Posts filed under “Rules”

Random Thoughts: Comebacks, Intraday Reversals and the like

Since it is a Friday before a 3 day holiday weekend, it is a good time to kick back and think about what the recent market action might (or might not) mean.

• Most Day-to-day market action is noise, There is very little signal involved, with the vast majority of commentary simply after-the-fact rationalizations of what just occurred.

• Over the years, one of the few exceptions that I have found to the daily noise is the IntraDay reversal. After a long move in either direction, followed by a big flip can be significant  (worrisome, if not conclusive).

• Hence, I do pay attention to days like Wednesday that start out strong and end weak. The caveat: All bets are off on FOMC minute days, as we seem to have a big spike in volatility (someone must have done a study on this).

• Never confuse a forecast with an analysis.

• Consider a day that starts out 150 Dow points up (or down) and ending the day down (or up) 150. That 300 point swing is more significant than a down (up) 300 point day. We sometimes see it at major tops and bottoms, as it reflects an exhaustion of one side in the battle of supply and demand. (Candlestick technicians have the data on shooting stars and dojis; if this sort of stuff interests you, then see Steve Nison’s book Japanese Candlestick Charting Techniques).

• Of course, all of this can reflect your biases, holdings, fears and worries. That is why I try to think about issues such as these in the abstract, rather than referencing current positions — to avoid my own b9iases and get stuck int he trap of merely talking my book.

• The alternative is allowing markets to serve as Rorschach tests, reflecting peoples pre-existing investment postures — not what they truly think. This an ongoing pundit problem.

• Be aware of your own timeline — are you a trader or an investor? Then act like it.

Bears see the intraday reversal (like Wednesday’s) as a very significant change in tone; Bulls see a comeback (like Thursday’s) as proof of a Japanese overreaction to weak China economic news — something inapplicable to the US markets.

• Lately, it seems that markets close the day much stronger than the early morning futures would imply. I’d love to see the actual data on that (Closes vs AM Futures). It is similar to what used to be called the Smart Money Index, something created by Don Hays. (I have no clue if SMI has any insight).

• My key takeaway is that the cognitive bias is immense. Most of the attempts we see to interpret short or even intermediate term market action are often overwhelmingly filled with rationalizations of existing positions.

• Be aware of the tendency to let Narratives obscure the data.

• Raymond James’ Jeff Saut is fond of saying “Where you stand is a function of where you sit.” Meaning, your book often reflects how and what you think.

• So much of what we have learned from the data is counter-intuitive.

• The most challenging thing confronting the vast majority of investors is their inability to make objective, emotion-free decisions based on empirical data. Instincts, hunches and emotions are killers when it comes to the markets.

Identifying the cognitive errors we make is only the first step; Developing a way to respond to them, preventing this aspect of our personalities from affecting investing decisions is an ongoing, indeed, never-ending process.

What are you doing to prevent your biases and emotions  from getting in your own way?

Category: Investing, Markets, Psychology, Rules, Sentiment, Technical Analysis

Bernard Baruch: 10 Rules of Investing

“Being so skeptical about the usefulness of advice, I have been reluctant to lay down any ‘rules’ or guidelines on how to invest or speculate wisely. Still, there are a number of things I have learned from my own experience which might be worth listing for those who are able to muster the necessary self-discipline:…Read More

Category: Investing, Rules

Warren Buffett Investing Quotes

Given that its the Berkshire annual meeting this weekend, now is as good a time to roll out these quotes from Warren himself:   “To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of…Read More

Category: Investing, Rules

The Fine Art of Being Worng Wrong

  “We are in the business of making mistakes. The only difference between the winners and the losers is that the winners make small mistakes, while the losers make big mistakes.” -Ned Davis “More than anything else, what differentiates people who live up to their potential from those who don’t is a willingness to look…Read More

Category: Apprenticed Investor, Psychology, Rules, Trading

Sell Out: "The Other Side"

  Reader:  “Is it just me or has Barry Ritzholtz gone over to the other side. I see him guest hosting Bloomberg more so maybe it just goes with the territory….I’m dismayed and don’t like it when these guys sell out. Roger Lowenstein and his article on Bernanke….in Atlantic Monthly. Just venting………” Fleckenstein: Lowenstein, who…Read More

Category: Gold & Precious Metals, Psychology, Really, really bad calls, Rules

Sell Out: “The Other Side”

  Reader:  “Is it just me or has Barry Ritzholtz gone over to the other side. I see him guest hosting Bloomberg more so maybe it just goes with the territory….I’m dismayed and don’t like it when these guys sell out. Roger Lowenstein and his article on Bernanke….in Atlantic Monthly. Just venting………” Fleckenstein: Lowenstein, who…Read More

Category: Gold & Precious Metals, Psychology, Really, really bad calls, Rules

Gerald Loeb's Market Wisdom

Gerald Loeb was a founding partner of E.F. Hutton & Co. He was the author of the books The Battle For Investment Survival and The Battle For Stock Market Profits. Following the 1929 crash, Forbes magazine called Loeb “the most quoted man on Wall Street.” Via Ivan Hoff, today we look at the rules which…Read More

Category: Investing, Rules

Gerald Loeb’s Market Wisdom

Gerald Loeb was a founding partner of E.F. Hutton & Co. He was the author of the books The Battle For Investment Survival and The Battle For Stock Market Profits. Following the 1929 crash, Forbes magazine called Loeb “the most quoted man on Wall Street.” Via Ivan Hoff, today we look at the rules which…Read More

Category: Investing, Rules

12 Rules of Goldbuggery

Yesterday morning, I mentioned the extent of cognitive dissonance surrounding the Gold was surprising (What Are Gold’s Fundamentals?). The reaction to Gold’s crash has produced some astonishing rationalizations. The refusal to acknowledge basic trading facts leads us to recognize that Gold bugs and traders have very specific rules that they MUST follow. These social conventions…Read More

Category: Gold & Precious Metals, Humor, Psychology, Rules, Valuation

50 Cognitive Distortions

  I stumbled across this interesting and exhaustive list of common cognitive distortions. It should come as no surprise that quite a few of these are applicable to investors. Here are a few that I found relevant: 3. Negative predictions: Overestimating the likelihood that a market or economic report will have a negative outcome. 7….Read More

Category: Markets, Psychology, Rules, Trading