Tag Archives: financial media

Old friends, and an investing epiphany

Live long enough, and even the somewhat socially awkward will accumulate a network of old friends with decades of experience in various fields. This is great for getting answers. When I have a question about physical science, I can contact a professor of physical science. Question about U.S. military history? I’m fortunate enough to know someone who teaches it at the collegiate level. Want to understand how a given firearm works? I can choose from multiple enthusiasts, none of whom need any encouragement beyond a hint of interest. Need an antique valued? One of the best men at my wedding has been in the business for thirty years. Question about the workings of a suburban police department? How about the deputy commander of a well-respected suburban police force? Real estate? In addition to agents I’ve worked with in three states, I could also call a friend and past client who made his career in the field. My uncle is a civil engineer, one cousin a retired petroleum chemist, another cousin a speech therapist, and so on.

The question is not whether one can locate the expertise, but whether one may fairly impose upon the friend. I’m not unique in this, nor even above the curve. I have this only because I lived to my mid-fifties without spending it all in a shack somewhere out near Glenallen, Alaska. Everyone else my age, except those who live in shacks near Glenallen, has at least as great a network. Those who got out more than I did probably have far greater networks, but I’m very satisfied with my folks. I wouldn’t trade any of you.

For them, it follows, I’m the old friend who edits. When they begin to consider doing some writing, it is quite natural that they ask me about it. I’m glad, because gods know I’ve bugged all of them often enough about this or that. If it comes to an actual project I’ll charge something, but advice is always free to old friends. Truth told, I don’t mind a bit. It’s rather nice that people would think I could help them understand something.

One old friend of mine is named Randy, and with some admitted contact gaps, we’ve known each other since college. Randy retired as a stockbroker with one of the big brokerages, and while in most people that might not mean as much, I’ve always known him as a maverick immune to peer pressure where he knows he is right. That tends to be true of me as well, so I found it easy to believe that he had knowledge and instincts on behalf of his clients that the average full-commission broker might not have had. Put another way, there aren’t very many such brokers I’d have steered anyone toward, but Randy would be the one.

Not long ago, Randy and I had a long conversation about investing. We agree in substance, especially in matters such as that people should remain within their comfort/knowledge zones. I told him I no longer buy separate issue securities, because while it’s possible I could develop the knowledge to do well at it, I know that I will not, and thus shouldn’t fool myself. I received a precious pearl of approval, which I will have set into a suitable mounting in a place of honor.

Maybe it’ll distract everyone from all the little tombstones representing my dumber investing mistakes.

While schooling me, Randy crystallized a realization that explains so very much: winning vs. losing, and the arithmetic. The instinct and habit is to look at an investing choice as one decision, to get right or wrong. It isn’t. Most investing decisions are based on some stated goal, even one as nebulous as “make money.” There are two decisions to make, and for an investment to meet or exceed expectations, both decisions must be right. There is the decision to buy (when/what/how much), and the decision to sell (when/how much) or hold (some or all). That’s a thing to consider: not to sell is also a decision.

If you are wrong 50% of the time, you will probably like your results 25% of the time because that represents the percentage of the time you will do what in hindsight turned out to be the right thing both times. That means that two times out of four you will likely be disappointed, and once out of four, you’ll probably take a straight-on bath.

If you are right 60% of the time, you will get satisfactory results 36% of the time, same reason. You are taking a hosing. About half the time, you will get one decision or the other wrong, with disappointing results. You’ll go splat big time about one time in six.

If you are right 70% of the time, all other factors being equal, you should be happy 49% of the time. You are still losing, though not by much. Slightly less often, one decision or the other will be wrong enough to disappoint. About once in ten, the disappointment will be great.

You have to be right just over 70% of the time just to be pleased more often than not. If you can arrange to be right 75% of the time, you will get a favorable result about 57% of the time. Not many people are that good. I’m not even close.

In the meantime, of course, the overall market does whatever it does. Goals can vary, as can strategies. This is a rabbit hole of exceptions, and I have felt the need to oversimplify this (yes, I am aware I am doing so), but the key takeaway is that there are two opportunities, not one, to screw up a given investment. A mistake in either case will probably cause disappointment.

Thus: even then, even being right three-quarters of the time, you’re pretty happy just slightly more often than not. Enough to matter, of course; enough to be meritorious, and definitely enough to offer a shot at outperformance over time. Your good decisions should outweigh your bad ones. And I guess if you are confident enough to feel you will be right 75% of the time, you probably should carry that through.

The minority of people who can achieve that success is small indeed. I have learned that I am not one. Many of the rest are more or less playing the slots in a different format. Whenever I find myself tempted, nowadays, I remind myself how much I despise gambling, and ask myself whether those glitzy casinos were built with the money people won. I suppose it’s like a former smoker who, when tempted to lapse, looks at graphic images of cancerous lung tissue: if that helps, go ahead.

And how often does one get to make an analogy between casinos and cancerous tissue? You’re very welcome.

