The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

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Let’s not mince words: Yesterday’s market action – down 1.75% on heavier volume — was a shellacking:

DJIA 12715.93 -213.66 -1.65%
Nasdaq 2991.22 -55.86 -1.83%
S&P 500 1358.59 -23.61 -1.71%

We are now rather oversold, and are due for a bounce. What I want to look at is the quality of the market internals during this period. It will provide some insight into how far we could bounce back, and where support might be if and when this reaction rally (2-7 days) fails.

I find whenever I discuss these sorts of technical actions, people get confused by the apparently conflicting perspectives (“You sound bearish today and bullish yesterday“). The key to understanding these are your holding periods and timelines. The wiggles in the day-to-day action mean different things to traders, investors, and company insiders.

My holding period is typically measured in quarters and years. But I feel compelled to be aware of what takes place over weeks and months. Shorter time periods than that — hours and days — are so noisy as to be meaningless to me.

Sometimes it appears market participants are disagreeing when they are really just looking at different holding periods.

Investors should never try to “play the squiggles” — using long term valuation measures to trade in and out for a quick profit rarely works. I’ve seen many a good investment turned into a trade — dumped on initial strength shortly after establishing the position for the quick winner, only to watch it run away over the next year. Its usually accompanied by this hackneyed phrase: “No one ever went broke taking a profit.”

Actually, they do. You need big winners to offset a lot of little losers, and small winners don’t help. Its like snatching defeat from the jaws of victory.

Traders who allow a short term position to turn into an investment are usually doing so because they got caught leaning the wrong way and are refusing to admit their error. Rather than take a small hit, they nurture their losing position on the hopes of it recovering. That happens rarely, but far more often the bad trade turns into a giant loss. In some cases, it becomes a blow out disaster that ends the trader’s career.

Any trader that wants to let a winning trade can and should do so, but they must establish a new exit rule for that position. I never like to give back more than 25% of a gain in these circumstances. You can alternatively use a shorter moving average as your exit signal.

My rules:

1. Make sure you understand what your holding period is before you establish any position.

2. Traders should NEVER let any losing trade turn into an investment.

3. Strong investments should be given the benefit of the doubt, rather than taking the quick profit.

4. Winning trades should be allowed to run, but require a new exit strategy.

These are fairly basic but oft overlooked ideas. Understand them or create your own, but please don’t just wing it. That’s a real formula for disaster.

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Previously:
Expect to Be Wrong in the Stock Market (The Street.com)

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My Sunday Washington Post Business Section column is out. This morning, we look at the annual premature housing recovery.

The print version had the full headline The eternal optimism of spring — except in housing; the online version had the longer Spring brings signs of hope and renewal — except in the housing market).

Here’s an excerpt from the column:

“Ahhh, winter is finally over. Each year about this time, flowers push up through the soil, trees begin to bud — and the stories about a real estate recovery appear.

Am I skeptic? But of course. To understand why, let’s consider a few questions . . .

Which of course, we do, looking at shadow inventory, affordability, and valuation.

I like the way the Post put heavy emphasis on the Ned Davis Charts in the print edition:
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click for ginormous version of print edition

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Source:
Spring brings signs of hope and renewal — except in the housing market
Barry Ritholtz
Washington Post, April 8 2012
http://www.washingtonpost.com/barry-ritholtz-on-investing-house-prices-are-down-mortgage-rates-are-low-but-is-the-real-estate-market-ready-to-rebound/2012/04/05/gIQAnveZzS_story.html

Washington Post Sunday, April 8 2012 page G6 (PDF)

No one seems to remember the second part of Occam’s razor as rumored¹ to be stated by Albert Einstein: “Everything should be made as simple as possible, but not simpler.”

That is an issue I am encountering quite frequently these days. We see it in discussions about markets, politics, sports, economics, indeed, just about any field where questions of an unknown future drive debate. This morning, I want to briefly discuss the issue, pointing out a few recent examples. My advice is to be wary whenever you see this approach.

