Every now and again, I like to jot down some random thoughts — about the markets, economy, crowd psychology. It is how I process ideas, intuition, various data inputs.

Make of this what you will, but these are the random thoughts that seem to be occupying my mind lately:

1. Markets are frequently disconnected from their expected inputs: Economy, Profits, Tax Policy, Interest Rates. This is more than a mere lag, it is a complex interplay that often looks like randomness — but isn’t.

2. To many market participants, this seemingly random walk is an exercise in frustrated expectations. Let’s call it “Fooled by Taleb” to separate the true low correlation, random outcomes from the hard-to-understand but non-random events.

3. The economy’s impact on markets is neither linear nor consistent. (Despite this, some people insist on basing investments on current economic data).

4. Wisdom consists (in part) of learning what to keep and what to discard. What you purposefully sequester and do not read is just as important as what you do consume. In practice, you I find it helpful to “Quarantine” the sources that are consistently wrong or money losers.

5. Evolution has shaped Human Beings over many millenia. I suspect Human learning came from adapting to recent experiences. Perhaps this is why people are so backwards looking, suffering extensively from the recency effect: Learning from recent events is a good survival skill, but it turns out to be a terrible investing trait.

6. I continue to wrestle with the concept of Valuation –it is more of a challenge than I previously believed. Fair value changes relative to numerous inputs, including taxes, interest rates and bond yields. I wonder if Valuation is far less of an objective measure than classically believed by the Graham & Dodd crowd.

7. Long arcs of time is an abstract philosophical concept, one that seems to elude many investors. While most people understand the idea of time elapsing intellectually, they do not seem to truly grasp cycles, years, and decades intuitively; I wonder if this is do to people being uncomfortable with it emotionally do to other factors (impatience, desire, even mortality).

8. Discerning crowd sentiment is more challenging than it appears at first blush. There are objective numerical readings, subjective surveys, and lastly, anecdotes. None are perfect tells, all require interpretation.

9. How someone constructs their rhetoric tells volumes about the underlying strength of their arguments. Abusing data, appealing to emotions, ignoring facts, shifting the debate to secondary or tertiary issues are signs of a weak, poorly reasoned thesis. Investors that learn to recognize the difference between powerful arguments and clever, weak ones are at an advantage.

10. Speaking of rhetoric: I sometimes wonder if the Expert Fallacy is itself a fallacy itself. The difficulty lay in some experts adding value, while the bulk do not. If you can identify the difference between the two — which apparently, most folks cannot — its money.

11. I have been mulling over this Jeremy Grantham quote a great deal lately: “We will learn an enormous amount in the very short term, quite a bit in the medium term and absolutely nothing in the long term. That would be the historical precedent.” That is quite a damning statement about you Humans.

12. If everyone is a contrarian, no one is a contrarian . . .

Feel free to comment.

Category: Markets, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

53 Responses to “A Dozen Random Things I Am Thinking About . . .”

  1. foosion says:

    1. Markets are frequently disconnected from their expected inputs.
    Market participants compare news to their expectations. Since we don’t know what other participants expect (no reason to believe surveys are accurate), output seems randomly related to inputs.

    3. The economy’s impact on markets is neither linear nor consistent.
    There seems to be no relation. It could be because the market is a reflection of expectations of the future economy. We only see the current economy and the market is not as good at predicting as we may hope.

    9. How you construct your rhetoric tells volumes about the underlying strength of your argument.
    Not really. Most people are not competent to judge the strength of an argument and instead judge the self-confidence of the speaker. Alas, there’s no relation. Your rhetoric tells volumes about your speaking ability, not your argument. There’s actually published research on this.

    10. I sometimes wonder if the Expert Fallacy is itself a fallacy itself.
    If we had the ability to judge experts, we’d probably have the ability to judge their underlying issues.
    It puzzles me why some realize they can’t pick winning stocks, but think they can pick winning managers.

    12. If everyone is a contrarian
    Everyone wants to be a contrarian
    We are social animals and the urge to belong, combined with the urge to believe patterns will persist, causes momentum investing to dominate contrarian investing. We can even convince ourselves we’re being contrarian while following the crowd.

  2. Foosion writes:

    “Most people are not competent to judge the strength of an argument”

    Ahh, but that does not mean rhetoric cannot be revealing to the astute observerm

    “and instead judge the self-confidence of the speaker. Alas, there’s no relation.”

