Fun visit, long day getting back.
So I'm about 1/3 of the way through Fooled By Randomness. As we landed in Phoenix last night my wife asked if I was enjoying the book and then she corrected herself and asked if I was learning anything. Taleb's books are not exactly fun reads but I learn some things and have some other concepts reinforced.
One concept is about not confusing random with skill. Or worded differently "I'd rather be lucky than good." Here is an example from my days as a beach volleyball player in college. I lived the life of a pro beach volleyball player except for the skill and the income:-0 I did play at a reasonably high level and there were a few parts of my game that were very solid; setting, jump serving effectively which was not done much back then and I was good with shots on offense. I was not good at hitting the ball straight down on offense, my serve reception was mediocre and my ability to control a hard driven ball on defense was borderline lousy.
It is that last one where the example lies. My partner and I were in a tournament in San Diego and we were playing two guys from the San Diego State indoor team. We were competitive but they were clearly better than us and we lost by a few points. On one play my partner was blocking I was back on defense and the guy on the other team, his name was Bill Bailey, sizzled one right at my face. My partner's block was perfect because he forced Bill to hit it right where I was standing. It wasn't exactly at my face but just to the the right of my face. I put up my right hand almost like I was waving hello to someone it hit my hand perfectly went straight up in the air to my partner for him to set me easily, I put the shot down for the point. For people who know beach volleyball very well open hand digs of hard driven balls were kosher by this time.
That I recall one point from one tournament from 22 years ago with such clarity should tell you what kind of impression it made on me. I was lucky with that dig. At the time I played it off of course but it was nothing but luck and I was self-aware enough to realize it. Not confusing luck and skill has important applications in many things especially investing. As I read Taleb, understanding the difference between the two is vital. This sort of self-awareness may be difficult--this is implied in the book anyway. I have no idea when I began to think about being self aware in this regard but certainly this little anecdote from my past was important in my development. Chances are you have something from your past that served the same role for you. Hopefully you realize it but if you had not before, maybe you will think back to that time and realize it now.
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17 comments:
First, I always enjoy your blogs, which aren't overly wordy and usually are poignant. I'm surprised it's taken you until now to read Taleb. He's my one financial hero. Not that his stuff can make me money. I think it's just that he THINKS. That's rare in life and rarer in the markets. Most of the Street is a scam and the safest way is to fade them at appropriate junctures. Anyway, enjoy.
read Black Swan first a while ago. i read stuff all day long that is more newsy (the opposite of Taleb) so I just don't get to many books.
Roger,
What is your opinion of the Roubini excerpt which was posted as a message yesterday? Here is is again...Thanks
"Roger- I believe you slightly dismissed the p/e concept advocated by Mish during your video last saturday. The following is an excerpt posted today by Roubini whom advocates that the best case scenario for the S&P500 bottom this year is 720 and that we are more likely to decline to the 500-600 range...
"I have been predicting for a while that the most recent bear market sucker’s rally would lose its steam and – like the previous bear market rallies in the last 18 months – US and global equities prices would head again towards new lows.
Let me now explain why…
As my work and the one of our research team at RGE Monitor predicts (we will publish later this week our 2009 Global Economic Outlook, a 75 page research piece for our clients and we recently published our US outlook) this will be the worst US recession in the last 50 years and the worst synchronized global recession in decades.
For a few weeks since late November equity markets ignored the onslaught of much worse than expected macro news (and all the new were really worse than awful) and had a nice 25% bear market sucker’s rally. But the drumbeat of terrible – and worse than expected - macro news and earnings news and financial news has finally taken a toll on the delusional market belief that the worst was over for financial markets and for equity markets and that the US and global economy would recover in the second half of 2009. So equity prices have already reversed more than half of their most recent bear market rally as the lousy macro news have finally shocked in the last week the wishful thinkers.
Indeed, the retail sales figures published today confirmed a shopped-out, saving-less and debt-burdened US consumer is now faltering as job losses, income losses, fall in home wealth, fall in equity wealth, high and rising debt and debt servicing ratios and a severe credit crunch take a severe toll on the ability of consumers to spend. And reduction in spending and deleveraging of the US consumer will take years to rebuild the savings rate of a household sector now hit by a severe shock to its net worth (as equity and home values fall while debts have been rising) and shocked in its ability to generate income as job losses mount and the unemployment rate surges.
Our research at RGE Monitor suggests that the US and global recession will continue at least all the way until Q4 of 2009 (a nasty 24 months U-shaped recession) and that the recovery in 2010-11 will be very weak with growth in the 1% range that is well below a potential of 2.75%. And we cannot rule out that a more severe L-shaped stag-deflation (as in Japan in the 1990s) will take hold. Indeed, as I argued recently:
While the odds of a systemic financial meltdown have been reduced by the actions of the Group of Seven and other economies, severe vulnerabilities remain.
The credit crunch will persist and spread beyond mortgages. Deleveraging will continue, as thousands of hedge funds -- many of which will go bust -- and other leveraged players are forced to sell assets into illiquid and distressed markets, thus causing price declines and driving more insolvent financial institutions out of business. Credit losses will mount as the recession deepens. And a few emerging-market economies will certainly enter a full-blown financial crisis.
So 2009 will be a painful year of global recession and further financial stresses, losses and bankruptcies. Currently, the probability of an L-shaped, stag-deflation is now rising to a third, while the probability of a severe U-shaped recession is two-thirds. Only aggressive, coordinated and effective policy actions by advanced and emerging-market countries can ensure that the global economy starts to recover -- however slowly --in 2010, rather than entering a more protracted period of economic stagnation.
