The Jewelry Effect

Bass LureI’m not a fisherman, but I was fascinated recently to come across an article about the science behind the creation and use of fishing lures. Size, shape, color and even taste all matter. Interestingly, however, there is a surprising degree to which the effectiveness of the lure doesn’t matter commercially. For example, there is a dizzying array of bass lures in variations of blues and purples (see at left, for example) even though bass cannot see those colors as anything other than gray. But people buying lures seem to like those colors. Those involved in the research and sale of fishing lures refer to this phenomenon as the “jewelry effect.”

“We design lures for the fish, but fish don’t buy lures,” says Keith A. Jones, a director of research for an Iowa lure-maker. “It’s hard to convince anglers that a lure’s color doesn’t make much difference.” Scientific reality doesn’t even get much respect in the fishing world.

Jones recognizes that, to be commercially successful, lures need to be aesthetically pleasing to the people who buy them. Accordingly, some lures that work well need a design change to sell. Ted Dzialo, executive director of the National Fresh Water Fishing Hall of Fame and Museum in Hayward, Wisconsin, simply captures the essence of the issue. “I think most lures are designed to catch more fishermen than fish.”

If this sounds remarkably similar to the money management business to you, you’re not alone. So-called “smart beta” is really good marketing because it takes advantage of demand for beta-driven solutions but it is no panacea. Moreover, “factor investing” can trace its origins back to at least Benjamin Graham and is hardly new to smart investors. After the financial crisis, consumers rushed to money managers offering tactical management in order to try to avoid the next big downturn even though there is precious little evidence that it works. And hedge funds continue to lure major assets and major investors – perhaps because those investors want to prove to themselves and others that they’re rich – even though hedge fund performance has been, in two words, truly dreadful.

There are plenty of other examples, of course, but you get the idea. Good investing is necessarily a long-term enterprise and we humans struggle badly with the long-term. The short-term is too alluring. Our efforts at hyperbolic discounting generally suck. Thus we are always prone to eat the cake and skip our work-outs.

Those who market money management are well aware of these tendencies. And, to be fair, there isn’t much that’s sexy about good money management. We want the next Apple rather than diversification. We want to avoid the next big crash but every last drop of upside. We want to get rich quick and think we’re smart enough to find that next big thing. But we are routinely disappointed and, when we think we’ve (finally!) found the Holy Grail, it turns out that Holy Grail Investment Management is run by Bernie Madoff.

Most money management firms set out first and foremost to lure and catch investment dollars and only secondarily to manage the assets won effectively. The jewelry effect is at least as prevalent in money management as in fishing. But pretty it’s not.

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

Paradigm Shifting

I grew up in the investment business in the early 1990s on the ginormous fixed income trading floor at the then Merrill Lynch in the World Financial Center in New York City.  It was a culture of trading and instant gratification. “What have you done for me lately?” covered no more than that day, often less. I frequently argued that we should consider the interests of our customers – among of the biggest investment managers, pension funds and insurance companies in the world – in our dealings so as to build long-term relationships and enhance longer-term profitability even if it meant making a little less in the near-term.

I got nowhere.

Liar's PokerWe called our accounts “clients” to their faces, and I thought of them that way, but they were customers at best and marks at worst to virtually everyone on the floor, and especially to our managers.  We didn’t call them “muppets” like the guys (and it was almost all guys then) came to at Goldman Sachs, but we may as well have. Our mission was clear.  We were to make as much money for the firm as we could as quickly as we could. Lunch was a long-range plan.  In his first and funniest book, Liar’s Poker, about our counterparts at Salomon Brothers, Michael Lewis got the tone, the approach and the atmosphere precisely right. Continue reading

Top Ten Benefits Of Financial Advisors, Besides Investment Returns

Thank YouAs I have noted here many times, I am a big fan of Michael Kitces and his blog, Nerd’s Eye View.  If you aren’t a regular reader of it, you should be.  Michael is my “go to” guy for financial planning issues and concerns.  He is as talented and knowledgeable as they come.  That’s why I was so pleased that he asked me (unlike yesterday) to allow him to use my Financial Advice: A Top Ten List as a guest blog post.  I was honored and (of course) agreed.  The link is below.  Thank you Michael.

