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 his generation. Today that generation — my generation, the Baby Boomers, including Dylan — 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.

2018 Investment Outlook

2018 Outlook 01In a nutshell…

The world is a big and complicated place.

If you want to find reasons why it might collapse, and soon, they are easy to find. We are terribly loss averse, after all, and there is always bad news to report. The stock market goes down on roughly 47 percent of all days. Valuations are high. Bonds are rich too. The rally has been a long one and, in historical terms, we are overdue for a correction.

Worse than that, and more importantly, we could go to war with North Korea (or some other country). The Middle East could explode. We could face a monumental environmental crisis. We could suffer a major terrorist attack. The economy could dramatically underperform or simply run out of steam. We could experience some hitherto unknown problem.

The world is a big and complicated place.

However, the markets and the economy are in pretty good shape. In fact, pretty much the world over, markets and economies are in pretty good shape. There is no obvious impediment to that trend continuing (not that there needs to be for markets to get crushed) and things still seem to be improving.

Moreover, betting against the markets is dangerous business indeed. Over the past 90 years, as Ben Carlson has shown, the S&P 500 has seen 66 calendar-year gains to just 24 losses, making money nearly three out of every four years, with an average annualized return of 9.6 percent and topping 20 percent one-third of the time. In the 66 fat years, the average return was over 20 percent; 51 of those 66 years saw double-digit returns. In the good years, the gain was in the 8-12 percent range only four times.

Although longer-term expected returns are well below trend, largely due to high valuations, I remain constructive on stocks and very constructive on foreign stocks. I am neutral to slightly negative on bonds. Since getting there is at least half the fun, since the details and the rationales are crucial, and since understanding the limitations of this sort of Outlook are imperative, I trust you will stick with me for this, my annual Investment Outlook for 2018. Continue reading

Prone to Wander

My latest column in Research magazine is now available. I called it “Prone to Wander.” Here’s a taste.

Human nature and human behavior are not likely to change anytime soon.

Most fundamentally, our brains, our networks and even our social media accounts all conspire to put us and leave us in echo chambers rather than in places where we might find helpful correction.

We find what we’re looking for most of the time, but we’re not looking for the right things.

This general problem manifests itself most often in three ways, victimizing advisors and their clients alike. Oh, and it applies to life in general, too.

  1. We do what is easy instead of what is right.
  2. We feed our short-term impulses rather than our long-term interests.
  3. We do what we want to the detriment of what we need.

There are no easy remedies for our shortsightedness.

However, as Nobel laureate Daniel Kahneman said, “You are going to be more accurate and produce more accuracy by leaning against the biases.”

I hope you will read it all as well as the entire issue. Happy New Year!

How to Lean Against the Biases in 2018

Meaning is Expensive


Source: xkcd

On the morning of January 20, 2015, Stephen Pasceri, a 55-year old accountant, called in sick to work and left his suburban home without saying goodbye to his wife. He left behind a thumb-drive filled with medical “research” and drove to Brigham and Women’s Hospital in Boston.

The previous fall, Pasceri’s mother had undergone surgery there, performed by Dr. Michael Davidson, the hospital’s director of endovascular cardiac surgery, a professor at Harvard Medical School, a specialist in high-risk patients, and the father of three children (with a fourth on the way). However, Marguerite Pasceri died some weeks later at another hospital. Her death certificate listed her cause of death as “cardiovascular collapse” caused by her preexisting illnesses, including multiple heart surgeries, and exacerbated by a lifetime of Newports.

Stephen Pasceri knew better.

After much internet surfing, Pasceri decided that amiodarone, a commonly prescribed post-operative medication for patients suffering from an irregular heartbeat, had killed his mother. Dr. Davidson had prescribed that medication. “It’s very unlikely that she died of amiodarone,” said Dr. Philip Newman, a board-certified cardiologist and long-time practitioner who is an associate professor of medicine at the University of California–Irvine. “[Dr. Davidson] did everything right.” Notwithstanding expert opinion, Pasceri was “certain” that Dr. Davidson was responsible for his mother’s death.

On that brisk winter morning, Pasceri arrived at the hospital unannounced, wandered aimlessly for about an hour, and then demanded to see Dr. Davidson. “I’m not leaving without seeing him,” he said, over and over. Despite a busy schedule that had to be rearranged, the doctor – well known for his patience and good bedside manner – sat with Pasceri to listen to a grieving son and to explain what he had done and why.

Almost immediately, Pasceri referenced his internet study and accusingly asked, “Are you aware that this drug is extremely toxic?” When Dr. Davidson explained that he was well aware of the side effects and that his mother had been monitored carefully, Pasceri did not seem to hear and repeated his accusations, again and again. “Well, my mother died because of this,” he said.