    Sadly, you are correct here.

  3. krice2001 says:

    Well, Barry those random thoughts you have up there is much of why I come here. I guess I’m clever enough to know my blindspots and rely on you often to shine some light in these areas.

    I’m not sure that “we will learn… nothing in the long term” at least as individuals, but as a group there seems something to that. We do always seem to fight the last battle. And I have so far found this especially to be critical — “Learn to recognize the difference between powerful arguments and clever, weak ones”.

    As far as investing, speaking as one that does it for some fun but especially for the purpose of trying to ensure personal financial security, I find the concepts of valuation, sentiment, and forecasting to be mostly beyond my current abilities. Again, I look here for help with that.

  4. [...] Deep (market) Thoughts from Barry Ritholtz.  (TBP) [...]

  5. PDS says:

    I would add….prior to September 2001….global and domestic investors had grown accustomed to paying a premium multiple for US equities because the US was viewed as a “safe” place to invest…we had never been attacked nor had an external threat…9/11 changed all that and that premium global investors were willing to pay disappeared…and the flat performance of the S&P since then underscores that fact…think about it….long term does matter

  6. dead hobo says:

    Here’s something that I’ve been thinking about recently, it’s bothered me at a visceral level, and I don’t know why.

    Last week I caught a few minutes of Judge Judy because someone I was with loves to watch that show whenever possible … it’s an infrequent treat for that person. The dispute was over a bad check. Specifically, one person loaned money to the other but did it with a bad check. The borrower deposited the check, spent the money, and then got a call from the bank when it came back NSF and there wasn’t enough in the borrowers account to cover it. The person who wrote the bad paper was suing to be repaid for the value of the loan because, in her mind, she made a valid loan and it wasn’t he fault that her father cleaned her out before the loan check cleared the bank. The fact there was no real loan didn’t matter. She wanted to be paid back anyway. She also kept making these mean faces at Judge Judy and looked generally nuts in a dangerous way.

    Besides being a freak show in that case, something about this unsettled me and I’m trying to figure out why.

    Also, point 7: True sometimes, but also the foundation of wretchedly poor and goofy long term technical analysis.

  7. wally says:

    “… it is a complex interplay that often looks randomness — but isn’t.”

    You might want to think about that statement a bit more.


    BR: Whooops! Missing a “like” — I’ll clean that up . . .

  8. Darkness says:

    “This is more than a mere lag, it is a complex interplay that often looks randomness — but isn’t.”

    I picture an old witch bent over a scattering of just thrown chicken bones speaking this.

    On the other hand, she’s been watching the birds and the caterpillars for half a century and when she tells you to harvest early, probably should take the advice, chicken bones theatre, or no chicken bones theatre.

  9. dead hobo says:

    BR noticed:

    8. Discerning crowd sentiment is a challenge.There are objective numerical readings, subjective surveys, and anecdotes. None are perfect tells, all require interpretation.

    People almost always lie. Not all lies are evil and a lot of the time people believe their own lies. Sentiment is useful when everyone is on one side or the other or something rare and unique is happening. Otherwise, I believe my lying eyes and rarely what people say.

  10. rktbrkr says:

    Meanwhile the chain of title issue grinds ahead in the courts. BOA claims the subject matter expert and local attorney didn’t know the subject matter. Who’s on First?

  11. w says:

    Here’s an oldish (2002) BBC documentary for you, 4 hours in all:

    It will likely open your eyes on a number of things. An absolute must watch for anyone keen to understand the world they live in (particularly the US).



  12. call me ahab says:

    “If everyone is a contrarian, no one is a contrarian . . .”

    is that the same as saying that if everyone is a dull normal (on the bell curve)- then there are no stupid people?

  13. No — its saying only a handful of people can be true outliers

    Its not that there are no stupid people, but there are only a small percentage who are exceptionally smart or dumb. Most people fall comfortably under the broad part of the bell curve

  14. AHodge says:

    mostly makes sense as market philosophy..
    markets move far more,
    hourly weekly, yearly,
    than can be explained by anyone’s fundamentals however tortured and exaggerated.
    bubbles and trends, some reinforeced per /soros type feedback are part of that.
    for markets, no human being can Know anything
    its not like hard science.
    if you admit its dark n light a candle you may stumble your way home

    VALUES, incl P/E ,and fixed income hold to maturity, are only good based on their accounting . These days, if you go that route, you do you own.