First, let’s understand what Occam’s Razor actually means: When we select among competing explanations for any given unknown, we prefer that which offers the simplest explanation of any effect. This includes that which makes the fewest assumptions, and requires the least logical contortions. However, one should proceed to simpler theories until simplicity can be traded for greater explanatory power. This is especially true when it comes to explaining complex events with lots of moving parts.

Consider the following statements:

Politics: No modern president has ever won a second term when the unemployment figure was 7.3% or more.²

Markets: The average Bull Market lasts 31 months.³

Sports: The new line up of (Choose: NY Knicks Jeremy Lin/Carmelo Anthony or NY Jets Mark Sanchez/Tim Tebow) locker room disruption.

Credit Crisis: High levels of leverage existed prior to the crisis without incident.⁴

Apple (2004-10): Has a very high P/E.

Affordable Housing Policies: Allowed lower income people to purchase homes they could not afford.

Note that I did not include any conclusion based upon these single variable analyses. But these are the simple, recognizable memes circulating the intertubes. They lay traps for the unwary. The conclusions the authors of these draw are:

1. The incumbent will lose in November
2.Sell your stocks
3. The Knicks and Jets cannot win a playoff
4. Leverage was not a factor in the credit crisis
5. Don’t Buy Apple
6. It was all Barney Frank’s fault

These are all probability questions. When doing these analyses, we do not know what the future outcome will be. Certitude in the face of probable outcomes is discouraged, as is gross over-simplification.

I have addressed many of these over the years (I want to get to the leverage issue soon).

Some people work backwards: They start with their conclusion, than set about hunting for any data that supports it. This is the worst form of confirmation bias. The preferred method is to research all of the relevant data, and see what conclusion that leads you to.

Bottom line: When it comes to investing, the errors of single variable analyses, oversimplification and bias all can be very expensive. Recognize these flaws when you encounter them in any sort of commentary, and adjust your expectations accordingly.

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Previously:
Single vs. Multiple Variable Analysis in Market Forecasts (May 4th, 2005)

Hume, Causation & Science (January 14th, 2012)

______________________

1. Provenance: There is some question as to the whether Einstein actually said this, according to (Quote Investigator)

2. Unemployment rate by year (BLS)

3. This Bull Market Is Hard to Pin Down (NYT)

4. Bethany McLean: The meltdown explanation that melts away (Reuters)

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My Sunday Washington Post Business Section column is out. This morning, we look at a pretty rad option for Apple and its cash hoard: Buying Twitter.

The print version had the full headline A modest proposal (in more than 140 characters) of what Apple should do with its cash hoard.  (The online version is merely Why Apple should use its cash hoard to buy Twitter).

As noted earlier this week, Apple has gained zero traction in Social, which has become the hottest trend in technology this decade.

Here’s an excerpt from the column:

“One acquisition stands out to me as a model for what Apple could do: Google’s all-stock acquisition of YouTube for $1.65 billion in 2006.

Essentially, it was free. The market rallied Google’s stock enough on the news that the acquisition had an effective cost of zero (though it was slightly dilutive to earnings). YouTube became one of the fastest-growing parts of Google, replacing the underperforming Google Video. Monetization of YouTube appears to be increasingly close.

And Apple? Its history is primarily of small, almost tactical purchases. Even its biggest buy, the 1997 purchase of Next Computer that returned the prodigal son Steve Jobs to Apple, was “only” $400 million.

But Apple was a very different company then — a small, niche computer maker, with a visionary at the helm. The Apple of today is a giant consumer electronics firm, selling mobile devices, telephones, tablet computers and, in the near future, televisions. Maintaining mindshare, staying on the cutting edge of consumer tastes, is more important to Apple today than it was 15 years ago.”

