Posts filed under “Apprenticed Investor”
Source: Red State
A friend writes: “What do you do when presented with a chart such as the one above?”
My answer was simply that it depended upon who is showing you the chart:
• If it comes from a hard core partisan, you laugh at the flaws in their wetware and say nothing. Recognize they are not capable of comprehending logic or objective reality, and can only respond to emotional narratives.
• If they are a student, or anyone genuinely interested in markets, economics, or probabilistic analysis, you ask, in your best Socratic method, the questions below.
• If they are an investor, you simply take their money.
Sports fans, Partisans — anyone emotionally invested in any specific outcome — lose the ability to objectively judge reality. Studies have shown that their brains appear to have a form of damage similar to aphasiacs. But there is no physical damage, it is merely inherent flaws built into the wetware.
To investors, this is a devastating problem, one that eventually will become terribly expensive if they do not learn how to compensate for it. The psychological term for this is selective perception. I love tracking down examples of this at work, as it reminds me how we are all wired in a way that is filled with cognitive flaws. Investing enlightenment only is possible once you objectively recognize and learn to work around the inherent flaws in your wetware.
This chart — which is hysterically funny to anyone who can objectively review economic data — reveals pretty much nothing about either politics or unemployment. But it reveals everything about the cognitive errors of the person who drafted it.
Let’s return to our student, or anyone genuinely interested in this data: See if your wetware can answer these questions. Once you have done that, go back and review the chart again:
1) Is this time period unique or typical? Do other eras share a similar relationship between the two variables?
2) Is there a causal relationship between the two variables? Asked another way, does the House Majority significantly impact employment, or is this merely a classic example of correlation without causation?
3) What other factors might impact employment more significantly than House Majority?
4) Is there a similar relationship between White House and Unemployment? How about the Senate and Unemployment?What do these relationships reveal about the original two variables?
5) Why such a small sample? We have been tracking unemployment for many decades, along with House majorities — What does using the complete data set reveal?
6) What about other employment related data? How do wages, long term unemployment, job mobility, and labor force participation rate compare to House Majority? What about GDP, balance of trade, inflation, deficits, etc?
7) What other ways are there to consider the data? Does a peak-to-peak or a trough-to-trough measure of unemployment change the outcome of the relationship between variables?
8) What about other time periods? Does the relationship in the chart hold true for periods of 5, 10, 20, 25 or 30 year periods?
In my business, I cannot allow my personal political preferences to interfere with my ability to form a coherent and objective view of reality. Whatever the business of the person who createdthis chart is, objectively reality does not matter much.
I only hope they are active participants in the stock market . . .
Jason Zweig has an interesting piece in the Saturday WSJ about the bad advice investment advisors give: “Investment professionals are supposed to exercise independent judgment; in Warren Buffett’s words, they should be fearful when others are greedy and be greedy only when others are fearful. It doesn’t always work that way. Corporate pension funds had…Read More
The never ending parade of stock scandals seems to continue unabated, the stock lending scam being only the most recent. As history has shown us — from Mexico to Orange County to analyst banking crisis to Derivatives to etc., when the Street comes aknockin, best for you to hide your wallets. For reasons we are…Read More
My inbox is deluged with rants and demands from people who are insisting that This. Rally. Must. End. NOW! A composite of their emails would read something like this: “How can you sit there so blithely while the Fed debases the world’s reserve currency? Why haven’t you commented on POMO?!? The entire game is rigged,…Read More
Michael Steinhardt was one of the most successful hedge fund managers of all time. A dollar invested with Steinhardt Partners LP in 1967 was worth $481 when Steinhardt retired in 1995. The following six rules were pulled out from a speech he gave: 1. Make all your mistakes early in life: The more tough lessons…Read More
This comes from a math blog by a teacher called WITHOUT GEOMETRY, LIFE IS POINTLESS (get it?).
There is a recent post I wanted to reference — Habits of Mind — that was originally written for math students. With a few small changes, it can be readily adapted to thinking about markets, risk, investing, etc.
