It’s quite a world we live in. The (satirical newspaper) The Onion earlier this week proffered investing advice as good as anything I’ve seen on any financial news source this year: Report: Only .00003% Of Things That Happen Actually Matter.
This is so true for investing it’s almost (ahem) a joke. People fret over so much nonsense and minutiae each day in the market. For long-term investors trying to build wealth over time, the simple reality is at least 99.99% of what gets reported out there is mere noise or beside the point. And in the focusing on noise, it’s easy for folks to simply overlook what matters: stocks up nicely this year as earnings increase, in the context of what’s been a strong and long bull market, seeing new all-time highs in many spots.
Always and everywhere with financial and economic news, ask yourself if what you’re reading really matters.
If you’re like me, you get annoyed ubiquitously by the clichéd, overused, nonsense, nondescript lingo central bankers, central planners, politicians, and guru economists routinely employ. My current most peevish is “downside risk.” As in, “Currently downside risks for the economy are stronger than a month ago.” Or, “We see downside risk abating in the intermediate term.”
What does this mean? It means nothing. It’s gibberish. In the era where central bankers claim to be more open kimono, what they really are doing is just saying more words. The opacity is the same, as depicted by the current—and bizarre—speculation over “tapering” clogging today’s financial headlines.
When you see this stuff, don’t try to read tea leaves. Just ignore it until there is something concrete to form an opinion.
Looking at history and the long waves of demographics is a great and fine thing. It can tell you a heck of a lot. It’s frequently the case that history is driven by large, abstract, impersonal forces rather than singular decisive events. But…
…to start forecasting equity markets using these metrics is a perilous thing. And it’s becoming all the rage lately.
The problem with demographics as equity market forecasters is that, first, in order for you to be right, you might have to wait, you know, a generation or more. Also, even if you can shoehorn a theory to explain all, at best you only have a few good data points to support the correlation tied to equity markets. That’s not much to stake a +20 year forecast on.
It’s an old adage: Investors have short memories. Another: the market discounts the future.
Here’s some interesting psychological research as to one reason that may be: Yesterday came suddenly
“Because future events are associated with diminishing distance, while those in the past are thought of as receding, something happening in one month feels psychologically closer than something that happened a month ago.”
The next time an investing guru presents you with ironclad statistical results, remember this article:
Unreliable neuroscience? Why power matters – Suzi Gage
In a paper published today in Nature Reviews Neuroscience we reviewed the power of studies in the neuroscience literature, and found that, on average, it is very low – around 20%. Low power undermines the reliability of neuroscience research in several important ways.
As with so much of her work, Deirdre McCloskey has penned a biting and powerful critique of today’s economic study of “happiness”.
This stuff is worth being aware of because it’s popping up in political discourse regularly. In particular, note the creeping paternalism lately becoming a full infestation in behavioral economics.
Markets adapt, and long-term profits approach zero for high-speed trading. The winners are market participants, who benefit from higher liquidity and smaller bid/ask spreads. The part most folks miss about the flash crash is the market self-corrected as fast as it sank.
Regulator, Go Slow on Reining in High-Speed Trading: Algorithm-driven trading appears to be self-correcting. That’s good—the hyper-fast world needs it.
If you’ve never read Leonard E. Read’s I, Pencil, it’s always a good time. A wonderful summation of free market principles, it’s also a document Milton Friedman referred to often. Here’s a parting lesson, straight from the pencil himself:
“The lesson I have to teach is this: Leave all creative energies uninhibited. Merely organize society to act in harmony with this lesson. Let society’s legal apparatus remove all obstacles the best it can. Permit these creative know-hows freely to flow. Have faith that free men and women will respond to the Invisible Hand. This faith will be confirmed. I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth.”
Fisher Investments faithful Bill Shepherd recently opined on a number of topics. When experience like his speaks, I think we ought to listen. Here are a few thoughts:
Mutual funds were originally created to help achieve diversification—and are still helpful for those who don’t have a lot to invest, but would like a diverse portfolio. They can help investors get started in the markets, but can be expensive, due to trading and possible tax implications, and can lack the flexibility of a portfolio of stocks and fixed income. “While mutual funds make sense for some investors, it’s important to make sure you own them for a reason and/or haven’t out grown them,” says Bill Shepherd. “Meaning, you can achieve sometimes cheaper diversification buying multiple stocks than buying mutual funds—but it depends on your financial goals and what you can truly afford”, he continues. Here it’s helpful to have a money manager whose interests are aligned with yours to help guide you to optimal investing decisions in your portfolio.
Bill Shepherd recognizes there are many different avenues in the financial industry when it comes to choosing a money manager. “In general, I think one of the most important questions to ask yourself is, are my interests aligned with my financial professional’s? Said another way, will they do well if you do well?” asks Shepherd. “This may not be true in all facets of money management. Brokers, for example, may work on a commission system based on activity rather than a management fee based on the size of your portfolio like Fisher Investments. This structure allows us to align our interests with our clients. We utilize separate custodians to house client assets, so we don’t earn commissions on trades that are placed in your account, nor do we sell you products. So our answer to that question is this—absolutely—if you do well, then we do well.”
A big challenge in investing is the culture of emotional created largely, it seems, by the media—especially now that news is available 24/7 on the internet, TV, smartphones and tablets and constantly updates. “It’s very easy to let emotional reactions lead your investing decisions, and your understanding of economics,” says Bill Shepherd. “A good example of media spreading negative sentiment about markets right now is the fiscal cliff. However, Fisher Investments believes talk about the fiscal cliff’s impending disaster is likely a lot of hot air—which unfortunately sells more for the media,” continues Shepherd. More about Fisher Investments views on the fiscal cliff can be found on MarketMinder.com.
The investment process is only half the battle. The other weighty component is struggling with yourself, and immunizing yourself from the psychological effects of the swings of markets, career risk, the pressure of benchmarks, competition, and the loneliness of the long distance runner. – Barton Biggs