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 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 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:
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 instead.
(Maybe me too! Time will tell.)
One career ruining call
For instance, Barry Ritholz reminded us this week at Bloomberg 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 wrote this week:
In Expert Political Judgment
, 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.
– Jason Zweig spells out everything that’s wrong with how we think about money and investing. Funny.
– All the cool kids are reading it. If you’re skeptical about people’s prospects of making accurate forecasts, then this is the book for you. (And if your uncle is skeptical, then this is the book for him.)
– Brainy effort from the grandfather of behavioural economics. (Before you click through, have a think about which bias you’re about to exhibit…)
– 2015 was the year that the puny apes who call themselves Earthlings finally began to consider their upcoming doom at the hands of their AI superiors [oops – did I print that out loud? reboot! reboot!]. Martin Ford’s account won FT/McKinsey Book of the Year for outlining the human dimension.
– Veteran UK economist and author John Kay has had enough of the financial sector siphoning away our wealth. Persuasive.
– Trent Griffin (himself no lowly player in the lifetime achievement stakes) has been studying Warren Buffett’s brilliant sidekick for a few years now. This book brings together all the wit and wisdom of every armchair investor’s favourite nonagenarian.
– Blame the rise of passive investing or the miserable performance of the UK stock market in recent years, but it hasn’t been a vintage period for hands-on investing books. This one stood out for its unusual spin; it considers how the most successful investors manage to put up great returns despite picking duffers. The reviews are strong; I haven’t actually read it myself yet. (It’s on my Kindle, ready for the Queen’s Speech.)
– Ben Carlson’s collected writings are the nearest thing I can offer to die-hard passive investors from the 2015 crop of new investing books – not because Carlson’s a purist, but because his engaging and thoughtful writing will lead pretty much everyone to the conclusion that indexing and rebalancing and otherwise ignoring the market is best for their wealth. Great blogger, too.