Bad Habits: The Greenspan Put

Mandated Markets

The recent research from the New York Fed indicating the close correlation between the Federal Reserve’s interest rate decisions and the movement of equity markets just prior to its announcements has added fuel to the flickering flames of suspicion that the Fed’s actions are designed to support stockmarkets and the super-rich who rely on them, rather than the wider economy. 

It's just as possible, though, that market participants can now force anyone they want to kowtow to their demands.  It seems that politicians and central bankers are no longer in charge of the economy, but that the market – at least as defined by the demented lore of economic orthodoxy – rules by dint of habit.  Which is not OK, not OK at all.

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Things Investors Should Hate Series

The whole series of posts:

• Things Investors Should Hate 1/5: Models
• Things Investors Should Hate 2/5: Gurus
• Things Investors Should Hate 3/5: Innovation
• Things Investors Should Hate 4/5: Observation
• Things Investors Should Hate 5/5: Themselves

Be careful out there!

Things Investors Should Hate 5/5: Themselves

We can blame many things for the state of our retirement savings plans – economists, bankers, politicians, the Chinese, globalization, sunspots, socialists, capitalists, journalists, investment analysts, financial advisors or even just bad luck.  But in the end the only person that’s really responsible is the one staring back at us in the mirror in the morning.

Personal responsibility is the adult basis for grown-up investing.  Unfortunately our infantile brains resist our every attempt to train them.

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Things Investors Should Hate 4/5: Observation

No human being can resist trying to draw general conclusions from personal observation.  It’s not purely a matter of wilful ignorance, but is an in-built evolutionary trait necessary for our ancestors' survival. After all, on the primeval savannah if you didn’t learn rapidly from experience you were likely to end up as a lion's dinner.

Unfortunately, in our globalized, modern investment world personal observation is about as useful a survival trait as poking a sleeping cobra with your bare foot.  It’s just that the poison is a lot slower acting.

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Things Investors Should Hate 3/5: Innovation

I love innovation.  My entire career has been spent in technical innovation.  Even now I’m trying to replace the need for cash and credit cards by putting them on a cellphone.  But as an investor, innovation sucks.

Unfortunately we’re attracted to innovation like a moth to a flame.  You can just see the bucks going up in smoke.

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Things Investors Should Hate 2/5: Gurus

I''m not entirely sure what constitutes the entry qualification to be an investment guru. Intense self-belief and a complete lack of introspection, perhaps?

The best analysts tend to be self-effacing, are often cautious in the face of uncertainty and usually hedge their bets a lot of the time.  Lacking brazen overconfidence they’re less popular, but they’re the safest hands in the business.

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Things Investors Should Hate 1/5: Models

I don’t hate all models. I’m quite keen on the tall, leggy ones.  It’s the mathematical ones that come trailing clouds of false precision that are the subject of my ire.  Yet the world is a complicated place, too complex for our complex brains, so assisting them with some expert mathematical models is entirely sensible. 

However, entirely replacing human analysis, intuition and commonsense with a computer program isn’t so much not sensible as unbelievably stupid.  People responsible for such behavior should be barred from any position of responsibility higher than a barista, and even then should be carefully watched when making anything more complicated than an Americano.  And do not, on any account, let them near a cash register.

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Mindful Investing

The whole Mindless Money series:

1/5: Focus on Failure
2/5: Don’t Oversimplify
3/5: Hold the Big Picture
4/5: Stay Resilient, Be Prepared
5/5: Avoid Overspecification

Permalink for the Mindless Money series and landing page for future Mindful Investing resources is on the Mindful Investing page.

Mindless Money 5/5: Avoid Overspecification

The paradox of investing is that the best investors have a system, but that this system, mindlessly applied, exposes them to the very risks that they’re trying to avoid.  Markets go through phases, and systems and concepts developed during one phase may not be suitable for others.

The problem of overspecification – developing methods which are so tightly specified that they can’t respond to novel situations is one met in many walks of life.  Simply following a recipe ensures you can always make your favorite cake; but what happens when no one wants to eat it any more?

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Mindless Money 4/5: Stay Resilient, Be Prepared

Every so often in an investor’s lifetime the markets will throw us a completely unexpected curve ball.  Markets will fall off a cliff or soar off into the stratosphere. 

