Investing Myths and Disjunction Fallacy

Here are the results from a twitter poll I ran yesterday.

gain loss quiz

It was a small sample size. Only 30 people. I assume most were financially literate.

I wonder what people thought when they saw the results, after answering the poll. Did they feel more or less sure of their answer? Did they feel validated or perhaps confident in their contrary position?

It seems most people believe that a 50 percent loss takes a 100 percent to make it whole again. That a 90 percent loss takes a massive 900 percent to offset it.

That my friends is bullshit. It is one of the most widely perpetuated myths in investing.

Investing is a parallel pursuit. A 50 percent loss in one investment is offset by a 50 percent gain in another investment of the same size. A 90% loss is made whole by a 90% gain.

the real gain loss picture

Yes if you loose 80% of your total portfolio you’ll need to make 400% to get back to scratch. While that concept is important, I consider focusing on outcomes for individual investments more crucial. I’ve always liked the saying, look after your pennies and the pounds will look after themselves.

There is no need to be terrified of losses. The upside is infinite the maximum downside is only 100 percent (ignoring leverage). I don’t wish to encourage you to be a bag holder and take big losses. My aim is simply to make you wonder why almost everyone is hell bent on convincing you that deepening losses require exponentially higher returns to offset.

Now for anyone thinking, but you didn’t say an investment I thought you were talking about a portfolio, let’s talk about disjunction fallacy.

In short disjunction fallacy is thinking that a member is more likely to be part of a subset rather than a member of the set which contains the subset. In the above poll, both 50% and 100% are subsets of it depends.

This is similar to the better known Linda effect or conjunction fallacy, when people guess that the odds of two events co-occurring is greater than either one occurring alone.

The return required to make you whole depends on whether you’re considering a portfolio or an investment and the position size of each investment.

A rational investor picks himself up

As an investor it’s important to remain rational and unemotional in the markets. But I’d be lying if I said I was always a rational investor.

I get emotional. When I’m getting a market arse-whopping I may even yell at my kids — more than usual. My rational side knows the losses don’t matter, that any loss is merely a temporary aberration. But when my rational side also knows that I screwed up and it’s not simply a market gyration my emotional side kicks in to overdrive.

Conquering your emotions

Over the years I’ve developed strategies to put my emotional side back in the box. My three main strategies for remaining rational are using mistakes as a learning opportunity, gardening and music.

My primary strategy is using mistakes as a learning opportunity. And believe me I still get a lot of opportunities. By thinking long and hard about my mistakes and how to correct for them in the future I gain a sense of accomplishment, a satisfaction that I’ve paid for and learnt a valuable lesson. An investment diary is an invaluable tool in this regard, as it helps to avoid deluding oneself.

Gardening is my regular go-to-strategy. If you don’t like gardening you can use any mindless repetitive task that gives you a sense of satisfaction, maybe walk, run, cycle, swim or knit. The key is it has to be a repetitive task that puts your mind on autopilot, thus letting your mind wander, allowing you to see more clearly. Almost all my investment ideas crystallise while I’m gardening. Perhaps I’d have more investment ideas while cycling if I didn’t listen to TED or similar podcasts which captivate my mind. This ability to let your mind run free seems to disappearing, as people are constantly tuned in.

Finally there is music. Music not only improves our moods by encouraging the release of dopamine, it has been shown to improve performance and results. I find music to be both the opposite of and complimentary to gardening. After gardening has let my mind run free to make connections, music helps me focus and improve on the realisations.

All three strategies help reign in my emotional side and assist me to remain rational.

Those who’ve read this blog for years will know there is one other strategy that I’m a strong advocate for, juggling.

Juggling is one of the few activities that simultaneously engages both brain hemispheres and strengthens the corpus callosum — the link between the hemispheres. As investing is best described as a combination of art of science, having your creative and analytic ‘brains’ working together is highly desirable. Besides that juggling is heaps of fun. I find it impossible to frown or feel down when juggling.

Enough psycho babel, show me the money

This month our winning ways returned. Despite a cash balance of close to 50 percent, Fusion Fund more than doubled the total market return — which includes dividends. Our fund gained 1.55 percent compared to the ASX200 Accumulation Index return of 0.68 percent. Yay – no yelling at the kids tonight, heck I may even let them have ice cream!

