- Monevator - https://monevator.com -

Weekend reading: Being wrong can be alright, but being in denial is a disaster

Good reads from around the Web.

I don’t easily back down in what I’ll pompously call ‘intellectual debates’ (which I have all the time with everyone, to everyone’s annoyance).

But I will change my mind, if persuaded.

For example I was far more left-wing at University – having been “to the right of Genghis Khan” as a schoolboy, as my dad [1] once quipped.

Today I’m pretty centrist (though libertarian if not an outright anarchist on personal freedoms and so on).

Traveling from Left to Right with age is not an unusual journey, but I do think it demonstrates the flexibility to change my mind.

Being wrong the right way

This is relevant to our discussions here, because if I was to pick one thing that’s most changed my active investing after more than a decade [2] at the coal face, it’s probably that I’ve cultivated an ability to more quickly decide I’m wrong.

And then to sell, sell, sell.

This is not as easy as it sounds.

As the on-point Morgan Housel recently noted in a Motley Fool article [3]:

One of the hardest parts of investing is finding the balance between:

  • Riding out periods temporarily unfavorable to your views.
  • Realizing your views are wrong and moving on.

It’s the difference between patience and stubbornness, and can separate the ruined from the rich.

Sell your lagging value shares too readily, and you’ll cultivate a Buy High, Sell Low strategy that’s bound to end in tears.

Or on the growth investing angle, be to quick to dump winners because you now see they’re possibly overvalued, and you’ll probably never enjoy big gains from the handful of hot shares that generate most returns in bull markets.

Obvious corollary alert: This challenge is exactly why most people will be best off not trying to pick stocks or to time markets, and to invest passively [4] instead.

(Maybe me too! Time will tell.)

One career ruining call

For instance, Barry Ritholz reminded us this week at Bloomberg [5] about the fall of the once-famed market timer Joseph Granville.

Granville moved markets. He made millions of dollars a year from his newsletter business, and when he urged his subscribers to sell everything on 7 January 1981 he apparently sent the US Dow index down 2.4%, on then-record volume.

What power!

Sadly, though, he was wrong. In fact America was just on the cusp of its greatest ever bull market.

Worse was his inflexibility. Ritholz notes that:

Granville, who died in 2013, never managed to admit his error or reverse himself; he ended up being consigned to the dustbin of history, his track record in tatters.

Mark Hulbert, who tracks the performance of investment newsletters, noted in 2005 that Granville’s letter was at the bottom of the “rankings for performance over the past 25 years – having produced average losses of more than 20% per year on an annualized basis.”

To be an active investor, you need to take a different view from the market. It demands a certain arrogance to take a contrary view to the world’s best guess.

But to believe the world is wrong and you are right for three decades! That’s hubris on a par with the great Greek myths.

Certainly, admitting you are wrong can get harder with time. But it’s doable.

It took me about a decade to finally concede I was wrong not to buy a London flat in 2004, for instance. (And who knows, perhaps in 2025 I’ll see I am wrong not to buy one now…)

Staying humble and reminding yourself daily of your limits is I think essential – whether you’re an active investor, or a sensible passive investor whose strategy is built from day one on understanding the difficulties of all this decision making.

Foxy forecasting

We might ask why we find it so hard to intelligently prevaricate?

I suspect it’s to do with incentives.

In investing – and in much of the rest of life – people prefer you to be bold and wrong than to be undecided.

As a result, you’ll hear an active fund manager say “I don’t know” about as often as you’ll hear them say: “Yes, let’s see what we can do about the fees on that.”

As John Kay [6] wrote this week:

In Expert Political Judgment [7], Philip Tetlock demonstrated to little surprise that forecasters were not very good.

More surprising was his identification of the characteristics of good and bad forecasters.

Tetlock employs a distinction, credited to the Greek poet, Archilochus, but popularised by the philosopher, Isaiah Berlin, between hedgehogs and foxes.

Hedgehogs know one big thing; they have an all-encompassing world view and discover facts that confirm what they already know to be true. Foxes know many little things; they are eclectic in their sources of information and nuanced in their judgments.

Hedgehogs command more public attention but foxes make better forecasters.

Harry Truman, the former US president, (perhaps apocryphally) sought a one-handed economist who would not say “on the one hand” and “on the other”.

The two-handed approach corresponds to the reality of most complex issues. Yet modern business people, politicians and media seek the Truman type and find it in hedgehogs.

To grab attention and build a reputation, it is more important to be unequivocal than to be right.

So let’s all resolve to be less sure of ourselves in 2016.

Happy New Year everyone!

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: The cost of the very popular Santander 1-2-3 [22] account goes up to £5 a month from Monday. The Telegraph [23] runs the numbers to see who it still works best for.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1 [24]

Passive investing

Active investing

A word from the brokers

Other stuff worth reading

Book of the week: While I prevaricate over starting my first book and my co-blogger The Accumulator begins a second year on Monevator: The Dead Tree Edition (working title), blogger and investment manager Meb Faber keeps knocking out hits like Motown in its heyday. His latest – Invest With The House [39] – is about cloning hedge funds. It’s £6.73 on Kindle.

Like these links? Subscribe [40] to get them every week!

  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [ [44]]