Wisdom From Jason Zweig
I received this wisdom from the Kirk Report blog, it is well worth reading for an exercise in introspection.
- There are only three kinds of investors – those who think they are geniuses, those who think they are idiots, and those who aren’t sure.
- One of the clearest signals that you are wrong about an investment is having the hunch that you are right about it.
- Investors who focus on price levels earn between five and ten times higher profits than those who pay attention to price changes.
- The only way to be more certain it’s true is to search harder for proof that it is false.
- Business value changes over time, not all the time. Stocks are like weather, altering almost continually and without warning; businesses are like the climate, changing much more gradually and predictably.
- When rewards are near, the brain hates to wait.
- The market isn’t always right, but it’s right more often than it is wrong.
- Often, when we are asked to judge how likely things are, we instead judge how alike they are.
- Most of what seem to be patterns in stock prices are just random variations.
10. In a rising market, enough of your bad ideas will pay off so that you’ll never learn that you should have fewer ideas.
11. The more often people watch an investment heave up and down, the more likely they are to trade in and out over the short term – and the less likely they are to earn a high return over the long term.
12. Investing is not you versus “Them”. It’s you versus you.
13. The single greatest challenge you face as an investor is handling the truth about yourself.
14. Hindsight bias keeps you from feeling like an idiot as you look back – but it can make you act like an idiot as you look forward.
15. Ignorance of our own ignorance haunts our financial judgments.
16. Investing requires taking a stand on at least some of the uncertainties that the future holds. So your goal is to be as sure as possible that you don’t think you know more than you really do. How much you know is less important than how clearly you understand where the borders of your ignorance begin. It’s not even a problem to know next to nothing, as long as you know you know next to nothing.
17. Being part of the herd is fun while it lasts, but it’s seldom lucrative for very long, and it’s impossible to predict when the herd will change its “mind.” If you want to make more money than other people, you can’t invest like other people.
18. Knowing, or even imagining, that someone else is relying on your advice can make you feel more accountable, forcing you to go beyond your gut feelings and fortify your opinions with factual evidence.
19. Find out who has a negative view and give this devil’s advocate a full hearing.
20. Whether you should take a risk depends not just on the probability that you are right but also on the consequences if you are wrong. You must always weigh how right you think you are against how sorry you will be if you turn out to be mistaken.
21. We are often most afraid of the least likely of dangers, and frequently not worried enough about the risks that have the greatest chances of coming home to roost.
22. When an intangible feeling of risk fills the air, you can catch other people’s emotions as easily as you can catch a cold.
23. Overreacting to raw feelings “blinking” in the face of risk is often one of the riskiest things an investor can do.
24. There’s safety in numbers only when there’s nothing to be afraid of.
25. Many of the world’s best investors have mastered the art of treating their own feelings as reverse indicators. Excitement becomes a cue that it’s time to consider selling, while fear tells them that it may be time to buy.
26. A mistake that stems from an action hurts worse than a mistake that results from inaction.
27. Once you have a handful of options, adding even more choices will lower you odds of making a good decision and increase your chances of regretting whatever decision you do make.
28. The harder the choice feels, the less people want to choose. Yet, the threat of having less choice almost always disturbs us.
29. The closer you come to hitting your target, the more regret you are apt to feel if you miss it.
30. The human brain is a brilliant machine for comparing the reality of what is against the imagination of what might have been.
31. There’s no end to the roads not taken.
32. Investors probably hurt themselves more by avoiding risks they imagine they might regret than by taking risks they really do end up regretting.
33. Instead of making judgments one at a time, you should follow policies and procedures that put your investing decisions on autopilot.
34. The more you can automate your investing, the easier it should be to control your emotions.
35. The pleasure you expect tends to be more intense than the pleasure you experience.
36. We often find out that what we thought we wanted before we got it is no longer what we really want once we have it.
37. There are two tragedies in life. One is to lose your heart’s desire. The other is to gain it.
38. Your memory of what was is shaped largely by what is.
39. If you focus too narrowly on the task at hand, you may never use your peripheral vision.
40. Chance favors the prepared mind.
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US REITs TOPPING
After a very long topping process I do believe we have finally reached a point where the market is likely to run out of steam.
The Dow is now up ~8% since the 19 December low, including 21 sessions with no more than a 1-3 session pause. The VIX is 18 and showing extreme complacency.
Coming back to our chart IYR representing the US REIT market, the wave count as it stands is extremely clear, and the corrective wave has now reached a deep 78.2% fib retracement.
Hold on to your hats we are about to start a whole new wild ride.