Our 3 and 5 years performance continues to be around double the market and well ahead of my arbitrary 15 percent  return. But before I pop the champagne it’s worth noting these returns have come on the back of a rising market. Equity markets are now expensive and returns are very likely to be lower over the next 5 years than they have been for the past five.

Over-optimistic institutional and individual investors have failed to adjust for a world of declining returns that will leave them short of money in retirement, says Cliff Asness, one of the world’s most prominent authorities on financial markets.

Asness, the outspoken 47-year-old founder of $105 billion investment firm AQR and a protégé of Nobel Prize-winning economist Eugene Fama, says bonds and stocks have only ever been more expensive 15 per cent of the time in the past century.

We’re not in a “bubble” – a term he hates – but we are at a stage where we should revise just how much wealth our financial assets will deliver.

Everything is expensive but nothing is in a clear bubble, which means you don’t want to short or time things, but you do want to expect less,” Asness told The Australian Financial Review from his office at AQR headquarters in Greenwich Connecticut. via AFR

fusion fund performance vs ASX200 accumulation index 2014-05

Next month will mark the six year anniversary of our fund — or at least the tracking of our fund. It sure has been a bumpy but profitable ride.


And finally, I started a position in Acrux (ASX: ACR) last week. I took a half position as Acrux is a falling knife, but one which could have a quick rebound. I bought because it is fundamentally cheap and has an excellent risk reward profile. I’m likely to buy more based on technical signals.

Disclosure: Long Acrux. This babble blog is for my amusement only. I am not authorised nor wish to provide investment advice.

It’s OK to be wrong

My father was never ever wrong, or at least that’s what he thought. It’s still is a running joke in our family to try and get dad to say “sorry I was wrong“.

We used to joke about his inability to admit he was wrong, but I stopped laughing when, while studying psychology, we learnt about narcissism. Things aren’t as funny when they have a label, especially if it sounds as bad as narcissism. I felt a little sad that my dad, who I love, may not be a strong righteous man. That instead his pride, insecurity, lack of insight and self reflection were probably behind his inability to admit being wrong.

For whatever reasons I’ve swung the other way. I find it easy to admit I’m wrong and spend a lot of time trying to determine if I’m wrong and why I was wrong. I consider focusing on the downside and trying to figure out how you’re wrong important attributes for an investor, hence I’m often both stunned by and intolerant of other investors who are unable to admit being wrong. Before I get to my negative example I’d like to call out Cullen Roche at Pragmatic Capitalism for his shining example of self reflection. Even the title of Cullen’s article Three Things I Think I Think illustrates his humility.

I score Cullen 1.5 out of 3 this time on the things he thinks he thinks. I’m also pretty certain that he’s open minded enough to consider the excellent replies he has received and to perhaps change his mind. I’ll simply say you shouldn’t use outliers to form a general view. In this case the Forbes 400 rich list to form a view on social mobility. There are always exceptions to rules and while it’s good to think about them it’s also important to realise that exceptions don’t negate the general rule. In this case, it’s a bloody tough road if you come from a poor family and those of lucky enough to come from a middle class Western family or better should always remain humble enough to realise we’re lucky.

I loved Cullen’s second point. ‘Value’ investors all too often overlook the voting machine, but unlike Cullen I see no inconsistency in the concept that in the short-run the market is a voting machine and in the long-run it’s a weighing machine. Here’s what I said back in 2009.

In the Intelligent Investor Benjamin Graham commented on the market, “In the short-run it’s a voting machine, but in the long-run it is a weighing machine.” For some reason most market participants focus on the second part of that statement, they concentrate on the weighing machine. As a fusion investor I find equal value in both parts. In the short-run the market is a voting machine. In the short run the market is a voting machine. Come on say it with me 21 times a day for the next 21 days. Then you’ll no longer expect the market to ‘do something’ or to be in-line with your economic reality, you’ll no longer think the market is crazy.

People are driven by fear. They sold out on the way down out of fear of losses and now they’re buying back in out of fear of missing out. Understanding basic human nature is why psychologist are one of the best performing professional groups in the market. They understand the voting and respond to it.

Back in 2009 I said it was time to focus on the voting. Now it is time to focus on the weighing machine.