I really like what the Post did in the dead tree version of the paper, the art work is whimsical.
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click for ginormous version of print edition

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Source:
Why Apple should use its cash hoard to buy Twitter
Barry Ritholtz
Washington Post, March 25, 2012
http://www.washingtonpost.com/apples-hoard-and-how-it-should-be-used-think-twitter/2012/03/19/gIQAS7TfVS_story.html

Washington Post, March 25, 2012 page G6 (PDF)

I had a conversation with a friend recently about Wall Street. We discussed some of the odder aspects of the Street, not so much about investing itself, but about having a career in finance.

I have a somewhat skewed and skeptical perspective on Wall Street. I started out as a lawyer (I loved law school but hated practicing); got a job as a trader under very random circumstances; eventually moved to research and then onto asset management.

But I spent a long time learning what this industry was about — reading everything I could get my hands on, critically analyzing what works and what doesn’t. Learning and studying was a crucial aspect of a job in this industry; Long before Malcolm Gladwell wrote about it, I had a colleague who used to say that it took 10 years to become an overnight sensation.

As a newbie, I critically read everything – skeptically, carefully, looking for weakness in the logic. Over that period of study, there were quite a few things I learned about Wall Street that surprised me:

1) Deep thought: Surprisingly few people rolled up their sleeves and thought deeply about why things in market are the way the are. What causes markets to go up and down? Why do things blow up? Why do most investors under-perform markets? Lots of myths and urban legends, not nearly as much quantitative evidence.

If you get really deep about it and study the data, there are some rules to learn. To succeed in markets, one needs to become a philosopher-mathematician.

2) Long-Term Greedy: Too many people went for the easy money, but that was never what motivated me. It was more about intellectual curiosity and honing ones craft, and less about the quick hit. I made less money compared to many of my peers, but I kept more of it and never blew up.

The phrase “long-term greedy” was coined by former Goldman Sachs director Gus Levy many years ago. You can make (lots of) money over time, but only by serving clients’ interests. Its amazing to me that view is so far out of fashion today.

3) Hard Work: There is no other field where a person of average skills and intelligence who is willing to put their head down and work hard can makes 100s of thousands or even millions of dollars a year — but only if they are diligent and patient and willing to put in the hours.

However, most of Wall Street is taught how to sell products to clients; rarely are they instructed what they buy, why they are buying, when to sell (or why). This is the industry’s fatal flaw.

4) Get Rich Slowly: Few people have the patience to get rich slowly — everyone on Wall Street who ever got into trouble was impatient, and couldn’t wait the requisite 10-20 years it took to become a millionaire. They ended up in jail or as mortgage brokers. Patience is virtue.

5) Mentorship:  Finance is filled with amazing, generous, really smart people — who mentor and teach and bring along the next generation. I hope the crisis & collapse and bailouts and mergers didn’t ruin that — My fear is that has gotten a lost over the past decade.

I have found Wall Street, warts and all, to be a deeply satisfying place to work, filled with intellectual challenges, wonderful people, and deep rewards. Sure, there are frustrations, and there are people who focus on the piles of money to be made, to the detriment of all else.

If that’s your focus, you will have missed out on some very important life lessons.

Barry Ritholtz
Washington Post
March 10 2012

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Last week, Greece officially defaulted on its debt. (Unofficially, it defaulted long ago.) This formal default on about $100 billion triggered payment of $3 billion in credit-default swaps. These are the non-insurance insurance products that pay off in the event of a default.Let’s take a closer look at the tortured history of the swaps and see why they should be regulated as commercial insurance policies.

Our story thus far: CDS obtained their favored status as unregulated insurance policies courtesy of the Commodity Futures Modernization Act of 2000. It was sponsored by then-Sen. Phil Gramm (R-Tex.) — and benefited Enron, where his wife, Wendy, was a director on the board. The energy company had discovered the fast profit of trading energy derivatives, which was much easier to achieve without those pesky regulations. Late in the year, the CFMA was rushed through Congress. Passed unanimously in the Senate and overwhelmingly in the House, it was mostly unread by Congress or its staffers. On the advice of then-Treasury secretary Lawrence H. Summers, the bill was signed into law by Bill Clinton.

No one associated with this awful legislation has yet to be rebuked for it. Anyone who actually read this debacle and recommended it should be banned for life from having anything to do with public policy or economics.