    I dont get Grantham this time
    too deep for me,

  15. Julia Chestnut says:

    Valuation is an art. I’ve always really enjoyed watching people value business deals, and I used to be privy to some very interesting debate on the topic (and I’m naturally curious, so I used to ask questions). Value is highly subjective, which is what drives deals of course – but there’s more to it than that. Valuation has to do with risk and your comfort level with risk, fundamentally – it’s kind of personal in that you come to a comfort level on the tidiness of what you don’t know based on what you’ve discovered. When it comes to stocks, as opposed to working assets, I feel like I don’t have the information to go with more than some standard measures – but when it comes to rooting around in a living business, I really like playing with what it is worth on the intangibles.

    And don’t get me started on valuing lawsuits for plaintiffs’ cases. I used to have to take a crack at that, too, and it is truly mind boggling to me.

  16. Petey Wheatstraw says:

    It might be more difficult to predict manipulated (faux random) markets — especially in this era of insider trading, high-frequency trading, fraudulently created and rated derivatives, and bail-outs — than it is to predict a truly random, rule based, or cause/effect series of events. The the sole reason for the manipulations is to fleece those who “invest,” but who are not involved in or beneficiaries of insider trading, high-frequency trading, fraudulently created and rated derivatives, or bail-outs.

  17. the pearl says:

    Debates about valuations often creates strange bedfellows. Those convinced as to the certainty of the current over valuation of common stocks possessing tangible and human assets producing countable returns often are the same convinced as to the certainty of the under valuation of gold that possesses nothing tangible other than the psychological dysfunction of the person on the other side of the trade. It wasn’t long ago that most would be willing, in fact giddy, about trading one’s gold bars for granite countertops and square footage.

  18. Bruman says:

    Great stuff, Barry… insights like these are the gems I come back for on this site. Some aren’t necessarily new to me, but knowing that another smart independent thinker thinks them gives me comfort (would that be “contrarian herding”? :-p ).

    Here are my faves in your list: (sorry, I got wordy here)

    6. I continue to wrestle with the concept of Valuation –it is more of a challenge than I previously believed. Fair value changes relative to numerous inputs, including taxes, interest rates and bond yields. I wonder if Valuation is far less of an objective measure than classically believed by the Graham & Dodd crowd.

    Comment on 6:

    Since investing is my second career, I keep thinking that the talking heads that confidently announce that something is cheap or expensive must clearly know something I don’t about how to do good valuation. But now, after several years in the industry, I realize that valuation depends on so many fudgable or nebulous factors that it is at best a (mildly) informed guess, and more often nothing more than numbers thrown around with a bunch of bravado. I am happy to know that someone smart, with more experience than me seems to be saying that valuation is really tricky.

    Admittedly valuation may make more sense when applied to Graham & Dodd’s methodology, because the “margin of safety” is essentially padding for errors. My problem with G&D is that it seems like an awful lot of work to come up with the relatively rare cases where one can find a discount at what would truly be an appropriate margin of safety. That, and the fact that the most dynamic sectors of the economy run increasingly on nontangible assets like human and intellectual capital and brand identities.


    8. Discerning crowd sentiment is a challenge.There are objective numerical readings, subjective surveys, and anecdotes. None are perfect tells, all require interpretation.

    Comment: it IS challenging to figure out the crowd sentiment. And sentiment makes its way into more “objective” things like valuation. For example, I like to think about how sentiment relates to the market risk premium, and how that feeds back into the discount rate. When markets “climb a wall of worry,” often times this is nothing more than worry->risk aversion->higher market risk premium. Or Euphoria->insufficient risk aversion->low market risk premium. This is why I like the idea of measuring companies relative to the market and industry’s overall performance, and then trying to gauge market performance separately with technical and sentiment indicators.

    And finally, contrarianism. I think contrarianism is appropriate at times, but I often wonder if the celebration of contrarianism has a very strong dose of survivor bias in it. If you are contrarian and right, even once, you stand to make big money and be celebrated for your vision and courage. But there are probably plenty of contrarians going broke every day.