As I said in that 2009 article “Hopefully, you’re not surprised when I say there is no point in making [market] calls. You simply want to know where the game is at and the probability of each side winning.” It’s time to update my comment from back then. While I was on margin back then I’m now carrying a lot of cash. Why? Because bargains were plentiful in 2009 and now…well if you know any bargain please let me know.

My own view is there remains way to much focus on calling a bottom top and looking for signs of a market bottom top based on historical analysis. While it is important to be versed in the market’s history and use that knowledge as a rough guideline, my focus is on the here and now. Selling fully valued stocks and buying undervalued has been and remains my strategy.” [As an aside, I love this saying, if history was the key to financial success, librarians would be the richest people in the world.]

Finally this graph by Meb Faber via John Hussman brilliants illustrates why it’s not wise to disregard value. In the short-run anything can happen and the market is indeed often irrational, but in the long-run value counts.


If you don’t like ‘bitchy Dean’, it’s time to stop reading.

Equity markets are not zero sum

Over the weekend I tried to correct well known blogger/tweeter Tren Griffin on what I thought was simply a sloppy mistake. Tren said “Mr. Market is bi-polar. There’s a winner for every loser since the game is zero sum after fees. When muppets lose, someone else must win.

I’m sure most of you know, but for those who don’t “zero sum” is a simple concept that means exactly what it says on the can, that is, losses and gains equal zero. As equity markets return on average 10 percent a year they are clearly not zero sum. I’ve seen other bloggers go to some length to illustrate that equity markets are not zero sum, but for my money it doesn’t get any simpler than a 10 percent average annual gain is not equal to zero. Not even close.

In my book Tren then committed so many ‘crimes’ I feel obliged to call him out.

1. Rather than use his own logic and arguments he quoted others and stated they all agreed with him.

2. He was wrong. I’m not sure if it was a lack of comprehension or, more generously, if we were talking at cross purposes, but the linked articles highlighted that alpha is mostly a zero sum game. I agree with that and pointed out to Tren that he’d extrapolated the idea of alpha being zero sum to the entire equity market. Please let me reiterate, 10 percent annual returns clearly proves that gains and losses in the market do not sum to zero.

3. Tren continued to post links to articles that circled even further away from the point, e.g. active vs passive management. My dad used to do that, if he wasn’t winning an argument he’d change the framework rather then admit he was wrong.

I also disagree with the concept that for every winner there is a loser. Yes in aggregate market out-performance must come from under-performance.  But people sell and buy stocks for myriad reasons and to think in such simplistic terms as winner/loser is unlikely to be of any benefit to an investor. Except to think why they may be the loser! In this post Peter Phan provides a good anecdote of why this dogmatic rationality is problematic. Yes I know I’m linking to an article rather than using my own logic, what can I say, I love irony. Also Peter illustrates my point rather than highlights my mistake.

Further, market returns to individuals/institutions are not equally distributed. It’s closer to reality to say that for every winner there are 2-3 losers. It’s also worth considering that a 7 percent annual return, which some may call a loser, may actually be a winner on a risk adjusted basis. I could go on, but I doubt anyone is still reading.

Of course I could be wrong about all the above and I’m clearly out of sync with the majority of investors, as 16 people re-tweeted and 16 favourtied this tweet by Tren “Tech stocks are down from when they were up, but are still up from when they were really down. This up and down pattern will continue.” I read that to my 10 and 12 years kids and they laughed as much as I did. I thank Tren for giving us a lovely family moment. In fairness Tren may have simply been trying to better explain his point of view and I appreciate the time he took to reply to me, but wonder if that was driven by pride or selflessness.

And finally, it’s OK to be wrong, just don’t stay wrong.

Staus Quo Bias and Fusion Investing portfolio weighting

Embrace change

Most people don’t like change. Even optimists often concentrate more on the problems wrought by change than on the benefits. Of course you know that already. But how do you react to change?

Resistance to change is called the status quo bias, it’s one of the many cognitive biases that has been researched for decades. Perhaps the most famous research paper on this bias is Samuelson’s and Zeckhauser’s 1988 ‘Status Quo Bias in Decision Making‘. It’s worth a skim at the very least.

I’m sure it’s no surprise that Samuelson and Zeckhauser concluded individuals disproportionately stick with the status quo.

