Posts filed under “Cognitive Foibles”

Greg Harmon: We Are All Useless Morons that Suck

Let’s face it you suck at investing. Your adviser sucks at investing too. If you had picked the best stock to buy every day you could have turned $1000 into $264 billion by mid December. That is a 26.4 billion percent return. Did you even get a 1 billion percent return? How about 1 million percent? 1000%? 100%? If you did not hit a 100% return then you did not get even 4/10 millionths of what was out there. Translation: You suck at stock picking. People like Jack Bogle will use this type of data to tell you that you are wasting your time even trying and that you should just index your portfolio. Coincidentally he runs a few dollars in an index fund. I find it more interesting when some manager makes a killing and convinces themselves that they are geniuses. No one in this game is a genius. 100% return sucks remember? When you dig into more of these people, the elite suckers, the ones that can do it again and again, they all have one thing in common. It is not that they are on television and have great hair. Have you noticed that they usually are a bit modest about their results? The one thing they have in common is that they all have a process and are continually trying to improve it. Yes there is still skill involved to be an elite sucker, but all of them also know that they are not as good as they can be and are trying to be better everyday. They work at it full time, all the time. And the best they can do is make less than 4/10 millionths of the best possible return out there. Where else can you strive to achieve that kind of suckiness and be called a superstar? There are only 3 days left in the trading year and you are not likely to materially change your return against market perfection. But those 3 days are 3 more days to try to get better at what you do. To suck less. If you had a ‘good’ year, beating your benchmark then congratulations. But move on and keep trying to get better, because you still suck.

Happy New Year.

~~~

Greg Harmon, Dragonfly Captial

Category: Cognitive Foibles, Psychology, Think Tank, Trading

Am I Too Bullish?

Over the past few weeks, I have been trying to push back against the usual contingent of bears. In particular, I have argued that this bull cycle is not yet over, markets are not in bubble and that people have been sitting for too long in way too much cash. John Coumarianos of the Institutional…Read More

Category: Apprenticed Investor, Cognitive Foibles, Investing, Sentiment

Change Blindness

Psychologists who study the fascinating phenomenon of change blindness know that merely looking at something is not the same as actively paying attention to it. As the demonstration in this video shows, people can be blind to significant changes in a visual scene that are obvious to someone who expects that these changes are going to happen

Originally posted at NOVA

Category: Cognitive Foibles, Video

Personal Finance for Engineers (Twitter, 2013)

This is an updated version of my talk “Personal Finance for Engineers” given at Twitter HQ in San Francisco on October 9, 2013. Personal Finance for Engineers (Twitter, 2013) from adamnash Oct 09, 2013

Category: Cognitive Foibles, Investing

Critical Thinking

A look at some of the principles of critical thinking.

Category: Cognitive Foibles, Video

Found Stock Certs: Spot the Selection Bias

This issue comes up every few years: Someone is rummaging about in their attic or basement (or less romantically, a safety deposit box), and they find some long forgotten stock certificates.

I first noticed this as an issue with EMC more than a decade ago. A Massachussetts area man found a few certs that had appreciated somewhat:

The man, a 62-year-old salesman who wants to keep his identity under wraps, recently found that some stock he thought he had sold long ago had been quietly gaining value for 13 years. A week ago, it was worth about $4 million. The investor said he bought 3,000 shares of EMC, the data storage company, on a tip from his cousin in 1987, but soon sold 2,000 of them to pay for his children’s college tuition. He forgot about the remaining 1,000 until the state’s Abandoned Property Division, noticing the inactivity, contacted him last month.

Sure enough, after spending three days in his cellar with a kerosene lamp, he found the still-sealed envelope with the stock certificates. The shares, for which he paid about $15.75 each, have split several times, making him the owner of 48,000 shares whose latest 52-week high was $104.94.

-New York Times, December 03, 2000

I was reminded of that story this week when this one showed up in the Guardian:

Man buys $27 of bitcoin, forgets about them, finds they’re now worth $886k
Bought in 2009, currency’s rise in value saw small investment turn into enough to buy an apartment in a wealthy area of Oslo.The meteoric rise in bitcoin has meant that within the space of four years, one Norwegian man’s $27 investment turned into a forgotten $886,000 windfall.

Kristoffer Koch invested 150 kroner ($26.60) in 5,000 bitcoins in 2009, after discovering them during the course of writing a thesis on encryption. He promptly forgot about them until widespread media coverage of the anonymous, decentralised, peer-to-peer digital currency in April 2013 jogged his memory.

These sorts of stories typically are used to extol the virtues of Buy & Hold investing, or Set & Forget portfolios.

Why is this an example of Selection Bias?

I am reminded of the Steely Dan song “Throw Back the Little Ones (and Pan-Fry the Big Ones)”. This method of collecting samples uses outliers — the Big Ones — the wildest and most improbable investing success stories to demonstrate their point. What you do not see are all of the Little Ones, the higher probability, more common versions of the found stock certificate. That narrative usually goes something like “Did you ever here of a company called First Amalgamated Something or Other?” These stories lack the sexiness and Wow! factor of improbably finding a few million dollars in your basement.

Here are the headlines that you did not see — because no one shares this information, and due to the natural selection bias of them:

• Man Finds Worthless Lehman Brothers Stock Certificates in Attic;  “I thought I sold these,” he cried

• Man Inherits 10 million shares of now worthless GM Stock; Great Grandfather dies after 10 year coma “If only he went sooner

• Forgotten AIG shares Almost Worthless; Post Bailout and Reverse Split, boy finds $11 dollars worth of stock; “it was once worth millions” dad laments

Or most likely:
• Forgotten Penny Stock Certificates Still Worthless

I bet for each one of the found millions story, there are 100 worthless unpublished stock cert tales.

Steely Dan song after the jump . . .

 

Read More

Category: Cognitive Foibles, Financial Press, Investing

Makers and Takers

@TBPInvictus here. An IBD editorial picks up on a story originally run over at CNS News. Here’s the lede at CNS (emphasis mine): (CNSNews.com) – Americans who were recipients of means-tested government benefits in 2011 outnumbered year-round full-time workers, according to data released this month by the Census Bureau. They also out-numbered the total population…Read More

Category: Cognitive Foibles, Economy, Employment, Financial Press, Really, really bad calls

More Signal, Less Noise

Its Friday, the day I like to step back and get all Zen on y’all. As promised yesterday, our subject this morning — indeed, over the past few months — is how to reduce the meaningless distractions in your portfolio (and your life). You want less of the annoying nonsense that interferes with your investing,…Read More

Category: Cognitive Foibles, Financial Press, Investing, Psychology, Rules

Look Out Above, I Dont Know Why Edition (part II)

click for updated futures Source: Bloomberg     Yesterday morning I wrote Look Out Below, I Don’t Know Why Edition. Today, the market half is a mirror image — up about as much as yesterday was down. The only thing that remains the same is my ignorance — I really don’t know why markets are…Read More

Category: Cognitive Foibles, Investing, Markets

NYT Discovers Confirmation Bias

  “Perhaps something more complicated than sketching out voting districts is at play. The polarized political map is now accompanied by a media ecosystem that is equally gerrymandered into districts of self-reinforcing discourse.”   From the better-late-than-never files: I want to direct your attention to an article from David Carr, titled It’s Not Just Political…Read More

Category: Cognitive Foibles, Financial Press, Really, really bad calls