    One simply cannot be contrarian all the time, for two reasons: first, markets trend a fair proportion of the time, and contrarianism only pays off near the ends of the trend. You can set risk controls, but you have to do it in a way that you make more on the turns than you lose in the trends. Secondly, the crowd isn’t wrong on EVERYTHING. More likely, it has some (or even most) things right, most of the time. You can’t just bet against the crowd all the time – you have to know what the crowd is missing and why it’s important. You also have to have a sense of how long it might be before the crowd figures it out.

    In your work, I think you are concentrating on the fact that the crowd takes a while to digest new information and that by keeping your thumb on the pulse of fundamental data, you can increase your contrarian exposure when you see the fundamental-sentiment relationship diverging, and you use long-term historical knowledge to make those judgements. Obviously it’s not a perfect method given that the future may not necessarily look like the past, but it’s a lot better than many other methods I’ve seen, and has a better chance of picking up true contrarian opportunities.

    What’s going through my mind these days is trying to separate out how much of the change going on is cyclical in nature and how much is structural/secular. I think I am not the only one, and perhaps the volatility in the market is really about people alternating between the “it’s structural, the US is screwed, yay emerging markets” view to the “it’s just a cycle, remember to keep breathing” view.

  19. johntao says:

    There is a disconnect between our analytical assessment of what should move markets, and how they actually move. I think much has to do with our biological nature (a more robust consideration of “animal spirits”). “Immediacy” is biological as we are much more concerned with the next and closest bannana (more so than any other bannana), and we worry more about the lion lurking behind the nearest tree (more so than any other lion). Everyone notes how greed and fear move the markets, but we have a hard time accounting for the difference between “greed and fear” and “hunger and survival”. We also struggle to square short term animal behavior with with our intellectual analysis of what the most logical overall bannana/lion strategy is.

    I wish some smart person would analyze whether the study of market behavior can benefit from Einsteins Special Theory of Relativity, which addresses the interplay of space and time, as well as the impact on perception. I get the feeling that there isn’t nearly as much randomness as one might think, it is more a matter of us not being accustomed to conceptualizing phenomena in proper perspective across time – past, present, and future – while accounting for how things move relative to one another.

  20. louis says:

    If you guy’s that do this for a living have these thoughts, how in the world does anyone from main street have a chance to truly participate in the market?

  21. Mannwich says:

    “YOU humans?”” Wow, BR. I know that you’ve made quite the name for yourself in recent years, but……….. ;-)

  22. IS_LM says:

    Good thoughts on behavioral finance. Another thought to ponder is how leverage exacerbates both positive and negative feedback mechanisms, in particular when it allows certain investors to be price setters rather than price takers.

  23. gms777 says:

    “The theorem is that financial crises take much, much longer to come than you think and then they happen much faster than you would have thought. So you have a chance to be wrong twice.”

    Dornbusch’s Law….


  24. canoles says:

    According to this scientist, everyone is motivated by sex, that is all:
    Inconvenient truths about our evolution?
    A controversial scientist claims he can shed light on human behaviour. But not everyone will like his theories, says Jeremy Laurance – Tuesday, 30 November 2010

  25. HonestJohn says:

    Adam Curtis’s documentaries are fascinating, have you seen The Power of Nightmares?

    he also has a blog on BBC, I linked to it earlier, but I think Barry or the moderator thought it was spam, and it never showed up…here it is again (without the hyperlink) …well worth checking out if you want to explore the psychology of why we do the thing we do.

  26. nofoulsontheplayground says:

    As for recency, here’s a few thoughts.

    1. The Euro has been in a parabolic drop, losing as much this Nov. as it did in Aug. 2008.

    2. Many commodities are exhibiting huge backwardation. Cotton and sugar are two big ones. We saw this in 2008 with many commodities as the inflation trade was being unwound.

    Gold and Silver are acting as if they are the new global reserve currency.

    The corporations that have been floating tons of long term debt at record low yields recetnly are only dumb if they are using that money to float pension funds or fund stock buy-backs. Otherwise, history should judge them as pretty smart.

  27. hadacol says:

    The behavioral psychology of the market has a material impact on valuation, but I have yet to see a valuation model with a respective coefficient that quantifies it. Probably b/c its ever changing and close to impossible. (note: grad students, get on it)

  28. peter north says:

    Barry, great post. Got me thinking about a lot of stuff this AM. But I have one question RE #4 – specifically, the statement, “‘Quarantine’ the sources that are consistently wrong or money losers.”