During my ten years working as a business consultant for SAP the status quo bias was my daily enemy. I was mystified. I could see the appalling systems the businesses I worked with had in place. I knew the solutions I designed and the SAP software underpinning the processes were vastly superior. Yet everyone bitched incessantly.

The solution to this distaste for change seemed so simple.

  1. Accept that change happens.
  2. Be part of and influence the change.
  3. Focus on the benefits.

Change is one of the fundamental certainties in our lives and yet most people never develop the skill set to deal with it. That bewilders me as I strongly believe that embracing change results in both better decisions and a happier life.

Do you embrace change like Eep or hide in your cave like Grug?

Fusion Investing sector allocation

While I am not an advocate of market timing I do have a penchant for sector allocation. Consequently I keep tabs on how the funds I manage are allocated across sectors. Our current allocation may alarm closet indexers and with two thirds of our funds concentrated in two sectors, diversification advocates are no doubt shaking their heads.

Fusion Investing sector allocation

The above chart is simply a snap shot in time and is of little value, but perhaps some embellishment may be of interest. At one point Telecommunication Service companies comprised over half of our direct equity holdings. Despite reducing exposure to the telco sector over the last six months, the sectors rising tide has made reducing the allocation wonderfully difficult. I will persevere.

I recently slashed our exposure to consumer discretionary. The market finally awoke to the idea that the consumer was emerging from the bunker and strongly bid up the prices of our consumer focused companies. I was quick to sell as it is not a sector I have an edge in.

Health Care and Energy are the only two sectors I’ve increased our exposure to this year.

Fusion Investing ASX position sizing

I’ve written a lot on position sizing over the years, suffice to say I sit firmly in the concentrate to accumulate camp.

Fusion Investing position sizing

The above chart details the position size and sector of our stocks.

Our Australian equity portfolios contain 17 companies. Perhaps a handful too many, although saying that, as our top four holdings make up  50 percent of our portfolio, it’s fair to say it’s a concentrated portfolio.

The simple explanation behind our position sizing is I invest more in my best ideas.

Wrapping it all up

Resistance to change keeps many long-term investors overweight in sectors at the wrong time. While sector allocation theory doesn’t contain a magic formula for being positioned in the right sectors, it does provide a framework to work with.

It makes little sense to remain long retail stocks when consumers are deleveraging. It’s a good idea to go long retail stocks when sales and margins have been crushed and most longs have capitulated.

It makes little sense to start going long a sector that has had strong past performance, but that’s what most investors do. As a general rule this years best performing sector will be next years worst.

A good path investors can take is to look forward and figure out what changes are likely to shape our investment universe and which sectors will benefit. Hunting within those sectors increases the probability of success. Just in case you don’t know, after market returns, sector returns have the greatest influence on stock returns.

Fugetaboutit, it’s already gone

I caught up on my Damodaran reading last night. As always, fabulous explanations and thought inspiring.

Damodaran’s post on sunk costs is important for investors and non-investors alike. In short, you’ve  got to know when to pull the plug on an investment, no matter how much it’s cost you. Cost absolutely doesn’t matter, beyond tax considerations.

If Victorian politicians understood the importance of ignoring sunk costs, Melburnians would have an Oyster card — or some other already proven electronic card for mass transport. Instead $1.5B was wasted on Myki.

Shefrin and Statman looked at whether investors are reluctant to realise their losses. They concluded the investor’s return is 4.4% higher over the next year if he sells the loser rather than the winner. So IGNORE what a stock cost you, it’s already gone. As Lynch put it, water your flowers and pull your weeds.

Damodaran puts forward four possible solutions to over our irrationality.

  1. Regular value audits: Value your companies at least once a year. Sell on value versus price value. If you use a spreadsheet for tracking your investments then try this. Hide the column with you original cost or share price. Having the sunk cost on display will screw with your mind.
  2. A selling rationale: Damodaran sells a loser for every winner and then happily deludes himself that he made a tax savvy sale instead of a mistake. Similarly, I try to minimise my capital gains. Or maybe I just make a lot of mistakes and want to sweep them under the carpet each year ;-).
  3. Automated rules: If you are going to use stop loss rules or any automated rule, then make sure you have other rules to buy back in.
  4. Decision making separation: Separate the buying and selling decision. Get your partner or investment buddy to make the sell decisions.

