Posts filed under “Rules”
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 look less like a debate about asset classes and more like a religious cult.
The advocates for any sort of investing thesis have their rules, metrics, heuristics and biases. Here are the rules we teased out for the Gold Trade:
The Rules of Goldbuggery
1. Gold is a Currency: This is rule number 1. It is not a decorative or industrial metal, it is a permanent store of value, as dictated by Greeks in Lydia around 700 B.C. And, it shall be ever thus.
2. The price of gold cannot fall, it can only be manipulated lower: When gold’s price falls, it is an unnatural act. It can only occur as the result of an international cabal of Central Bankers and politicians. Its a conspiracy, and we know who the guilty parties are.
3. If the price of gold is rising, it is doing so despite enormous and desperate efforts by manipulators to prevent the rise: This is the corollary to the prior Rule of Gold manipulation. Gold runs up despite the overwhelming opposition to it.
4. The world MUST return to the Gold Standard one day: It is inevitable that we will return to a Gold Standard. We all know this to be true. When we compare the size of the money supply to past amounts when there was a Gold Standard, we can derive prices of Gold in the $7,000, $10,000 even $15,000. Hence, we know its cheap even at $2,000.
5. Central Bankers are printing money relentlessly, and this can only drive Gold prices higher: NOTE: You must ignore, for the moment, that Gold has not gone higher for the past 2 years as Central Banks around the world have ramped up QE. This only means that ultimately, Gold will go much much higher.
6. Gold works whether the economy is good or bad: When we have a red hot economy, Gold is your hedge against inflation. When we have a bad economy, Gold is a safe harbor against collapse. It is a one way trade that never fails!
7. Gold will survive after the world economy crumbles: Gold is the ultimate currency, as it has a value that will survive even after the whole world tumbles around you. Get yourself some gold coins and a Glock and you will be just fine when the whole world goes to shit. We welcome the era envisioned in the movie Mad Max.
8. Never admit that Gold is essentially a sucker’s bet: Never discuss how in the last century, gold has run up only be to trounced in repeated massive sell offs (always blame rule #2 for this). Do not discuss how this has happened in 1915-20, 1941, 1947, 1951-66, 1974-76 1981, 1983-85, 1987-2000 and 2008.
9. Gold is a rejection of government, and their control of fiat money and finance: There are no printing presses that produce gold, it is finite, natural and God created. How much we scrape out of the ground each year is limited, and the only variable to the old equation. (Just ignore Man’s natural tendency to organize into to City-States over the past 12,000 years).
10. All Gold discussions must contain ominous macro forecasts: Your description of why Gold is going higher must consist of spurious correlations, unprovable predictions, and a guarded expectation of bad things in the future. Avoid empirical data at all costs.
11. Gold is always rallying in one currency or another: Sure, it may be down 30% in Dollars, the reserve currency it is priced in, but you can always find a currency falling faster than it does and claim you own it in that denomination. Last week, it was up in Japanese Yen. This week, it is up in Zimbabwe dollars.
12. China & India know the value of Gold; the Western world does not: The massive buying of gold by consumers in Chindia reflects the culture, intelligence and investing savvy of the people in these countries. The West doesn’t get it, and it is their loss.
Bonus rule: Never admit Gold might be falling because it trades on human emotions and psychology and has no intrinsic value whatsoever.
The enormous amounts of dollars involved in the Gold trade has attracted all manner of charlatans and frauds to the Gold trade. Although this list can help you separate the true believers from the criminals, time has proven them to be both are enormous money losers.
Ignore the risks of being a gold bug at great peril to your portfolio . . .
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
Before Todd Harrison created Minyanville, he was an options trader at Morgan Stanley, eventually becoming President of Cramer Berkowitz, where he toiled as head trader at Jim Cramer’s hedge fund. Todd has an excellent analysis of the various biases that endanger investors. Here is the full list: 1. Confirmation Bias 2. In-Group Bias 3. Gambler’s…Read More
Way back in 2011, we pulled together a run of some of the Trading Rules & Aphorisms that show up on the site. It turned out to be a popular post, and I added “Rules” as a new category.
Thus, we update this semi- annually. These are my traders, analysts, economists and investors views’ on what to do — and what not to do — when it comes to markets that have been published on TBP.
Here is the latest update:
Trading & Investing Rules, Aphorisms & Books
• In Defense of the “Old Always” (Montier)
• The golden rules of investing (India)
If you have any suggestions for any good lists of rules I may have missed, please link to them in comments. If they are worthy, they will get added to the list.
My own trading rules and favorite Trading Books are after the jump
Keep it simple, avoid the pitfalls Barry Ritholtz Washington Post, January 25 2013 “A simple, albeit less than optimal, investment strategy that is easily followed trumps one that will be abandoned at the first sign of under-performance.” That’s from Tadas Viskanta of Abnormal Returns, a “forecast free” investment blog. He was…Read More
My Sunday Washington Post Business Section column from yesterday — Keep it simple, avoid the pitfalls — described 10 ways to keep your investing simple. Here are my 10 (plus 2 corollaries) Simplify Your Investing 1 Go passive. 2 Diversify across asset classes. 3 Be mindful of valuation. 4 Dollar cost averaging. 5 Keep costs…Read More
My Sunday Washington Post Business Section column is out. This morning, we look at the advantages of avoiding complexity in your investment process. The print version had the simple headline Simplifying Your Investment Strategy while the online version used the hedder Keep it simple, avoid the pitfalls.
There are know advantages to certain complex investing strategies, but these complexities become harmful disadvantages most of the times, as Humans are emotionally unable to follow them.
By creating an investment plan that is simple and easy to follow, you make it more likely that you will ultimately succeed and reach your goals. Hence, all of the familiar themes get mentioned in my focus on simplicity: ETFs, lower costs, diversification, rebalancing, dollar cost averaging, etc.
Here’s an excerpt from the column:
“We must recognize our own behavioral errors. To be blunt, you are not likely to become a cognitive Zen master anytime soon. But a little enlightenment could keep you from making some common investing errors.
Knowing these limitations, we can design an investment plan to circumvent the behavioral pitfalls. And a good step is to simplify. Toward that end, keep these 10 ideas in mind when approaching your portfolio”
The 10 ideas are not groundbreaking — but they are often overlooked.
Less can be more.
Keep it simple, avoid the pitfalls
Washington Post, January 25 2013
Michael: I don’t know anyone who could get through the day without two or three juicy rationalizations. They’re more important than sex. Sam: Ah, come on. Nothing’s more important than sex. Michael: Oh yeah? Ever gone a week without a rationalization? -The Big Chill One of the things we all do as…Read More
Keep it simple, avoid the pitfalls Barry Ritholtz, Washington Post, January 25 2013 “A simple, albeit less than optimal, investment strategy that is easily followed trumps one that will be abandoned at the first sign of under-performance.” That’s from Tadas Viskanta of Abnormal Returns, a “forecast free” investment blog. He was…Read More
Its the start of the new year, and most of you have been thinking about some grandiose plan for self-improvement. Quit smoking, lose weight, clean out the basement, exercise, spend more time with family and friends, floss. May I suggest taking control of your portfolio as a worthwhile goal this year? I have been thinking…Read More