Posts filed under “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 at themselves and others objectively.”
-Ray Dalio

“Its okay to be wrong; it is not okay to stay wrong”
-Old Traders Expression

 

On Friday mornings, I like to wax philosophical about recent events. There are often instructive lessons to be learned, if only we pay attention to what others are doing correctly — and incorrectly — in the world of investing and trading. I take every opportunity that presents itself to let someone else pay for my tuition in the school of life.

This has been a week of blunders. Whether it is research, trading, market calls, or economics, we have seen some pretty awful judgment exercised.

When it comes to investing mistakes, I like to use a simple, 3 step process* to avoid big mistakes and to keep errors manageable.

Rule #1: Expect to be wrong.

Rule #2: Admit Error

Rule #3: Repair

The first step is simple attitude shift that is designed to remove your ego from the error recognition and repair process.

We know that the best stock pickers in the world are wrong about half the time; we also have learned that four fifths of active fund managers under perform their benchmarks. Almost no economists consistently forecast future GDP, Employment, Interest Rates, etc. — indeed, nearly all get it wrong when they look out more than month or so.

If you recognize the statistical certainty that you will be wrong, it should be much easier to accept any error as a normal part of your life.

When people refuse to admit error, it is because their sense of self-worth is too tied up in their calls. Once the expectation of error becomes built in, you remove the ego altogether.

Admitting error should be part of your regular process. I have found two ways to do this that seem to get good results: 1) Identify the error in a professional capacity to relevant parties. This can be to you, your co-workers and colleagues. 2) Perform regular reviews of your errors with the hope of avoiding them in the future. I do this with my annual mea culpas; Ray Dalio’s Bridgewater hedge fund is notorious for their brutal self-examinations — and they are (arguably) the most successful hedge fund in the world.

What does NOT admitting error look like? It is Apple investors, who double up all the whole way down from $700 to $400. It is the radical financial deregulators like Edward Pinto & Peter Wallison blaming the financial crisis on unrelated bank loans to poor minorities. It is the cacophony of excuses from the Gold community, blaming the 30% drop on central banks, Goldman Sachs, “paper” gold, the shorts and the dollar. My friend Albert Edward’s reiterated call for S&P500 at 450 — with the SPX kissing 1600 — smacks of a classic non-admission of error. His preference is to go down with the ship.

This week’s mother of all refusals to admit mistake has to be Harvard professors Reinhart & Rogoff. Instead of clearly and honestly issuing a mea culpa, they half admitted error, then back-peddled in a stunningly dishonest OpEd in the NYT today. We still don’t know what the real drop-dead line is for debt because they refuse to admit the mistake and try again (please consider peer reviewed publication next time).

Refusal to admit error prevents you from reaching the third step: Repair. If you do not admit the error, how can you fix it? In academia, this affects your reputation. In trading, your P&L is worse off, and in investing, your long-term returns suffer.

What mistakes did you make this week? What have you done about it?

 

Previously:
Expect to Be Wrong in the Stock Market (April 5, 2005)

My Annual Mea Culpas: 2012, 2011, 2010, 2009

Ray Dalio & the Machinery of Finance (September 15th, 2011)

 

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* If we want to be clever, we can add a fourth step — analyze how and why the error occurred, and consider ways to systemically prevent these in the future. That is a long term business management issue, and is itself worthy of a full post.

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

12 Cognitive Biases That Endanger Investors

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

Category: Markets, Psychology, Rules

Investing/Trading Rules, Aphorisms & Books (Spring 2013)

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

Sir John Templeton 16 Rules For Investment Success

10 Lessons from 1987 Market Crash

Livermores Seven Trading Lessons

Bob Farrell’s 10 Rules for Investing

James Montier’s Seven Immutable Laws of Investing

Richard Rhodes’ 12 Trading Rules

John Murphy’s Ten Laws of Technical Trading

Six Rules of Michael Steinhardt

Nassim Taleb’s 5 Rules of Volatility

Morgan Housel’s 9 Financial Rules

David Merkel: The Eight Rules of My Investing

Art Huprich’s Market Truisms and Axioms

DENNIS GARTMAN’S NOT-SO-SIMPLE RULES OF TRADING

Rosie’s Rules to Remember

Louis Ehrenkrantz’ 7 Golden Rules for Investing

In Defense of the “Old Always” (Montier)

Lessons from Merrill Lynch

Lessons Learned from 37 Years of Futures Trading

Richard Russell’s The Power of Compounding

The golden rules of investing (India)

25 Common Sense Money Tips

Dan Bunting’s Laws of Investing

Cassandra’s (Not so) Golden Rules About Investing (& Not Investing)

 

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

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Category: Apprenticed Investor, Investing, Rules, Trading

Keep Investing Simple

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

Category: Apprenticed Investor, Investing, Rules