As Damodaran reminds us and Andrew commented the other day, holding a stock in your portfolio is equivalent to buying the stock.

Dumb Trade of the Month

Despite making money in Leucadia National Corp. (LUK) it is my dumb trade of the month. My trade has had me feeling bad for a while and this stock seems to want to make it personal and kick me while I’m down, if I may anthropomorphise. Up another 4.4% to $24.60, and a kick in head to Dean for good measure.

I am totally comfortable with stocks trading higher after I sell them. It is so normal that I barely ever notice. However, in the case of LUK, I did not want to sell and I thought I’d have plenty of time to build a large position. I wanted to own this puppy at bargain prices and I did for a month.

As I posted about here and on Seeking Alpha I liked LUK a lot. So why the hell did I sell $15 April Calls? Why the hell did I only make $2.35 a share? I’d like to claim it was risk management and in part it was, but the truth is slightly different. While the truth may hurt at least it reinforces another lesson or two for me.

First on the positive side. I made money on LUK. An 18% return in one month. I also got to know another company, but wait there’s more. I also got to know a couple bonus companies a little better, two of Leucadia’s holding, Fortescue andAmeriCredit. Three for the price of one, woohoo! 

So why did I sell those calls, if I liked the company so much? What was my mistake and why did I make it? My issue was I had been on a spending spree and was 14% on margin. I sold the calls on 12 March, if you can remember back that far 😉 you’ll recall it seemed like the sky was falling and the end of capitalism was nigh. I didn’t believe that and was recommending an aggressive stance in my TMF posts, but the cacophony of wails was deafening and despite considering myself an independent thinker I became uncomfortable with 14% margin.

My mistake was attachment, anchoring and recency. I had not yet even been put LUK, but was likely to be. LUK had been my research focus. So when I came to sell something and I decided on selling calls it was the first company to mind. I was not attached to it, like I unfortunately am to some of my other shares, heck I didn’t even own it yet. If called I would make a good profit, whereas unfortunately that would not be the case with many of my other shares at that time. My mistake was I did not compare my holdings to determine which had the least prospects going forward, I sold calls on what I was currently focused on. Last in first out is not a good investment style. 

LUK are due to report Q1 2009 between 8-May-09 – 18-May-09. ACF will hang heavily on the Q1 book value, though it is now back up above its end of year price. FMG.AX has been a steady gainer and with Chinese iron imports hitting an all time high it is likely to continue heading up. 

I hope a reader bought and held Leucadia. Though I really hope the market swoons again and I once more get an opportunity to buy LUK at a bargain price. 

As an aside I’m now 0.3% in cash. Long time readers will know that I wanted to utilise margin at low market prices or upon confirmation of a new bull market. Well I did utilise margin to a small degree, 14% is small for me, but the speed of this rally has taken me by surprise and I am not yet convinced a new bull market has arrived. I’m looking to sell three companies in our US portfolio and have no US purchases planned. Anyone got a great stock recommendation for right now?

I do know my LUK regrets are all post hoc, but the pain the pain 🙂

The Greenspan Put and Behavioral Finance

The Greenspan Put: Put as much blame on Greenspan as possible!

While everyone is now signing on to the lynch Greenspan mob, here is someone who appears to have been six years ahead of the mob.
Losch Management called out Greenspan in a Client letter from 2002.

Behavioral Economics tells us that markets learn from pain but forget about rational values after long periods without economic pain. If this is correct then it is likely that concepts such as “Soft Landings’ and the “Greenspan Put” fathered a good deal of our recent foolishness, and history will not view Mr. Greenspan’s role quite as enthusiastically as the business press does today.

Greenspan Standup Comedy

I like this comment on Losch’s behavioral finance page:

Markets are not about math, they are about psychology, and although, in a lot of ways, the market may be very efficient it certainly is not rational. The market is very efficient at registering not only the value of the stock but also the current mood of ‘Mr. Market.’ The price of a stock at any given point can be seen to have two components 1. Its value, and 2. A psychological component determined by the degree of mania or panic prevalent in the mind of the participants.

Many investors concentrate on the first component, value. They dive down into detail to determine what the value right now is. To make their guess work sound analytical perhaps even scientific they call it intrinsic value and parade it around for all to see as a reliable indicator of value. Value is part of investing, no more.