    I struggle with this, because someone like Gary Shilling does such an impressive job supporting his thesis with data, I am unable to refute it. So, my wetware tells me, just because the market may be irrationally discounting this logical thesis, does not mean it will always do so. (And presumably, the longer there seems to be a deviation between perception and reality, the closer to a convergence.) Should a guy like Shilling go in the “quarantine” pile?


  29. peter north says:

    @canoles: Amen brother.

  30. mad97123 says:

    The fact that you are wonder whether valuations even matter anymore says the secular bear market has not run its course. Sure common stocks possess tangible and human assets that produce countable returns, but if those returns are not being distributed to the shareholders via dividends, then so what? There was a time when dividends were the reason to own stocks. They provided a cash stream which could be valued. Now we buy stocks for the capital gains (i.e. I’ll sell to the next guy/greater fool rationale) rather than dividends. That’s the sound reasoning we used for buying houses and .com stocks with no earning, right?

    Another decade of churning sideways, with a crash or two throw in, should bring the herd back to dividends and cash flows as a reason for owning stocks.

  31. Mannwich says:

    @mad: Like I’ve asked many times recently, then morally and ethically how is this is any different than pumping other bubbles (e.g. the real estate/credit bubble) and hoping not to be the “greater fool” or bagholder in the end? People rip on the NAR and other shills for other so-called “asset” bubbles, but then we see the same kinds of things going on with equities. How is this any different NOW? And why should anyone in their right mind who’s INVESTING (remember that little thing?) for longer than a day or a week (or month, max) get in NOW?

  32. Madseason23 says:

    Off-Topic, but wonder what impact the Wikileaks bank scandal release will have on the market…

  33. mad97123 says:

    I would echo Peter North’s comment. Should a guy like Shilling go in the “quarantine” pile? How about Hussman? He’s bearish now, he missed most of the recent rally, but his fund has nearly tripled the S&P’s return over the last 10 years (as of 6/30/10).

    How about Precther? Called the March 09 lows, but got bearish too early in the rally. Hulbert Digest says Precther’s Elliott Wave letter has beaten the market over 5, 10 and 30 year periods (I guess he missed the 20 year window by being bearish to early in the 90s). Quarantine someone who’s beat the market over a 30 year period, something EMH says can’t happen?

    Then there’s Granthan and Rosie…….

    Seems the key is ‘consistently wrong’. There is a reason the zombie-bears still have a following – they have been right long term, and their reasoning rings true, even if early.

    Simply avoiding large losses can produce large market outperformance as Hussman’s fund clearly demonstrates, even if he has ‘no excuse’ for missing this rally.

  34. highside says:

    Re Point 6

    Time you read Security Analysis. Again?

    G&D emphasised that there is no objective valuation of a company. That is why a margin of safety is so important. They knew nobody could effectively forecast cash flows years into the future. Yet so many institutional models are built on long run DCF of DDM models with distant forecasting periods and claim to be inspired by G&D.

    Nearly all the successful value investors I have met have really been contrarians.

  35. mad97123 says:

    Mannwich, I’m saying the same thing, there will be a time in teh future when value returns and we stop chasing capital gains and focus on income streams. I’m a babyboomer who will need an income stream in the future. There won’t be enought young peole with a good job to sell my stock to at higher prices since all my friends will have the good jobs, working into their 70′s to make up for their lost decade(s?) of investing for capital gains.

  36. the pearl says:

    Folks, a small bit of wisdom:

    It is not rather Hussman, Rosie, Grantham, Schiff, or Batman, The Green Hornet, or Barry Ritholtz is right or wrong. The only question is are you going to be right or wrong? I would further make a case that it doesn’t matter if you are right or wrong, it is what you are going to do about it?

    Too much time is spent trying to figure out what the experts think.

  37. cognos says:

    1. Certain people have great track records: 20-30-40 yrs, 1 or 2 down years, 20 to 50% ann rets. Follow in their footsteps. Read what they wrote. Grantham in not one of them. Stop paying attention to people with low-quality, poor return track records. People can be “interesting” (Taleb) or even “smart” (Asness) but still bad investors. Avoid them.

    2. Even basic facts are hard for most people — prices are DOWN, yet most people seem to think they are up. Beware the “no facts” crowd, data-driven decisions are much more productive despite the noise of the investment process.

    Monthly %-ret is the ultimate fact. No discussion or excuses necessary.