The last half of the conversation was unwitnessed, but after meeting for nearly 40 minutes in total, two blasts from a .40-caliber pistol rang out. Dr. Davidson burst from the room, clutching his wounds and yelling, “Run. Run. He’s shooting, he’s shooting!” Meanwhile, Pasceri shoved the gun into his mouth and pulled the trigger. Pasceri died at the scene. After more than eight hours of emergency surgery, Dr. Davidson was pronounced dead.

Pasceri’s thumb-drive, full of internet “research,” had starkly announced his intentions: “The doctor is dead. I am dead. There is nothing more anyone can do.” Continue reading

“I’m Joining a Cult!” (said nobody, ever)

Tribalism 01

George Orwell famously defined the tribal mindset as extreme identification with one’s tribe, “placing it beyond good and evil and recognising no other duty than that of advancing its interests.” In today’s world, that sounds like what passes for normal. As George Johnson wrote in The New York Times: “Viewed from afar, the world seems almost on the brink of conceding that there are no truths, only competing ideologies — narratives fighting narratives. In this epistemological warfare, those with the most power are accused of imposing their version of reality — the ‘dominant paradigm’ — on the rest, leaving the weaker to fight back with formulations of their own. Everything becomes a version” – what Robin Ince calls a “reality tunnel.”1 As Andrew Sullivan has reminded us, tribalism is not just “one aspect of human experience. It’s the default human experience.”

The Berlin stationmaster and spy, Alec Leamas (played by the great Richard Burton in the movie, excerpted below), is asked about his beliefs within the context of the Cold War – that great tribal conflict – in John le Carré’s classic novel, The Spy Who Came in from the Cold. His reply is both sarcastic and poignant: “I reserve the right to be ignorant. That’s the Western way of life.”

Examples of tribalism run amok are ubiquitous throughout history and especially so today. War. The president versus the press. The Two Cultures. ISIS. Active versus passive investing. Tastes great/less filling. Syria. Republicans and Democrats. The Buddhas of Bamiyan. The American Civil War. Catholics and Protestants. Facebook groups. Nazism. Bridgewater Associates. Twitter wars. Communism versus capitalism. PC versus Mac. Racism. Factor investing. Yankees and Red Sox. “Alternative facts.”  Abortion. Duke-Carolina. Red state/blue state. Urban versus rural. Segregation. Fox News versus MSNBC.2 Sharks and Jets. Fake news. Believers and atheists. Nationalism. The Montagues and the Capulets.

Tribalism is everywhere and permeates everything. “Journalistic integrity is dead,” declares Breitbart News Washington editor Matt Boyle. “There is no such thing anymore. So everything is about weaponization of information.” In a recent column, former Wisconsin Democratic Senator Russ Feingold made clear what is usually only implied; he thinks Republicans are Nazis. To oppose his political agenda is an act of bigotry and hate. Eric Trump says his father’s critics are “not even people.” Hollywood heavily criticized Donald Trump over the Access Hollywood scandal but was largely silent about decades of sexual abuse by Harvey Weinstein, one of its own, while those who defended (or failed to criticize) the now-President over his own abuses couldn’t wait to attack Weinstein.

Brendan Eich was hounded out of Mozilla, a major company he founded, simply because he once opposed marriage equality. A CBS executive in the wake of the recent Las Vegas massacre that killed nearly 60 and wounded 500 said that she had no sympathy for the victims, since the shooting took place at a country music concert and the dead and wounded were most likely Republican Trump voters. Tribalism is turning Aung San Suu Kyi, winner of the Nobel Peace Prize, into an enabler of ethnic cleansing in Myanmar. These tribal identities, terrifying though their outputs may be, offer us a powerful sense of belonging.3

“There’s a southern accent where I come from,” sang the newly and dearly departed Tom Petty, perhaps the best writer of opening lines in rock ‘n roll history. “The young ‘uns call it country; the Yankees call it dumb.”

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Navigating Uncertain Rewards and Certain Risks

Great White Swami'sPhoto source: Gary Elliot, San Diego Union Tribune

My latest Research magazine column is now available online. Here’s a taste.

September 1, 2011, was a beautiful day. Photographer Gary Elliot was taking pictures at Swami’s, a popular surfing beach in Encinitas, California. The surf was high that day, but nothing else seemed out of the ordinary.

When reviewing his photographs later, Elliot noticed a large shark fin in a cresting wave near several surfers. There had been no reports of sharks. As confirmed later by experts, the size and shape of the fin indicated a great white shark, about 12 feet long and weighing roughly 1,000 pounds.

This remarkable happenstance is a powerful metaphor for investing in stocks. Equity investing offers uncertain rewards but certain risks, no matter how beautiful the weather or how calm the seas. These risks are often opaque to us. There is no way to know if and when those risks will bite and what the extent of the damage will be.

I hope you will read the column (and the issue) in full.

Navigating Uncertain Rewards and Certain Risks