OT: Intelligence isn’t everything. The average IQ in that building in Greenwich, Conn. [the offices of Long-Term Capital Management], was probably over 155, wouldn’t you say Charlie? Buffett in Foolish 2007 Interview

The Book of Investing Wisdom

A month ago I was not checking the VIX daily. The Volatility Index hit a new high of 59.06 during Wednesdays sixth straight fall for US markets.

For the Dow and the S&P 500, Wednesday capped their biggest six-day point loss ever. It was a session of wild swings, with no clear direction determined until the final minutes…
In the last hour of trading, U.S. Treasury Secretary Henry Paulson warned that the turmoil “will not end quickly.”

In possibly unrelated news. Last night I decided to re-read The Book of Investing Wisdom, Part IV, Market Cycles.
At first there is Charles Dow “the panic of 1873 was essentially a money panic”. Dow describes the cycles and to mind highlights behavioural finance, contrary positions, market and economic cycles and long term big picture thinking.
Then William Peter Hamilton discusses Dow Theory. I mention those two first so I do not seem to be segueing from Paulson into the brilliant Three Different Stock Market Movements by Roger W. Babson. Babson like those before him describes the business and stock cycles and then goes further to discuss the conscious and unconscious manipulation of the markets by the six wise men and a larger Wall St group. “The operations of these bigger men are based wholly on fundamental conditions and long swings.” They accumulate around the lows while fundamental conditions improve to later distribute while continuing to talk the markets prospects up.

During which time the leaders are talking optimistically, the banks are loaning money at low rates and the corporations are raising their dividends. Nevertheless, fundamental conditions are no longer improving,…

When the public has bought as much as they can, word is passed around to “pull the plug”.

You get the idea. I think the difference between Buffett and many value pretenders is that he utilises a lattice work of multiple models. On top of his fundamental detailed analysis he surely layers, among many things, a detailed understanding of cycles. Cycles are why I fell into my 50:150 style of investing. Market timing combined with fundamental analysis is where the best investors get their alpha. It’s all about Fusion.

VIX from stockcharts

Edge – The Way of the Turtle

Most Friday’s I drop my daughter at dance class, head to one of Melbourne’s best cafés and have a latte while I wait for Borders to open at 10. I then have around 20 minutes to choose and scan an investment book. While I am normally a slow reader I can skim a book in 20 minutes and pick out a few lessons which resonate with me.

Way of the TurtleToday my book of choose was Way of the Turtle, by one of the original turtles, Curtis Faith.

Almost every page I scanned contained a gem. From the introduction where Faith said he has learnt something from almost everyone he has every interacted with to his thoughts on edge and his simple clear rules.

Before I buy this book I thought I should re-read the Turtle Rules, a copy of which is linked at the bottom of this blog post on investment tips.

Faith’s Dos and Don’ts for Thinking Like a Turtle, are a great example why even strict fundamental investors can learn a lot from trading books like this or Tharp’s Trade your way to Financial Freedom.

  1. “Trade in the present. Do not dwell in the past or try to predict the future. The former is counterproductive and the latter is impossible.
  2. Think in terms of probabilities not predictions. Instead of trying to be right by predicting the market, focus on methods in which the probabilities are in your favor for a successful outcome over the long run.
  3. Take responsibility for your trades. Don’t blame your mistakes and failures on others, the markets, your broker, and so forth. Take responsibility for your mistakes and learn from then.”

Jim (BMW) has provided the framework to easily implement number two. The BMW method provides a framework rooted in probabilities for a successful outcome over the long run.

But Dean, what does this all have to do with EDGE? I hope to wrap up the loose ends at and tie it back to many conversations held on the BMW board. First indulge me with one final quote from Faith, this quote spoke to me so strongly that other shoppers looked up as I exclaimed “Fork yeah!”

the best edges come from the market behaviors caused by cognitive biases.

I realise the market is made up of different opinions and communities such as this are a reflection of those opinions. However, I all too often see cognitive biases in TMF posters and no doubt some of mine ooze on to these digital pages.

People talk about price way to much. The worst examples of this can be found in TMF subscriptions publications. Many issues contain phrase like “XYZ is now a bargain at 30% off its high” or “we’re getting to buy XYZ at a 30% discount form recent prices”. While XYZ may be a bargain, I find this constant reference to price insidious in publications which aim to educate investors.