  38. Mannwich says:

    @mad: Oh, I know you are. I was just supporting your point. I fail to see the difference between now (if you’re truly concerned about valuations for the longer term and aren’t merely trading like BR does for a living) and buying late into other obvious bubbles.

  39. the pearl says:


    Read Security Analysis again? How many posting comments have read it once or for that matter have the skill set necessary to understand and than apply it? My guess is the number is close to zero.

  40. the pearl says:

    Mr. Cognos is dead on.

    The list of successful investors that have 30 to 40 year track records is small, but elite. A good argument can be made that anybody without 20 years or so under their belt of a verifiable, audited, track record should be ignored. The multi-decade elite employ variations from a simple, but complex approach pioneered by Mr. Graham. Most of the media gurus of today have limited track records, don’t actually manage money, or posted results during raging bull markets. Neither of those qualify as robust.

    My goodness Mr. Cliff Asness lost 50% and was rewarded with the cover of Bloomberg magazine. For the most part 99% of are more than willing to play the game that Mr. Market, Wall St., and the blogosphere want us to play. Much of the anger at the system, at the government, and other various feelings of inadequacy stem from participating in a style of investing we are not equipped for intellectually, emotionally, or physically.

    Some of you would do better reading about Walter Schloss.

  41. obsvr-1 says:

    just a couple of thoughts as I read through the posts above …

    Valuation — Try to do fundamental valuation on the fiction of the public information; Restore discipline in accounting policies and enforce the law against fraud and misrepresentation; then perhaps a reasonable valuation can be accomplished. And even if there are no fiction in the reporting, how does one rationalize a market valuation of a company like Salesforce.com (CRM) with a P/E of 250+, yes they have been growing the business and revenues, but seems they are earning less on increased revenue — however on the other hand they are the leaders in Cloud Computing, could be the next .com valuation phenomenon.

    Invest for dividends – would be nice, but when the execs and bod continue to increase exec compensation and bonuses that strip the profits or hang onto the cash and let the PE, M&A overlords to strip the equity, the individual equity investor is left with crumbs (if that). Example: GS pays out 1.40 per share (750M) to the shareholders while paying Billions to the execs, partners and employees.

  42. wally says:

    “Certain people have great track records: 20-30-40 yrs, 1 or 2 down years, 20 to 50% ann rets. Follow in their footsteps.”

    You can’t follow luck.

  43. mad97123 says:

    BR, you recently commented that you did not make any money flipping houses during the housing boom, and that it took years for your views to payoff. You took a lot of professional risk, ate a lot of crow, and were mercilessly tortured by eejits over what you knew was a giant debacle in the making.

    Your ‘excuse’ for missing the ‘housing rally of a life time’ was that you made some money on what you learned on the way down. An excuse is an excuse, you missed a great money making opportunity, and the fact that you made it up later does not excuse missing a great opportunity in the first place.

    Your constant refrain about there being no excuse for missing a rally cuts both ways. You could have made money coming and going, but you let your judgment and being right get in the way. There is no excuse for missing the housing rally of a lifetime.

    Think how stupid John Paulson must feel for setting up his housing shorts years early. He also missed the housing rally of a life time.

    I think your point is trough lows like 09 are obvious, and everyone should have played some portion of it. As posted on your blog many times, most of the perma-bears called the bottom near March and played long some portion of it. Your zombie-bears are a strawman. If they are not, I’d like to see some names so I can put them on my quarantine list.

  44. [...] Barry Ritholtz, “Discerning crowd sentiment is a challenge.There are objective numerical readings, subjective surveys, and anecdotes. None are perfect tells, all require interpretation.”  (Big Picture) [...]

  45. VennData says:

    Regarding 3. “…people insist on basing investments on current economic data…”

    If everyone looked at current economic data, then the market would reward the person who could assign profitable probabilities about the very near future. Then, if everyone saw that and started thinking about the very near future, than successfully investing on probabilities in the farther future would be quite rewarding. This process repeats itself until a stasis exists between current, near future, and foreseeable future.

    Therefore, current valuations have a difficult-to-quantify market guess of the future in them.

    If you hate the Fed – you can’t even come to allow yourself to think rationally about them – you will miss their effect on things. The same for politicians, changing demographics, new rules and regulations, etc… If you allow some raging partisan kook to influence your thinking, you’ll never invest near the market’s return (described in this blog as “Do you wanna be right? Or do you wanna make money?”)