So while our benchmark scenarios sees a severe U-shaped global recession with very weak growth recovery in 2010 we cannot exclude the possibility of a worse outcome, i.e. an L-shaped recession that – in our view – has at least a one third probability. So the worst is ahead of us rather than behind us for the real economy and for financial markets. With my forecast of 2009 earnings per share for S&P500 firms being in the 50 to 60 dollars range and with P/E ratio likely to be in the 10 to 12 range given a severe global recession the S&P500 could bottom – at some point in 2009 – at best at a level of 720 and, in a worse scenario, as low as 500 or 600. So, the worst is indeed still ahead of us."
in late, up early, perhaps you could let me catch up
I thought long and hard about that self awareness thing, and all I've managed to come up with is ... "we are too soon old - and too late smart."
OG
anon 7:46
I have to agree with your analysis and have been thinking in this direction for the last 7-8 months. In addition to your analysis, I see a mistrust of the market increasing, not improving.
My personal opinion is that we need strict enforcement of regulations and consequences for companies and individuals that have derelict in their fiduciary duties.
Here's a short article from Roger McNamee on why we should not be investing in stocks. He points to the worsening financial stability of state governments. His answer? Buy treasuries.
There's also a video.
http://finance.yahoo.com/tech-ticker/article/158616/Why-You-Shouldn't-Be-Investing-in-Stocks?tickers=%5Eixic,yhoo,goog,msft,mot,nt
An A level volleyball player, eh. Man there are times I'd pay good money for a nice set in our beer league.
Spot on ,OG!
Roger,
I am a big Eagles fan. How do you feel about the Cards chances against the Jimmy Johnson Defense? Warner moves like a turtle and that plays into the hands of the Eagles defense.
Birds 27 - Cards 14.
bwjr
i've never been a Cardinal fan and so won't hop on now. that said didn't the Cards D play lights out? the game be Delhomme (not gonna look up the spelling) might have been the worst game ever in the playoffs for a q-back. was that all delhomme, the Cards or both?
If the cards D give the O the ball on the 20 a couple of times then the eagles d could be less of a factor (or more if you know what I mean).
Is A Boldin playing? Have not checked but they become better with him obviously.
The Eagles must be the better team but Cards bring the same performance as last week they will be tough to beat, no?
Roger-- I'm a newbie to your blog... I stumbled upon you since I'm a publisher of trading and finance material at Marketplace Books... anyways- I actually wanted to comment on the vball story! You had me hooked at "serve receive" haha! Thanks and I look forward to reading more of your posts...
a couple players (past or present) reading the site; very cool
Investors always gravitate between fear and greed. The pendulum had swung too far toward greed in recent times. Now investors have been traumatized and the danger is that they will stay fearful and lose opportunities.
Both extremes are bad. Being too fearful is less destructive than taking too much risk but it is still a huge problem. Whether someone is saving for their first house, to send children to college or to have a secure retirement they must invest prudently. But to do that, they must accept prudent risk. Every investment carries some risk whether an investor identifies that risk or not.
A measure of the level of panic is the investment posture of major institutions. Short-term treasury bills are being issued at close to zero percent interest. What that means is that major market players are willing to hand over their money to the biggest borrower in the world in return for -- nothing. There are trillions of dollars under the government's mattress and major institutions are asking for nothing in return except for a piece of paper that says the U.S. government will give the money back, with no interest, at a specific time.
So if the big institutions panic, should individuals panic too? While panic was certainly justified for several months in the fall -- just because I'm paranoid doesn't mean someone isn't out to get me -- one should examine the current environment in weighing investment decisions.
It's highly likely that the world economy will go through a brutal slump for most of 2009 and recovery for late 2009 or even 2010 is problematic. While there are some grounds for being more optimistic, it's not necessary to rely on that to chart an investment course.
Going back as far as we have good records, to 1926, the broad stock market has increased on average by more than 10 percent per year. That takes into account the 85 percent drop during the Great Depression, the dark days early in World War II when the Germans and Japanese raced toward victory, the brink of nuclear war in the Cuban missile crisis, the ravages of inflation and the prolonged economic slump of the U.S. in the 70s and early 80s and the tech stock collapse at the dawn of the millenium. Through all that, the stock market has recovered and grown in line with the economy.
On average through all those bleak periods and boom periods, the stock market has doubled every 7 years and quadrupled every 14 years. It's never smooth and never guaranteed but it has worked for a long time. While there were periods this fall when it looked like the world economy could completely derail, the greatest danger seems past. Now it is a matter of being patient and enduring pain but the outcome should be similiar to that of all the many times over the last century.
Most investors do not have access to anything that can equal the returns of stocks over the long term. Investing in a broadly diversified representation of the stock market makes it possible to realize those returns with the least risk. Investors should not abandon that avenue as part of their investment arsenal just because of some recent trauma -- the second worst year of the last century. This too shall pass. From past experience we also know that whenever the market does recover, it is likely to be suddenly and with big moves. A big part of the gains will be concentrated in a short period and few people will realize what has happened until after it is over.
Of course being good prepares you to be lucky... ;)
Ajw
Good summary of market returns history by Anonymous at 8:08. It may be difficult to buy stocks now, but if it is not "different" this time, now is the time to step up to the plate, as they say. With each tick down, the market is a little bit "safer" for investment.--JL
Further on Taleb...it's not different this time, as just said. This is entirely in script. Read about any bubble, happening every 10 years or so from the 1600's onward, and they are quite similar.
This is not different in concept, but, as per Taleb, the depth is unknowable. Misjudging that is the difference between wipe out and great profit.
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