Have a go at it:
Habits of mind
1. Pattern Sniff
. . .A. On the lookout for patterns
. . .B. On the lookout for shortcuts
2. Experiment, Guess and Conjecture
. . .A. Can begin to work on a problem independently
. . .B. Estimates
. . .C. Conjectures
. . .D. Healthy skepticism of experimental results
. . .E. Determines lower and upper bounds
. . .F. Looks at small or large cases to find and test conjectures
. . .G. Is thoughtful and purposeful about which case(s) to explore
. . .H. Keeps all but one variable fixed
. . .I. Varies parameters in regular and useful ways
. . .J. Works backwards (guesses at a solution and see if it makes sense)
3. Organize and Simplify
. . .A. Records results in a useful way
. . .B. Process, solutions and answers are detailed and easy to follow
. . .C. Looks at information about the problem or solution in different ways
. . .D. Determine whether the problem can be broken up into simpler pieces
. . .E. Considers the form of data (deciding when, e.g., 1+2 is more helpful than 3)
. . .F. Uses parity and other methods to simplify and classify cases
. . .A. Verbal/visual articulation of thoughts, results, conjectures, arguments, etc.
. . .B. Written articulation of arguments, process, proofs, questions, opinions, etc.
. . .C. Can explain both how and why
. . .D. Creates precise problems
. . .E. Invents notation and language when helpful
. . .F. Ensures that this invented notation and language is precise
Linguistical Differences Amongst Market Theorists: Efficient Market Practitioners vs Behavioral Economists*
Ever listen to how people speak? I don’t mean their verbal tics or habits (“um”), I refer specifically to the words and phrases they choose to use. The way they deploy language can be quite revealing about their beliefs, training, and thought process. Consider, as an example, the bond market. The discussion of late have…Read More
Over the past few weeks, I have posted on an eclectic assortment of items. That is keeping with the blog’s sub-title: Macro Perspectives on Capital Markets, Economy, Technology, and Digital Media. A few of you have commented (here and here) or emailed about this recently. I want to take a few moments to explain the…Read More
A few weeks ago, I mentioned we were 50% long, 50% cash (up from 100% cash in May), and were planning on selling into any rallies. Since then, we have sold some winners outright (PWER), cut back other positions, and been stopped out completely of losers; win some, lose some. We are now approximately ~85%…Read More
This was originally published at The Street.com on June 1, 2005 — so this is a 5 year anniversary of sorts.
So far the Apprenticed Investor series has discussed a lot of don’ts. Don’t do this, don’t do that; avoid talking to these kinds of traders; don’t say or think these kinds of things.
Well, it’s time to shift gears, and since trading is an active enterprise, I’ll discuss some things you should do. I plan to expand on these ideas significantly in future episodes.
Taken together, the following 10 rules will not only help you with the philosophical grounding necessary for thoughtful — and successful — investing, they will help you avoid some of the more common mistakes made by investors and traders early in their careers.
This is the “Zen of Trading;” It is more than an overview — it’s an investment philosophy that can help you develop an investing framework of your own.
1. Have a Comprehensive Plan: Whether you are an investor or active trader, you must have a plan. Too many investors have no strategy at all — they merely react to each twitch of the market on the fly. If you fail to plan, goes the saying, then you plan to fail.
Consider how Roger Clemens approaches a game. He studies his opponent, constructs his game plan and goes to work.
Investors should write up a business plan, as if they were asking a Venture Capitalist for start-up money; just because you are the angel investor doesn’t mean you should skip the planning stages.
2. Expect to Be Wrong: We’ve discussed this previously, but it is such a key aspect of successful investing that it bears repeating. You will be wrong, you will be wrong often and, occasionally, you will be spectacularly wrong.
Michael Jordan has a fabulous perspective on the subject: “I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty six times, I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”
Jordan was the greatest ball player of all time, and not only because of his superb physical skills: He understood the nature and importance of failure, and placed it appropriately within a larger framework of the game.
The best investors have no ego tied up in a trade. Those who refuse to recognize the simple truism of “being wrong often” end up giving away unacceptable amounts of capital. Stubborn pride and lack of risk management allow egotists to stay in stocks down 30%, 40% or 50% — or worse.
Category: Apprenticed Investor