Why? The act was a radical deregulation of derivatives. It was an example of the now widely discredited belief that banks and markets could self-regulate without problems. Management would never do anything that put the franchise at risk, and if it did, it would be suitably punished by the shareholders.

It didn’t quite work out that way. Across Wall Street, nearly all senior management involved escaped with their bonuses and stock options intact. Lehman chief executive Dick Fuld lost hundreds of millions of dollars and now must scrape by on the mere $500 million or so he squirreled away.

The act did more than change the way derivatives were regulated. It annihilated all relevant regulations. First, it modified the Commodity Exchange Act of 1936 (CEA) by exempting derivative transactions from all regulations as either “futures” (under the CEA) or “securities” (under federal securities laws). Further, the CFMA specifically exempted credit-defaults swaps and other derivatives from regulation by any state insurance board or regulator.

Hence, the law created a unique class of financial instruments that was neither fish nor fowl: It trades like a financial product but is not a security; it is designed to hedge future prices but is not a futures contract; it pays off in the event of a specific loss-causing event but is not an insurance policy.

Given these enormous exemptions from the usual rules that govern financial products, you can guess what happened with the swaps. A very specific set of economic behaviors emerged: Companies that wrote insurance typically set aside reserves for expected risk of loss and payout. When it came to swaps, the companies that underwrote them had no such obligation.

This had enormous repercussions. The biggest underwriter of default swaps was AIG, the world’s largest insurer. Without that reserve-requirement limitation, it was free to underwrite as many swaps as it could print. And that was just what it did: AIG’s Financial Products unit underwrote more than $3 trillion worth of derivatives, with precisely zero dollars reserved for paying any potential claim.

Though this may sound utterly absurd today, circa 2005 it was considered brilliant financial engineering. Consider this quote from Tom Savage, the president of AIG FP: “The models suggested that the risk was so remote that the fees were almost free money. Just put it on your books and enjoy.”

Ahhh, free money — how could that dream ever go wrong?

As it turns out, quite easily. Underwriting swaps was enormously lucrative — so long as you don’t count that unpleasant crashing and burning into insolvency at the end.

Oh, and that massive $185 billion AIG government bailout. Aside from those tiny hiccups, there was some good money to be made.

It was more than just AIG. While the radical deregulation wrought by the CFMA led to AIG’s self-directed collapse, it also helped steer two of the largest securitizers of mortgages — Bear Stearns and Lehman Brothers — into insolvency. Perhaps they were lulled into complacency, believing (wrongly) that they were hedged against losses. The CFMA led to their demise, and it was indirectly responsible for the collapse of Citigroup, Bank of America and Fannie and Freddie. It also was a significant factor in the near-death experiences of Goldman Sachs, Morgan Stanley and quite a few others.

Despite the CFMA’s horrific fatality toll, it has never been overturned. Parts of it were modified by Dodd-Frank regulations, but not the insurance exemptions. Today, these swaps are cleared through exchanges or clearinghouses — but they are still exempt from all insurance regulatory oversight. Which is bizarre, because they are little more than thinly disguised insurance products, with the CFMA kicker that there is no reserve requirement.

Which brings us more or less up to date — and onto more topical issues, such as Greece. Two weeks ago, the International Swaps and Derivatives Association said that “based on current evidence the Greek bailout would not prompt payments on the credit default swaps.”

That is an odd statement about a tradable asset — based on evidence? Typically, an option or futures contract expires, and it either is in or out of the money. Any tradable asset — stocks, bonds, futures, options, funds, etc. — settles on its own. There is a market price the asset closes at, a total volume of sales, and a final print for the day, month, quarter and year. No interpretation is required. Why on earth would anyone need a committee ruling for a trade?

On Friday, the ISDA committee ruled that Greece formally defaulted. Thank goodness that was cleared up. Had they failed to do so, it would have fatally damaged the swaps market and made sovereign debt financing much more expensive.

