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.
I admit—freely—often my biggest hang-up with Ms. Rand was that she’s too pure, too idealistic, advocating a worldview not possible in this world. Charles Johnson’s recent IBD piece puts such anxiety to rest.
“My personal life is a postscript to my novels,” she wrote in the afterword to “Atlas Shrugged.” “It consists of the sentence: ‘And I mean it.’ I have always lived by the philosophy I present in my books — and it has worked for me, as it works for my characters.”
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.
Just about everywhere I go, I meet investors who tell me so-called core inflation is a dumb metric and food inflation is very high. Check out this recent graphic from Bloomberg Businessweek by Dorothy Gambrell.
“In 1984, the average U.S. household spent 16.8 percent of its annual post-tax income on food. By 2011, Americans spent only 11.2 percent. The U.S. devotes less of its income to food than any other country—half as much as households in France and one-fourth of those in India.”
In the words of Stan Lee, ‘nuff said.
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.
I don’t always agree with Jim Cramer, but here is some good sense that’s been espoused on this page for some time now:
You know what didn’t work in 2012? Risk on, risk off. As hard as I tried to stamp out this ridiculous bit of hedge-fund-ese, I was not able to. There are too many commentators out there, and too many traders who want to succumb to this kind of non-rigorous, intellectually lazy thinking, and it’s impossible to shut them all down. But let 2012 be a lesson to you: It was revealed that you would have underperformed these people if you’d followed them. Notice I say “underperformed,” because one thing is for certain — none of these blowhards will let you see their returns after what I bet was a fiasco year for what I can only call an “alleged” strategy.
Let this be the death of risk on, risk off – Jim Cramer
As said on this blog way back in April: I’m Adopting “Grey Pigeons”
Why? Because the concept of black swans is one of the most overwrought notions in recent financial memory. Now the Economist is getting in the act:
Gray Swans: Why Frugal Firms Keep Piling Up Cash – The Economist
Mind you, they’re seeing gray for slightly different reasons, but the logic remains: black swans are black swans for their rarity. For the market to have all sorts of little shocks, ebbs, flows, and unexpected events is status quo.
By now, folks have gleaned the Sandy storm won’t have as much economic impact as feared. On the Monday of the storm I saw figures speculating upward of $75 billion in damages. By Wednesday’s end it was knocked down to ~$15 billion, depending who you ask. But it’s clear widespread consensus overestimated by multiples.
Acts of God are often a case study in bad economics. Though, it’s probably not the calculations so much as the psychology of the matter: it’s far better in most folks’ minds to overestimate than underestimate. If you worry too much, no one will blame you. But if you worry too little, fingers will wag in your direction. (In my view, most economists could use a crash course in Bastiat and Broken Window Fallacies before publishing their guesstimates, too.)
Natural disasters have rarely or ever had lasting deleterious effects on capital markets. It’s quite a statement about the durability and plasticity of global capital markets that the NYSE along with US markets generally can be closed for two days and one could barely tell come Wednesday’s trading action. And yet people worry over and over about this stuff.
Remember just a half-year ago we were supposedly headed for a global nutrition Armageddon? Why didn’t it happen? Because folks largely misunderstand what prices are: one of the ultimate technologies for information transmission. Prices are signals, when they go higher producers (like farmers) respond by shifting available resources (like arable land), investing in increased productivity (like genetically modified seeds and modern irrigation), to get more of those higher prices. In fairly short order, via competition, prices come back down as that new supply (which shows its first signs of life in the futures contract markets and is a reason so-called “speculation” on such things matters and is largely a good thing) comes online.
In the very short term, food prices can spike, drop, shimmy and shammy. Food prices are volatile. But it’s clear by now, once again (because such a scare seems to materialize once every couple years) global food fami-geddon isn’t happening. Generally efficient allocation of resources and utilization of technology via free markets is the reason.
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.