Whether we like it or not, if we invest in the markets for long enough we will be exposed to events that we have no experience of.  How we deal with these will make a major difference to our returns over an investing lifetime.

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Mindless Money 3/5: Hold the Big Picture

The key phrase here is situational awareness.  It’s about having the big picture as well as the focused analysis.  The world, even that part of it tracked by stockmarkets, is a complex adaptive system made up of many working parts.  Ditto corporations.  No one can keep track of everything all the time.

So maintaining a big picture of the world around us, and how it impinges on our investments, is an important factor for the able investor.  It’s about paying attention, and knowing what to pay attention to; it’s about identifying the warning signs which should cause us to revisit our beliefs and expectations.

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Mindless Money 2/5: Don’t Oversimplify

Simplifying things is what we do, habitually.  The world is too complex, too multi-faceted for us to do anything else.  We develop a specific, individual mindset which we use to frame the world we operate in.  Sometimes this is a political viewpoint, sometimes it’s a tribal one, mostly it’s just the way we think about things.

Unfortunately oversimplifying stuff is a dangerous, mindless, trait for an investor.  You may think that the automobile or the internet is going to revolutionise business and you may even be right.  But that doesn’t mean that every company with “motors” or “.com” on the end is going to be a winner.

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Mindless Money 1/5: Focus on Failure

If one theme emerges and re-emerges from the study of behavioral bias it's that humanity is endlessly over-optimistic about the future. No matter what life throws at us we never seem to get over this, and it’s probably a good thing that we don’t, since being depressed seems to be the only way to conquer over-optimism. 

Assuming that we’d rather not spend our lives attempting to make ourselves feel miserable then we need to take alternative steps to counter our rosy-tinged view of the future. A relentless focus on failure should do the trick. 

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A Tall Tale of Risk Aversion

Dead or Alive, It's all the Same

Amos Tversky’s and Daniel Kahneman’s 1981 paper on The Framing of Decisions and the Psychology of Choice demonstrated that people are risk averse in situations involving potential gains and risk takers in situations involving potential losses.  The researchers showed that these traits could be manipulated by presenting the same problem in a different way – so if you offer up the choice of 200 people surviving (out of 600) or 400 people dying (out of 600) then you can invert the behavior.

Nonetheless the relationship demonstrated was a statistical one.  In both cases about a quarter of people preferred the non-standard response; which should hopefully make us wonder if these people have something different about them.  One answer now suggests itself: they’re taller than the rest of us.

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Totally Addicted To Debt

Squeezed Addicts

Predictably the recent set of rating agency downgrades caused squeals of anguish from top tier banks, expressing outrage that their efforts to make themselves less risky aren’t being treated with the respect they think they deserve.  Or perhaps their executives are simply angry that their bonus-justifying profits are being squeezed?

Their real problem, though, is that the world has changed.  Their debt fuelled addiction to old-style business models is under threat of extinction.  Those last century profit margins are gone for a generation or more: it’s time to go cold turkey, whether they want to or not.

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A Woman’s Place is in the Money

Money Maketh Woman

The research showing that women are better investors than men has been around for a while.  This is linked to the evidence that women are more risk averse than men – they tend to take less chances in general and with their money in particular.

This leads to a simple idea; that we should encourage more women to get involved in trading, both in the professional world and in the home.  The reasoning is that if women are more cautious, and therefore more successful, investors then their stabilizing influence will lead to a safer and less volatile financial world.  Which is a nice idea, but is probably wrong, although you’ll need balls to admit it.

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Clueless: Meet the Overprecise Pundits

Bedside Punditry

Most short-term opinions on markets or any system that includes human beings as part of the machinery are generally worthless in a financial sense.  Mostly we can’t predict what side of the bed our children will emerge from in the morning so why anyone should expect to be able to accurately forecast the outcome of the interactions of millions of people remains an abiding mystery.

Despite this reams of words are written each day by pundits safe in the knowledge that today’s news is forgotten tomorrow and that expressing unwarranted certainty is the way to succeed.  They’ve learned that extreme, albeit incorrect, precision will fool most of the people most of the time, and no one ever checks.

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