Top Ten Benefits Of Financial Advisors, Besides Investment Returns

Why Do We Hate Our Kids?

D-DayIn honor of the 69th anniversary of D-Day, I am repeating this post from a year ago.


We just celebrated the 68th anniversary of D-Day, and well we should.  That day in western France was the pivotal day and the pivotal event of the 20th Century.  As Omar Bradley pointed out, every man who set foot on the beaches of Normandy on June 6, 1944 was a hero – the men who took the cliffs to fight tyranny and took back a continent for freedom. I dare you to try to watch footage of and about that horrible, dreadful, wonderful day with dry eyes or a cold heart.

Here’s to the boys of Pointe du Hoc.  In the words of Stephen Spender, these are men who in their “lives fought for life and left the vivid air signed with [their] honor.” Continue reading

‘Burying the lead’ on investor mistakes

MarketWatchMy latest “RetireMentor” column at MarketWatch is available here.  A taste follows.

“[T]he discussion of investment performance (such as it was) in no way dealt with the most important issues of all—why we make such lousy investment decisions and how those lousy decisions impede and damage our financial health.”

‘Burying the lead’ on investor mistakes

The Missing Lead

big_butt_chairI’m a big fan of Jake Tapper.  I thought he was terrific at ABC News as the senior White House correspondent and I was disappointed when he wasn’t picked to host This Week both when George Stephanopoulos left in 2010 and when he came back in 2012.  As of 2013, Jake returned to CNN to become Chief Washington Correspondent and anchor of a new weekday television news show, The Lead with Jake TapperThe Lead, which debuted this week to generally good reviews, is the first CNN show to launch since Jeff Zucker took over as president of CNN Worldwide to revitalize the franchise.

I agree with the good reviews, but there’s a “big but” coming. Continue reading

Getting almost right, right

horseshoes and handgrenadesAs they say, close only counts in horseshoes and hand grenades.

As reported in The Los Angeles Times this week, Alex Permann, a 24-year-old optometry student at the University of Missouri-St. Louis, was selected for one of those popular shooting contests at this past Sunday’s Missouri Valley Conference tournament title game between Creighton and Wichita State. “All” he had to do was make a lay-up, a free throw, a three-pointer and a half-court shot in 24 seconds and he would win $50,000.  Permann made the lay-up and, on his second attempt, he hit the free throw. He then ran out to half-court and nailed a shot from there. $50,000! Permann went wild, jumping around the court, arms raised in triumph.  The crowd went wild too. 

“When I hit that shot,” Permann said later, “I was thinking about 50 grand.”  Watch it below. Continue reading

The Price of Safety

The Price of SafetyThe Fed has been using all the tools at its disposal to try to encourage (some would say “force”) equity investment and, by all appearances, has succeeded rather spectacularly.  As Josh Brown pointed out Saturday, the current cyclical rally has now exceeded four years.  Indeed, according to Bespoke Investment Group, the rally has reached 1,460 days, making it the eighth longest of all time and causing to some to question whether we may have entered into a new secular bull market.  Stocks have more than doubled over that period.  Those who have avoided stocks — likely seeking “safety” — have been crushed no less than whose who held on through the March 2009 lows. Continue reading

Invest Like Buffett

Worth ReadingLarry Swedroe thought he was done writing books.  After having written a bunch of them, he was comfortable that he had said what he wanted to say.  Moreover, he still had his blog at CBS News MarketWatch as an outlet.  However, as he explained to me yesterday, he came to see that while he had pretty much said what he wanted to say, he hadn’t always been heard and hadn’t always said what he wanted to get across in such a way as to ensure a maximum hearing.  That realization led to the writing of his newest book, Think, Act, and Invest Like Warren Buffett: The Winning Strategy to Help You Achieve Your Financial and Life Goals. Continue reading