What makes this issue so fascinating is not whether Greece has or has not technically defaulted. Rather, it is that there is a committee of conflicted interested parties rendering a verdict on that issue.

Funny, no sort of group declaration is required when a futures contract or an option must settle. No committee decision is required. Which (again) is why credit-default swaps look, sound and act a lot more like insurance than they do other tradable assets.

Why does it matter if swaps are not insurance? In a word, reserves. That is the key difference between insurance and swaps. State insurance regulators actually require reserves from insurers — a lot of reserves — to ensure payments can be made in the event any payable event occurs. The swaps industry does not require reserves. Not even one penny against billions in potential losses.

I think you can see why this matters so much. Swaps are a lot less profitable as an insurance product than they are as a trading vehicle. That is the primary issue that we all should be concerned about. It is exactly how AIG blew itself up. There is nothing that prevents the marketplace from doing it again. We could very well see a repeat unless this gets resolved. Indeed, the odds heavily favor such an event occurring, unless we collectively do something to stop it.

Credit-default swaps are insurance products. It is well past time we regulated them as such.

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Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture at Ritholtz.com. Twitter @Ritholtz

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My Sunday Washington Post Business Section column is out. This morning, we look at CDS — how they became such a dangerous aspect of the financial firmament.

The print version had the full headline Credit-default swaps are masquerading as financial products. They should be regulated as insurance products. (The online version is merely Credit default swaps are insurance products. It’s time we regulated them as such.).

Here’s an excerpt from the column:

“Despite the CFMA’s horrific fatality toll, it has never been overturned. Parts of it were modified by Dodd-Frank regulations, but not the insurance exemptions. Today, these swaps are cleared through exchanges or clearinghouses — but they are still exempt from all insurance regulatory oversight. Which is bizarre, because they are little more than thinly disguised insurance products, with the CFMA kicker that there is no reserve requirement.

Which brings us more or less up to date — and onto more topical issues, such as Greece. Two weeks ago, the International Swaps and Derivatives Association said that “based on current evidence the Greek bailout would not prompt payments on the credit default swaps.”

That is an odd statement about a tradable asset — based on evidence? Typically, an option or futures contract expires, and it either is in or out of the money. Any tradable asset — stocks, bonds, futures, options, funds, etc. — settles on its own. There is a market price the asset closes at, a total volume of sales, and a final print for the day, month, quarter and year. No interpretation is required. Why on earth would anyone need a committee ruling for a trade?”

The full column goes into the tortured history of CDS.

The Post had a little fun with the dead tree version — here is the art work:
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click for ginormous version of print edition

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Source:
Credit default swaps are insurance products. It’s time we regulated them as such.
Barry Ritholtz
Washington Post, May 11 2012
http://www.washingtonpost.com/business/credit-default-swaps-are-insurance-products-its-time-we-regulated-them-as-such/2012/03/05/gIQAAUo83R_story_1.html

Washington Post, May 11 2012 (PDF)

One of the more difficult things you human investors have to deal with is how your own heuristics, biases and cognitive deficits impact your views. It is how you are wired, a flaw in your wetware, and it consistently trips up your results.

I am not referring to the obvious sentiment extremes — greedily buying in at major tops and selling in a panic at lows. Rather, I am referring to the more insidious ways your brain betrays your objectives as an investor.

I have been exploring this theme for the better part of a decade, and the science has caught up and past many of our worst suspicions. What I am referencing goes beyond Behavioral Economics, which teaches us that the rest of the professions’ basic underlying assumption is in error: No, Humans are not particularly rational economic actors.

The newest research in Cognitive Neuroscience reveals misleading and incomplete our constructs of reality actually are. What we believe to be true is often far removed from what actually is.

And, it gets worse: Once we have a point of view, especially as a result of owning a position, we are even more inclined to misunderstand the inputs the world presents to us. This typically works to the detriment of our investing performance.

This morning, I want to discuss three examples of these biases:

1. Talking Your Book:  This is a classic example of seeing the world through a lens of your own holdings. You want them to succeed, you root for them to go higher, and this bias impacts your view of everything that occurs around the positions.

