Smart Investing is Reality-Based

YAZ backBarry Ritholz has published one of my pieces at his terrific blog, The Big Picture, today. Here’s a taste.

When I was a kid in the 1960s, obsessing over baseball players and stats, plenty of people were telling me to question everything, but the implicit (and erroneous) suggestion was that I reject everything. Instead, I suggest honoring the past without being bound by it. Sabermetrics doesn’t eliminate the need for old-fashioned scouting. Consistent with Robert Hagstrom’s idea that investing is the last liberal art, we should always explore and learn, combine thoughts from multiple sources and disciplines, try to think nimbly because the need for new approaches is ongoing, and we should test and re-test our ideas. I think that idea applies to baseball too.

If we are going to succeed, we’re going to have to ask questions and keep asking questions. Data won’t give us all the answers, but all of our good, objective answers — upon which we should build our investment (and baseball) beliefs — will be consistent with the data. Thus our processes should be data-driven at every point. Smart investing is reality-based. As James Thurber (and later Casey Stengel) would have it, “You could look it up.”

I hope you’ll read it all (and it’s a lot).

Smart Investing is Reality-Based


Worth Reading

Worth ReadingI have two pieces to highlight today. The first is ‘s wonderful synopsis of Sir John Templeton’s life and work. It’s sad that so few today aspire to be like Sir John’s. As Eddy puts it, the trend today is toward “crassness and institutionalized grift” rather than industry, charity and thrift. The other is Barry Riholtz’s annual mea culpa: My motto: ‘Fresh mistakes, every year,’ by which he intends to learn from his mistakes and to remind himself that we know a lot less than we think we do. Both are great. I recommend them heartily.


A Climate Change Twofer

CC1Barry Ritholtz has a terrific piece up today on dealing with climate change.

This debate is no longer about whether global warming is real (it is) or whether humans are the most likely cause (you are), but rather, some very interesting and different questions that might be more professionally relevant to finance: How is this going to affect business? What are the investing consequences? Who will be the financial winners and losers of climate change?

You should read it and read it in conjunction with my post from just over a year ago — Hot Action Item. Make it a climate change twofer.

Global Warming Battle Is Now About Market Share — Not Science
Hot Action Item

Worth Reading

Worth ReadingToday I offer four fantastic articles for your careful examination, perhaps over the week-end. All are worth your time and attention. 

I’ve seen complexity fail over multiple investment cycles in these types of portfolios, but as Keynes told us, “Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.” Somehow simplicity has become the exception while complexity is now the rule.

I believe that meeting long-term spending needs for institutional portfolios and controlling risk can be accomplished through simplicity.  That’s not to say that it’s easy, just less complex.  A complicated portfolio relies on the hope of being smarter than your investing peers and the markets while taking on added risks.  We all know hope is not an investment strategy.

Confessions of an Institutional Investor (via Josh Brown)

The world of investing is infinitely complex. It feels like we need complex strategies to generate returns. The problem is that as Adams says complicated systems are more likely to lead to “opportunities for failure.” We cannot control what the markets do. We can however control our own actions. For the vast majority of investors a simple system that we can follow over time will in all likelihood lead to better outcomes.

Simplify your investing to avoid ‘opportunities for failure’ (from Tadas Viskanta)

How many people here think that this bull market, wonderful as it is, is built on a foundation of robust and impressive macroeconomic growth and policy choices that are laying a foundation for impressive growth in the years that lie ahead? And how many think that it’s [built on the Federal Reserve’s] printing press? I prefer to play in markets that are priced attractively, priced to offer strong, long-term returns, not ones that are expensive.

Where should you put your money now? From Rob Arnott and others (via Fortune)

Modern day investment management resembles, sadly, another old profession – and I’m not thinking of the oldest one, although there may be parallels there as well. Rather, I’m thinking of ancient alchemy with its near constant promises to turn lead into gold, just as investment managers repeatedly offer to transform low returns into high returns. This raises the question as to why investors/people keep falling for the stories offered up by investment managers/alchemists.

No Silver Bullets in Investing (just old snake oil in new bottles) (from the wonderful James Montier)

The Wyatt Earp Effect

The Big PictureMy first post for The Big Picture, the wonderful blog from Barry Ritholtz, also of The Washington Post and Bloomberg View, is now up. You may read it here. I hope you will.

The Wyatt Earp Effect

A Critical Omission

Barry Ritholtz linked a fine video today on critical thinking.

Of course, precious few of us exercise truly independent thought very often and none of us does so nearly often enough. As no less an expert than Daniel Kahneman acknowledges, making consistently good choices based upon good reasoning is really hard. Training ourselves to do so more intuitively is even harder. The academic research is crystal clear on that point.  That’s partly because it takes lots of practice and we’re lazy and partly because it isn’t just a skill to be learned. And that’s the critical point that the video leaves out.