Many people fail to recognise that companies are on sale for a reason and those reasons are obvious to all market participants. Once a reason is priced is, you need to invert your thinking and see if a reversal of that reason is an opportunity for a catalyst. Making predictions based on known priced in reasons or worse predicting based on your own views is unlikely to outperform a focus on the probabilities. This mental momentum, make us believe that as everything is going wrong for XYZ it will keep going wrong. While that can occur the BMW method highlights that it probably won’t keep going wrong. The most probable outcome for companies with proven track records is that they will bounce back.

Consider your biases and formulate strategies to overcome then. If you are not buying more now than you were over the last couple years then perhaps you are predicting and letting your cognitive biases rule the day.

FWIW – in personal and/or model portfolios

  • I continue to hold SSD and sell calls on it.
  • I recently sold my trading position in Amgen. While the news flow has changed from negative to positive recent investors are likely to be nervous and have little conviction. Pocketing 50% in short order was a no brainer and more than compensated for my only ever loss on Amgen (2008 Leaps vertical spread which due to inexperience with spreads I let slip from profitable to a loss)
  • I’ve bought PFE, FDX and GE.
  • Taken large losses on a number of companies.
  • Started buying Australian banks (not recommended for US investors due to Fx rate).
  • Passed on BARE.
  • Safely profiting with SAFT.
  • Continue to hold way to many companies.
  • Trying to make time to look at AKAM and STP, which from a cursory look both appear to offer good value and excellent prospects.
  • Been very distracted trying to get a couple businesses off the ground when I should probably simply be focusing on My Family Inc. Despite having overcome monetary desires I still fail to contain my egotistically desires. While I should be the most contented I have ever been, my ego pushes me to achieve more, denying me the enjoyment of here and now. I must find a solution for that! Oh the pain, the pain of being an A type 😉

What do you Believe?

Investors beliefsBelief Systems

Why do so many intelligent people not transfer their success to investing success? Think about that for a minute. Got an answer?

Now consider this question. Why has investing research such as the following found that psychologists are more successful investors than some of the smartest people around?

Recently, a research, which was conducted by Bank of England, the universities of Heidelberg and Bonn together with McKinsey, observed the share-buying behavior of about 6,500 persons in an Internet experiment. They found that psychologists, particularly, were good at guessing other players behavior and mistrusted the overvalued stock by others. On average, psychologists were markedly more successful in their speculation than physicists or mathematicians – or even economists.

One answer is that most investors focus on valuation and detailed fundamental research as their belief system tells them a scientific, quantifiable, repeatable approach is the path to success. After investing for twenty years I am almost positive (that’s as sure as a doubter like me gets) that there is no edge to be gained from valuation and detailed fundamental research. Perhaps the absolutely smartest, most experienced and skilled fundamental investor can gain an edge through their research, but is that you? Fundamental analysis is a necessary step, for most investors, but it is not the key to alpha.

Examine your beliefs

Take a few minutes to consider what beliefs you may have that are stopping you from become a better investor. Invert every belief you have. Consider your core investing beliefs from every angle.

A life coaches would suggest you make a list of all your disempowering beliefs and ask yourself these three questions:

  1. Why do I believe this?
  2. What is this belief costing me?
  3. What do I have to loose if I let go of this belief?

I hope you found at least one investing belief that limits your possible success. I’d love you to read what it was.

Didn’t come up with a disempowering or limiting belief?

How about these few?

  • It is impossible to time the market. (Any belief you have which includes the word impossible should receive double your focus!)
    Invert it.
    It is possible to time the market. Now write down, research, consider how it is possible.
  • Technical Analysis is a waste of time.
    Turn that frown upside down.
    Technical Analysis can give me an edge and help me gain an extra percent or two when both buying and selling.
  • Options are risky?
    Options are less risky than direct share ownership.

A major disempowering belief that I have held since my early teens is that I could never be a teacher. When I became a dad I realised that was a disempowering belief I had to tackle head. I’m still working on it and hopefully incrementally improving. Part of my problem is another disempowering belief I’ve held since childhood, I must learn that not everyone is a dickhead! wink

So why do psychologists outperform? They understand behaviour and have learned understanding of psychological biases. Could that become an edge for you?


1 2