing into his 1981 Cadillac Eldorado Biarritz, and a car-bomb explodes. But we Americans, who overwhelming marry for love, don’t think our cars will blow up. We are utterly convinced that when problems crop up in our lives and relationships, as they inevitably do, we will be able to work things out.

Meanwhile, those of us who have managed to marry happily and well and to stay married for a long time [raises hand] are far too willing to pat ourselves on the back for it. Luck (or grace, depending upon your disposition) is much more a part of the success equation than any of us would care to admit. With the benefit of 20:20 hindsight, Alain de Botton suggests that a good question to ask one’s intended would be, “And how are you crazy?” However, like contestants on The Bachelor, which pitches a quest for true love amidst a harem of attractive women but has produced only one lasting relationship over 22 seasons, we might be willing to acknowledge that things often don’t work out, but we remain convinced of “forever love” for ourselves. To be fair, the Greshwin brothers are pretty convincing.

We may recognize that divorce is commonplace. But whatever version of the statistical landscape brides and grooms might dutifully be able to recite, we simply don’t think those probabilities are personally applicable. For example, recent research found that study participants thought the average member of the opposite sex has about a 40 percent chance of cheating on his or her partner. But those same participants said their own partner had only a de minimus chance of cheating. When you fall in love, all bets are off. When I fall in love, it will be forever.

Of that we’re sure.

In his fascinating book, On Being Certain, neurologist Robert Burton systematically and convincingly shows that certainty is a mental state, a feeling like anger or pride that can prove useful, but that doesn’t dependably reflect anything like objective truth. One disconcerting finding he describes is that, from a neurocognitive point of view, our feelings of certainty about things we’re right about is largely indistinguishable from our feelings of certainty about things we’re wrong about.

All of which confirms the (usually unspoken) truism about humans – we’re often wrong but never in doubt. We’re as sure of the future of our relationships as we are that 2+2=4. However, mathematics is a closed system. As such, it is subject to deduction (demonstration), which means that we can ascertain the outcome – even when we do very difficult math – correctly and certainly. Deductive reasoning, which happens when one begins with an accepted premise and then moves toward establishing a conclusion based upon the previously “known” information, can offer a definitive conclusion. Continue reading

Pay the Price

My latest column for Investment Advisor magazine is now available digitally. Since the accompanying charts could not be reproduced, I am posting the entire piece, with charts, here.


Since the Great Financial Crisis, investors have been spoiled. From March 2009 through January 2018, the S&P 500 has returned 18.3 percent annualized. Moreover, despite high levels during the GFC and spikes in 2011 and 2015, volatility has been surprisingly low for much of the past 15 years. At the end of 2017, the S&P 500 One-Month Realized Volatility Index dipped under 6 percent. For investors, high returns and low volatility are a fantastic combination.

Such good times couldn’t roll forever. Volatility is back.

The S&P 500 One-Month Realized Volatility Index is above 20 percent as I write this column. That level isn’t remotely unusual or even all that high, but investors who had gotten spoiled by one-way traffic to higher prices are being spooked nonetheless. Anytime is a good time for a reminder of the fundamentals of market movements and the advent of volatility after a long absence is a particularly good time.

So repeat after me: Volatility is normal and necessary.

Especially during these sorts of transitional periods in the markets, I am regularly and invariably asked – longingly – for “the next Amazon.” The thinking is that if these investors could just smoke out the next great whatever company, all would be well and investing would be easy.

However, good investing is never easy. It is always hard.

Finding “the next Amazon” is really, really hard. As I have noted before, over 90 years (through 2015), 58 percent of all stocks underperformed one-month U.S. Treasury bills and most lost money over their lifetimes. The best performing 86 stocks accounted for over half the $32 trillion (with a “t”) in value generated by stocks over bills during that time while a mere four percent of stocks accounted for all the outperformance of stocks over bills. Finding any outperforming stock is a daunting challenge. Finding “the next Amazon” in advance is almost insanely difficult – perhaps impossible without some serious luck.

But let’s suppose for a moment that you could.

If you had invested just $10,000 in the Amazon IPO back in 1997, as of March 2018 – barely 20 years later – you would have nearly $8 million.


Source: Morningstar

Who wouldn’t love that! However, look at the drawdowns you would have had to endure to get those returns.


Source: Morningstar

How many of us could truly stomach a 90 percent drawdown and multiple 50 percenters? I’ll take the under. Even the best possible investments suffer huge (and thus terrifying) drawdowns. With (always 20:20) hindsight, it may not seem like too big a deal. We’re focusing on the current value today. However, in the moment, our loss aversion and our impulsive performance-chasing militate strongly against our being able to hold on when investments inevitably suffer losses.

The sad reality is that when market volatility seems oppressive, many investors bail. They say they simply cannot stomach the losses. That’s why the “behavior gap” between investment returns and investor returns is so huge and so potentially damaging. Many – probably most – investors who cash out when negative volatility rears its ugly head will see their chances of retirement success decrease significantly.


Annualized Returns as of 12/31/17: Stocks (S&P 500); Bonds (10-year U.S. Treasury Note); Cash (3-month U.S. Treasury Bill). Source: New York University

Stocks generally do not offer Amazon-level returns, of course. But the returns they do provide are very, very good indeed. Over the 30 years ending December 31, 2017, stocks (the S&P 500) returned 10.6 percent versus 6.4 percent for bonds (10-year U.S. Treasury notes) and 3.1 percent for cash (3-month U.S. Treasury bills). Everyone can see that the differences are significant, but it’s easy to miss just how significant they are. Over those 30 years, $10,000 in cash netted $24,728, bonds provided $65,123, while stocks earned $205,557. Avoiding stocks to avoid volatility1 has an enormous cost.

Negative volatility hurts. Sometimes it hurts a lot. However, volatility is the necessary price paid for the much higher returns provided by stocks as compared with other investment choices. Investors would be wise willingly to pay-up.



1 Don’t forget both that (a) bonds had a fantastic run over this 30-year period, so the return gap will often be much wider; and (b) bond returns can have substantial volatility too.