Letters to a Young Analyst

letters%20cover%20(snipped)Tom Brakke has an excellent new ebook out entitled Letters to a Young Analyst based upon his series of that name at his terrific blog. You can buy it here. There are also contributions from Barry Ritholtz, Aswath Damodran, David Merkel, Jason Voss and others, including me. I heartily recommend it.


Thanks, Josh

Josh Brown has a fine post up today focusing on the great need for investing advice and how most of what purports to be financial media is quickly stale and not all that helpful to the great bulk of people.  I commend it.  I also appreciate the kind words Josh offers about me.  Thanks, Josh.

I have been away on a speaking trip (Tom Brakke — who also got kind words from Josh — and I both spoke today in Arizona at the same event), but will have some new material up shortly.

Financial Media Wake-Up Call: The Big Disconnect

CFA Conference: When Bloggers Meet

I had dinner with three bloggers you almost surely know and read already. If you don’t, you should. They are Tom Brakke (The Research Puzzle), Tadas Viskanta (Abnormal Returns) and Rick Ferri. They are all really smart, good guys and, best of all, have tremendous insights into the markets and our business.  It was an honor to be included with them.  We are pictured below (from left to right, Ferri, Brakke, Seawright and Viskanta).  Notice that Tadas’s new book, also titled Abnormal Returns (and you should read that too), is sitting on the table.

Analogies and Anomalies

Tom Brakke is a terrific analyst.  His new piece (“analogies and anomalies“) is excellent as usual and provides a helpful complement to my similarly focused piece from yesterday (featured here too). As Tom points out, “Differential information is critical and early warnings are highly prized, yet as an industry we waste a lot of time borrowing and reinforcing conceptual structures that are already formed rather than trying to shoot holes in them.  And most strive too hard to find analogies when anomalies are staring them in the face and going unrecognized or unexamined.” I also encourage you to read Stories vs. anomalies by Tadas Viskanta of Abnormal Returns, which compares and contrasts Tom’s piece and mine.

It is one thing to recognize our inherent biases and cognitive difficulties, of  course (why we too readily buy analogies and too routinely dismiss anomalies), and quite another actually to do something about them. I suggest that you start by using what Harvard Medical School’s Atul Gawande calls “the power of negative thinking.” That means (consistent with Tom’s advice) actively looking for failures and how to overcome them. Consider everything that can go wrong and plan as if each is a very real possibility. We need to have good contingency plans because we are going to miss important things far too often.

Write things down. By writing things down we can help to minimize hindsight bias. Practically speaking, having written plans with our clients and well-documented reasons for our clients’ decisions will limit the threat to our client relationships because of clients’ hindsight bias (and our own).

Check your work. One of the best cures for overconfidence is feedback. If you think you’re a marksman, go the range and test your hypothesis. In your business, have an accountability partner you respect to make sure you’re doing as well as you think you are (because of confirmation bias, we tend to reject feedback that we don’t like) and carefully examine if your clients’ portfolios are doing what they were intended to do (which of course correlates to the need for written goals and objectives). As Nobel laureate Dan Kahneman emphasizes in his brilliant Thinking Fast and Slow, outsiders can always see such things more readily and more clearly than insiders (we) can.  It always pays to check your work and to have it checked by someone you trust.

A good dose of humility, along with an acknowledgement of the old axiom that the markets can stay irrational longer than investors remain solvent is always sound advice. Astute asset allocation, portfolio rebalancing and careful attention to investors’ risk tolerances and their ability to withstand losses and other difficulties always makes sense. And we all need contingency plans.

We’re going to make mistakes. Our clients are too. That’s a given. How we handle those mistakes is vital. But how we prepare for these inevitable mistakes is perhaps more important still.