For the rest of us, it’s buy and hold index ETFs all the way. We will generally not outperform, but we will get the market return less (very bearable) expenses. Even Jason Kelly, a noteworthy author and manager who has an excellent track record with stocks, has shifted entirely to a mechanistic method involving index ETFs. I’ve been running it in two different portfolios now for a couple of years, and I think it stands a good chance of outperforming because it takes the emotion out of the decision. The only free choice one makes is when to add more cash to the plan. From there, the entire course of events can be handled with a pretty simple spreadsheet and two trades per quarter per portfolio. You can learn more from his book on the topic.

Jason’s writing is entertaining and straightforward. My favorite part is the way he begins by politely butchering out the pundits who bray frequent predictions for which they are never held to account. It’s hard to imagine they can even keep writing, much harder to imagine anyone still wasting time on them, after Jason hits them with the literary equivalent of a fire hose loaded with ice water. He calls them “z-vals,” as in “zero validity,” and when he’s done with them they look like Leroy Brown at the end of the famous song.

You want to hate the media? Don’t hate the ones who are trying to tell you what has happened around the country and world. Start with the mainstream financial media, because they have hate coming. They get to tell you what will happen, be wrong on a consistent basis, and never suffer. They don’t even lose readers. Were you able to confront one, he (most of them are men; for some reason, it appears harder to find intellectually dishonest women) would tell you that doing your own research was your problem, and not to blame him. “If you believed me, it’s not my fault you were that big an idiot.”

Even the salesiest full-commission broker at Merrill Lynch has more accountability than that.

As for me, if I have to be right three-quarters of the time in order to do well, maybe I’d better keep my decisions in the comfort zone.

Headlines + Dow = artificially generated freakout

In the past, I’ve written about how financial media spread panic, and how handy the Dow Jones Industrial Average is for them. Right now, this very day, I can give you a case in point.

As I type, the DJIA is off by 311, which takes it to 16,680. That is a decline of 1.83%. And Marketwatch is splashing the headline in huge bold letters: It’s getting ugly – Dow nosedives by 350.

Let’s take this one out with a series of quick snapshots, like in urban warfare training.

  • Obviously the index has rebounded by a fair bit, but the frantic headline remains. An alarming percentage of people absorb headlines as gospel, making them prey to the modern art of the misleading headline.
  • 1.83% is not that ugly. It’s a definite down day if that’s where it ends (and as I write, there are two and a half hours left in the trading day), but the sky isn’t falling. Ebola wasn’t found in all our supermarkets. A Kardashian didn’t have a wardrobe malfunctian.
  • Notice the verbiage: ‘ugly.’ Implies there’s blood in the aisles. There isn’t. ‘Nosedives’ emphasizes the deception: ZOMG PANIC DO SOMETHING OMG OMG YOUR ALL GONNA DIE OMG THIS IS THE END! This is the equivalent, in terms of common sense, of recommending someone get an ambulance ride to the ER because he or she woke up with a headache.
  • On the year, the DJIA is slightly down. It began the year at about 17,250. That’s fairly close to a flat year, if it ended today, which is not great, but it hasn’t been very volatile for most of the time. It’s been dull, and the media haven’t had anything to wet themselves over. Anything will do.
  • For the last five years, the index is up from almost exactly 10,000. I’m not doing the arithmetic, but that looks to me like annual gains of about 10%. After five years of that, you’d probably start to anticipate a flat year. No bull market is eternally sustainable. When it hiccups, that’s not a ‘bloodbath,’ another term MW is bandying.
  • People, in obedience to punditry whether they realize it or not, are still reacting to the Dow’s numeric change the way they did when it was at 10,000, or even 5,000, and such a numeric change was greater. When the index was at 10,000, a decline of 350 would be 3.5%, which is a bad day, but not a disaster. If you watch indices long enough, you’ll see those days a few times a year. At nearly 17,000, a decline of 350 is 2%, which is the kind of bad day you’ll see rather more often in a given year.
  • It follows that, after paying any attention to the Dow in the first place, the next dumbest investing blunder is to pay attention to its number rather than its percentage. Show me a day when it’s down by 10%, or 20%, and that’s at least got me looking at valid indices to see if there really is a bloodbath. For 2%, it’s not worth my time.
  • In the meantime, we can use MW’s helpful tools to find out what’s driving the decline. There are thirty stocks in the Dow. Microsoft, Apple, and Nike are taking the biggest hosings, along with Goldman Sachs. The first three are down over 4% each. It’s raining, but the sky isn’t falling. Three of the companies most unlikely to fail, are seeing a lot of selling today. That is all this means.
  • Since the DJIA is compiled according to a formula that was infantile and distortionate at inception (1896), it’s idiotic anyway. On a field of baseball players maneuvering to hit behind the runner, put the curve ball on the outside corner, and shade toward the line to avoid that long hit into the corner that could become a triple, the DJIA is the naked fan who streaks the field while we’re all trying to be observant.
  • Marketwatch is a publication of The Wall Street Journal, which is a publication of Dow Jones & Co., a subsidiary of News Corp. So you’ve got a website owned by the people who maintain this index. And they love this index, because the S&P 500 (a saner large-cap index) is around 2,000. You won’t get many triple-digit days from it, so it’s harder to generate a freakfest with the S&P.

Behold the current state of a venerable name published by a venerable name. Misleading garbage.