It still surprises me when I see examples of this bias revealed by some of the world’s best investors. Warren Buffett owns the largest stake in America’s largest mortgage lender. In his annual letter, Buffett claims that banks were “Victimized by Excesses of Ousted Homeowners” who emerged as winners in the foreclosure process.

Objectively, banks made loans to people they never should have. They abdicated traditional lending standards because they expected to sell them so quickly the loan quality was irrelevant. These same banks went on a forgery spree, engaging in institutionalized fraud.

What do you think was behind Buffett’s WTF moment? Might it have been brought to you by his frustration with a position that perhaps is not working out so well?

2. Looking for Confirmation: How many times have we seen a particular point of view reflected not by the facts on the ground, but by the inherent bias caused by specific holdings. The most illustrative example these days is inflation as spotted by holders of Gold.

The Fed is causing not just inflation, but hyper-inflation!  Its coming, its here, look at the price of everything going higher!

Except, not so much in the data. But medical care prices are skyrocketing! They have been going up for 2 decades, long before QE. Look at Gasoline prices! Does US/Israeli/Iran saber rattling have anything to do with that? And, gas is still cheaper than pre-crisis peaks.

When you own a specific position, its not just that you see the world differently — you actively hunt out information that confirms that position, while ignoring data that contradicts it.

3. Expressing Political Views via Portfolio:

There is a sub group of commentators I always find intriguing: The Political Economists. This is a set of people who see the world not through the lens of their portfolio holdings, but rather through the holdings of their political views.

The danger of this perspective is to you, the investor. These folks do not care about economic expansion, earnings, or your portfolio gains. They are only concerned with the next election.

We were treated to a world class, Harvard Business School case study example last month when NonFarm payrolls were released. CNBC’s Rick Santelli went through incredible contortions to explain why last month’s surprisingly good NFP report was actually terrible. I suspect a similar bias is why Fox Business channel has failed to become the ratings bonanza that Fox News is: Relentless negativity in the face of a 3 year, 106% SPX rally makes for poor ratings.

The 3 pounds of 1o0 billion or so neurons sitting atop your spinal cord is the result of millions of years of evolution. You are likely stuck with your grey matter, and its inherent foibles. We cannot rewire our brains; at least, not anytime soon.

If portfolio managers and investors can at least develop an awareness of their own biases, it will help them understand when they are making decisions based on factors other than their trading methodology.

Indeed, the most one can hope to accomplish is to be enlightened enough to have some degree of self-awareness as to these biases and cognitive deficits. That allows you to at least recognize, and perhaps compensate for, your own errors. Smart investors can quarantine money-losing political pundits as investing news sources.

But, putting politics aside, investors should always seek out different investing perspectives from their own. This include reading economists with differing views, and portfolio managers   more bullish and bearish than they — if for no other reason than to understand the other side of your investing thesis.

Its too expensive not to . . .

Joe Fahmy has guided his hedge fund to outperformance over the past 13 quarters. He has been sharing his trading skills to a novice to intermediate traders based on his 16 years of trading.

This is our their attempt at creating bite size, easy to understand, bullet points for traders. The prior posts are here and here.

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After 10,0000+ plus hours of trading, thinking and analyzing what you do, you come to recognize some measurable improvement. This is the point where you have matured as a trader. It also means you are at the point where you are consistently earning a living as a trader. Reaching this level of achievement should be the goal of every trader.

What are the signs that you are no longer a newbie? When you . . .

1) Are Self Reliant: When you stop asking other people: “What do you think of the market?” While I respect the opinions of my colleagues, I DO NOT rely on them. I prefer to do my own homework, research and analysis. I LET THE MARKET tell me if I’m right or wrong.

The ultimate goal for traders is to make confident decisions on your own and trade with complete independence. You should not have to rely on the opinions of others because you should have conviction in your OWN ideas.