Dualism and its Market Impact
I find myself writing this note in a reflective mood in a cocktail bar overlooking the gorgeous Shoal Bay. There are no shortage of market forecasts doing their rounds, as is common for this time of the year, and quite frankly the argument for a positive 2012 is about as equally compelling as is the argument for a negative 2012. I shall do the sensible thing and avoid making an absolute forecast for the year ahead. My focus is rather to develop a tactical portfolio around the probable risk vs. rewards on the dataset with which the market presents us with. In plain language without going into the detail of the analysis the mar-ket is offering us puny returns for the current risk environment, despite all the positive “surprises” from essentially lagging and coincidental indicators. This makes me cautious and unwilling to accept “normal” degrees of market risk. Our portfolio con-struction approach is a highly dynamic process and it is therefore best for me to leave the outlook for 2012 as one of caution for now, this may change at some point in the year.
With the concept of brilliant people discovering brilliant models of economic and psychological behaviour, how is it possible that there can be such vast differences of opinions as to what the outcome of these models is likely to be into the future.
In 1994 a scientist, Francis Crick, one of the discoverers of the molecular structure of DNA wrote a book about consciousness called The Astonishing Hypothesis. His theory posits that “a person’s mental activities are entirely due to the behavior of nerve cells, glial cells, and the atoms, ions, and molecules that make them up and influence them.” Crick claims that scientific study of the brain during the 20th century lead to acceptance of consciousness, free will, and the human soul as subjects for scientific investigation. Crick’s controversial message, “You, your joys and your sorrows, your memories and your ambitions, your sense of personal identity and free will, are in fact no more than the behaviour of a vast assembly of nerve cells and their associated molecules”.
Over the last few years I have read a number of books on the fast growing field of neuroscience and while I am immensely impressed with the progress made, I am somewhat disappointed in how many people are taking sciences discoveries as holy writ without the requisite amount of questioning. Can it be as Crick would have us believe that the mind is simply a circuit of brain impulses. In fact Crick is echoing the words of Thomas Hobbes in his classic book Leviathan published in 1651.
As I move onto my 2nd beer I wish to reacquaint you with the Theory of Dualism as taught by Rene Descartes (1596—1650). The concept of a separate mind and body with the mind being the soul was presented by Plato almost 2,000 years ago, and I believe is probably a comfortable fit for most of you reading this letter. Descartes was determined to prove his existence, as he believed it was possible to doubt every aspect of his physical existence. He said how is it possible to prove that I am a man living in the world with a family and a job, etc; surely it could all be a dream. He proceeded to cast every aspect of his life into doubt, except for one thing he said that he cannot deny that he is thinking, and from there came the famous words, “I doubt, therefore I think; I think therefore I am”. So using Descartes approach the mind can be seen as an entity separate from the body, with a process of causal interaction.
Now is probably a good time to ask the question what on earth has this to do with the managing of money and investing in the stock market. Armed with this theoretical background I aim to introduce a novel idea as to how we should understand the stock market and the vast number of opposing market views (this is probably well documented somewhere but is original to me with my current knowledge). I fear what I am about to say may be construed as heretical but it is a belief I have and because we don’t trade the market but rather we trade our beliefs about the market I think it is worth committing this belief to paper.
I believe the market has its own mind/soul/personality, made up of a combination of all market participants wants and desires. The sum of all buys and sells make up the body of the market; however, the mind of the market is determined not from a classic mechanical or physical process of how the economy or psychology of the brain should work according to a formulae given the current circumstance, rather the mind acts with causal influence but independence as a separate entity. It is for this reason that making mechanical forecasts about how the market will behave in 2012 are likely to be guesses. Rather a better approach to forecasting how the market will behave in 2012 is to focus on the markets personality.
I end with a quote from Steve Jobs that I believe best explains my point, “I began to realize that an intuitive understanding and consciousness was more significant than abstract thinking and intellectual logical analysis”.
Read More...Student Loans the new Subprime
The thesis that an even bigger debt crisis will follow the bursting of the Student Loan debt bubble was put forward more than a year ago. I came across the idea from Steve Eisman a hedge fund manager that made a fortune by playing the CDS market with subprime. The main stream media never picked up on this idea, and frankly I haven’t really followed the trade as I wasn’t sure how to play it.
With the focus all on European debt, the media hasn’t been focusing much on Municipal Debt and Student Loan debt. I have a feeling that not before long these debts will be confronted in a nasty way.
Take a look at the size of the student loan market, this is much larger than subprime, when it eventually catches up with the debt servicers it will have devastating effects.
Debt Ceiling Limit “Hit” Again
have you seen the mainstream media pick up on this??
According to U.S. Treasury figures, Uncle Sam bumped up against the debt ceiling a week ago yesterday.
The current ceiling, as provided for in the sleazy deal between the White House and Congress last August, is $15.194 trillion.
This morning, the debt totals $15.236 trillion. Thus is the Treasury once again dipping into government pension funds to pay the bills, just as it did last year.
The president will ask Congress to raise the ceiling again within “days, not weeks,” says White House spokesman Jay Carney.
Under the August agreement, an increase of $1.2 trillion will likely pass easily. The next one, not so much.
Hmmm… $1.2 trillion. That might not be enough to keep the lights on through Election Day. Could be interesting…
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