    Here’s an example:

    To take away Obama’s signature foreign policy win after the midterms, the GOP dropped support of the Russian START treaty, which they had supported with their committee votes…


    Then last week, after withering criticism of the GOP’s partisanship the WSJ opinion page attempted to defend them…


    Then after receiving further mocking for Rupert Murdock’s sophistic opinion piece, the paper decides to splash this on the front page today…

    Russian Missiles Fuel U.S. Worries


    …which, to summarize: “Someone said the Russians moved missiles close to to NATO last Spring.”

    So ask yourself, do you believe this? Russia is preparing to attack NATO? With nukes? The guys they sell their oil and gas to? The guys they buy their Louis Vuitton bags from? Their Mercedes limos??

    So if you listened to Rupert Murdock and the WSJ about Obama, Socialism, GM-will-fail etc… you missed the rally from March ’09. Yet you continue to let Rupert Murdock form your opinions? Why? What is his track record?

  46. insomnsv says:

    Dear BR:

    I enjoy reading your stuff, this piece not excepted. What I want to comment on, however, is your new found unabashed bullishness (not only about the markets but the economy).

    It’s one thing to say “trade the (‘resilient’) market in front of you and not what you think the market should be”. It’s another to start JUSTIFYING this rigged market by citing an improving economy.

    We don’t have 9% unemployment but more like north of 15%, with many more government jobs to be lost in the coming months. We have the highest use of food stamps in history. We have a housing market going into double dip (confirmed just today by Case Shiller). We have EU deflating under HUGE debt burden. We have China slamming on the brakes, risking hard landing.

    The ONLY reason why the equity market keeps going up is because Mr Helicopter owns the casino and his buddies (the primary dealers) are about the only players at the table anymore, engaged in a rigged game (called POMO). I know it, YOU know it, all the retail traders know it (which is why they are nowhere near the casino). It’s got zip to do with the economy.

    Let’s be honest here.


  47. DeDude says:


    I think you are making an excellent point about who is “winning” arguments in a political sense (in contrast to having a winning policy). Palin is a great example. Even in the rare cases when she has (i.e., someone could give her) arguments in favor of a policy she does not construct her gee-haw rhetoric around the facts and arguments, its all about rhetorical tools. She fully understand that most people judge by the confidence and rhetorical tools of the speaker, so she actually has a lot of followers although she has never formulated any policy (“we don’t know what the heck she is planning to do but she is a great gall so we will vote for her”).

    But if the goal is a winning investment “policy” you have to go with the people who think and construct their “policy” based on fact and arguments rather than empty rhetoric. So I think it can be very useful to look at an individual and judge if they are trying to construct an argument behind their views or just using straw-men and other stupid rhetorical tools to “win” the argument. The former has a lot better chance of presenting a winning investment policy than the later.

  48. notakid says:

    If you are lucky you will die before you run out of money.

    If not join the other 99%…

  49. airok says:

    Judging the expert / speaker – helps to break it out Aristotle style. Elements are:

    Pathos – passion of the speaker
    Ethos – credibility / credentials
    Logos – logic

    Pathos wins way too often.

  50. comet52 says:

    My contrarian, zombie-bear, teabagger buddy says to buy gold.

    That’s news to me, man.

  51. cognos says:

    the pearl — we share similar thoughts. but the graham-dodd guys are distinctly “tier 2″.

    steve cohen has 25 years, 60% avg annual returns, only 1 down year 2008 (down 20%). outside of his down year he has very few down months, like say 5 significant down months in the other 24 years.

    renaissance is actually better. i believe zero down years. 70% average annual returns.

    john arnold started centaurus energy with $5m in 2001-02. he has no years less than 50% return. his firm is now $7B, all proprietary capital.

    soros retired in about 2000. at that point, he had 31 years, only 1 down year, over 30% annual returns net of 2/20 fees. he has much more money today.

    there are a couple dozen hedge fund track records that are truly outstanding. the offshore wealth of these guys (and similar quieter pools) is very under appreciated.

  52. [...] Barry Ritholtz’s random thoughts are good thoughts. [...]

  53. [...] Once again, you have to follow your strategy and rules. From where I sit, everything has been disconnected.  I am not sure if it is cyclical or technology has changed it forever. As blogging goes, Barry Ritholtz beat me to some of these points. You can read it here. [...]