Productive critical thinking requires adequate domain knowledge to go along with lots of practice.  Most personal and far too many professional investors have neither. Critical thinking can’t be effectively undertaken in investing or anywhere else unless and until there is sufficient knowledge of the subject matter.  One’s knowledge base provides the foundation of and context for engaging in critical thinking. Critical thinking alone is never enough.

Something Wicked This Way Comes

witchesAs my firm’s Chief Investment Officer, it’s my role (among other things) to provide thought leadership for the organization and its representatives – to outline and explain best practices and approaches with respect to the markets and investing.  Most fundamentally, if metaphorically, my job means standing up and pointing in the right direction.

I have been thinking a lot lately about how to do that more effectively, and the issue was highlighted for me anew yesterday during the outstanding Big Picture Conference here in New York City, hosted by Barry Ritholtz and Josh Brown. As part of the conference, Josh hosted a panel of Chief Investment Strategists: Dan Greenhaus of BTIG, Art Hogan of Lazard and Jeff Kleintop of LPL. All three were intelligent, engaging and very well-informed. Dan’s bio says he “is charged with evaluating both domestic and global macro trends as well as formulating top down investment strategies for clients.” That’s consistent with the way the role is typically conceived. As he put it on the panel, his job is to tell his clients what’s going to happen next. Of course, strategists do what they do for a much wider audience than that, as all are providing opinions regularly across media platforms, including television and radio financial news. They’re out to build their firm’s brand, and their own brand too.

Josh led the three of them on a brisk tour of the world markets.  They talked about macro risks and opportunities – what they think the immediate future has in store. And they were very good at it, impressively weaving together stories, themes and data into a powerful package of possibilities. It was wonderfully entertaining and even plausible. Some bits of it may even turn out to be accurate.

But my thumbs kept twitching (“pricking” in the Bard’s turn of phrase) throughout. Josh hinted at the inherent problem with the approach each took, suggesting that such moment-by-moment commentary and reaction is effectively meaningless.  I’d take Josh’s point one step further and call it wicked. Continue reading

We Always Know Less Than We Think

Barry Ritholtz has another fine “Philosophy Phriday” piece up today on the value of not knowing. His emphasis is on recognizing what you don’t (and perhaps can’t) know so as to minimize error.  He’s right of course.  This idea reminds me of the following classic commercial.

Continue reading

On Free Will

In his Friday philosophizing today, my friend Barry Ritholtz offers the famous B.F. Skinner claim that free will is an illusion and suggests that Skinner is mostly right.  Indeed, much of the academic world asserts that Skinner is entirely right either by granting his determinism whole hog (because cause and effect are relentless via biological or genetic determinism) or by calling determinism “freedom” — so-called compatibilism. To the compatibilist, “freedom” doesn’t mean we could do otherwise, it merely means we weren’t coerced.  It’s odd to consider, but this view is pretty much just like Calvin’s view of election and predestination: we’re free to choose God but will never do so if left to our own devices.


If determinism is true, of course, most of our societal structures are incoherent.  Our theories of justice are predicated upon personal responsibility yet someone doing what s/he is hard-wired to do can hardly be deemed responsible in any meaningful way.  Similarly, the idea that we can earn anything or that we should be rewarded for special skills and accomplishments doesn’t make any sense. Moreover, the whole concept of creativity is meaningless if determinism is true.

Determinism is supported by the pioneering research of the late Benjamin Libet and those following him who showed that “our” brains make decisions for “us” before “we” are aware of them (the quotes reflect the perception we all share of our minds being separate from our brains, a perception that most scientists reject). Libet’s research showed that the brain region involved in coordinating motor activity fired a fraction of a second before test subjects “chose” to push a button. Later studies supported Libet’s theory that subconscious activity precedes and seems to determine conscious choice.  In other words, the idea suggests, we’re merely meat machines — albeit highly sophisticated meat machines — simply doing what we’re programmed to do.  Nothing more. Nothing less. Whatever we do, we could not have done otherwise.  We aren’t free.

I disagree and have an alternate interpretation of the facts. Continue reading

Barry’s Point Illustrated

Barry Ritholtz has an excellent post up this morning (as usual).  In it, he outlines his simple, 3-step process to avoid big mistakes and to keep errors manageable.

    • Rule #1: Expect to be wrong
    • Rule #2: Admit Error
    • Rule #3: Repair

Weather forecaster Lisa Hidalgo wonderfully illustrates our need to recognize when things go wrong and adjust accordingly in the video below (even though the original error doesn’t appear to have been her doing).  You might also want to read Joe Posnanski’s fine article on Rick Ankiel swinging for the fences, a rare example of an athlete adjusting when things go wrong and re-inventing himself to save his career.