2) Stop Celebrating Winners: When you stop feeling the need to pound your chest every time you make 30 cents on a stock. (It is the flip side  of not getting depressed over every loss). Recognize what you did correctly and move on to the next trade.

The great Pittsburgh Steelers coach Chuck Noll used to say, after you score a touchdown there’s no need to start dancing. Simply hand the ball to the referee, head back to the bench and “Act like you’ve been there before!”

Same thing goes for the stock market. Don’t act like you’ve never had success trading before.

3) Let the Trades Come to You:  When you stop feeling the need to trade every day and you get over the “fear of missing out.” This is the downfall of most traders.

It took me a while to shift my focus from worrying about “missing out” to playing great defense. Once I did this, I noticed an increase in my confidence level as a trader. Keep in mind, there will ALWAYS be opportunities and it’s okay if you miss a few.

4) Feel No Need to Brag: Those traders who compulsively tell everyone about every winner are over compensating for their insecurities. It is a sign of lack of confidence. When you make a good trade or a good call on the market, and you don’t feel the need to remind everyone — its because that is what is supposed to happen.

The key is to be consistent and to separate your ego from your trading. If you are doing a good job, people will notice.

5) Loss Management: When you learn to cut losses without hesitation. No one likes to lose, but cutting losses is part of the game. I have studied the best traders throughout history and they all have the same number one rule: CUT YOUR LOSSES! Learn to accept when you are wrong and move on!

Maturing as a trader involves discipline, focus and the ability to make decisions. How do you get to this point? Make decisions and learn from them! I openly admit that I have made TONS of mistakes in the market, and I still make mistakes EVERY DAY. Thankfully, I’ve learned from them and now try my best to minimize those mistakes. The key is to MAKE a decision without worrying that you might be wrong. As long as you learn from it, you can correct it the next time. Again, just make the decision! Who knows, it might end up being a good one.

~~~

Fahmy holds seminars for active traders who want to improve their returns.   Readers of the Big Picture who are interested will get a $500 discount on the full day event. Go to TradingBigWinners.com and enter the promotional code: “bigpicture500” for the New York (3/3) seminars. Barry Ritholtz will be discussing trader psychology and cognitive errors at this seminar.

Nice list from Jeremy Grantham, via Marketwatch:

1. Believe in history
“All bubbles break; all investment frenzies pass. The market is gloriously inefficient and wanders far from fair price, but eventually, after breaking your heart and your patience … it will go back to fair value. Your task is to survive until that happens.”

2. ‘Neither a lender nor a borrower be’
“Leverage reduces the investor’s critical asset: patience. It encourages financial aggressiveness, recklessness and greed.”

3. Don’t put all of your treasure in one boat
“The more investments you have and the more different they are, the more likely you are to survive those critical periods when your big bets move against you.”

4. Be patient and focus on the long term
“Wait for the good cards this will be your margin of safety.”

5. Recognize your advantages over the professionals
“The individual is far better positioned to wait patiently for the right pitch while paying no regard to what others are doing.”

6. Try to contain natural optimism
“Optimism is a lousy investment strategy”

7. On rare occasions, try hard to be brave
“If the numbers tell you it’s a real outlier of a mispriced market, grit your teeth and go for it.”

8. Resist the crowd; cherish numbers only
“Ignore especially the short-term news. The ebb and flow of economic and political news is irrelevant. Do your own simple measurements of value or find a reliable source.”

9. In the end it’s quite simple. really
“[GMO] estimates are not about nuances or Ph.D.s. They are about ignoring the crowd, working out simple ratios and being patient.”

10. ‘This above all: To thine own self be true’
“It is utterly imperative that you know your limitations as well as your strengths and weaknesses. You must know your pain and patience thresholds accurately and not play over your head. If you cannot resist temptation, you absolutely must not manage your own money.”

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Source:
10 investment lessons from Jeremy Grantham
Jonathan Burton
MarketWatch, Feb. 26, 2012
http://www.marketwatch.com/story/10-investment-lessons-from-jeremy-grantham-2012-02-26