We learned from the press conference that 104 isn't really 104, it might only be 83 and actually it might be less than 83 players, it is 83 positives. None of the names on the list should have been leaked and the leaks did not occur until after some sort of raid. The more I listened to the press conference the more fouled up the entire situation is; every aspect of this is a mess.
With no logical connection to baseball a reader left a comment yesterday that struck me as odd. It was constructive but still struck me a little odd but I must concede that the totality of his point was not clear to me. He was replying to comments in this week's video that a closed end fund I owned went down a ton and that I waited for a big retracement before selling it.
The reader said that "this is the sort of thing that slowly changes active traders to passive investors." He also talked about active strategies being less than ideal. He then went on to opine that my comments in the video revealed the cognitive bias known as anchoring.The first part of the comment is lost on me. Active traders, buy and hold stock pickers and passive indexers all have holdings that "don't work." The notion that a holding not working out would cause someone to change their approach seems unlikely to me. No matter what method you believe in, it cannot be the best 100% of the time. I've mentioned in past posts about having heard stories about all sorts of other RIAs having real problems navigating and surviving the bear market. By all sorts I mean all approaches which includes passive indexers.
One of the big building blocks to what I try to do and write about is that successful navigation of market cycles can come from correctly figuring out what to avoid. As this is one of my biases I conclude that from the hardship others may have faced in this market cycle that avoidance could have helped a lot of these RIAs; avoidance of the financial sector and avoidance of a fully invested portfolio.
I believe my take all along has been picking what is right for you and then sticking with that but trying to learn more as you go. I cannot say passive indexing is wrong but it is wrong for me. The reader can't say active management is universally wrong even if it is wrong for him.
In thinking about anchoring it may be difficult to have the introspection to realize when we may be anchoring to something and whether we may or may not be impeding progress to whatever we are headed towards. Candidly the way I come at my job is to to learn from things like how markets tend to work and incorporate that into a forward looking analysis. From where I sit there are certain truism that tend to hold up cycle after cycle even if not 100% of the time.
Here again the focus probably needs to be what works best for you. If the flip side to any sort of bias is to be passively indexed into the market, well that is right for plenty of people but not everyone.
16 comments:
I believe the reader wasn't saying active management is wrong per se, it is just that over time active management's return approaches the market's as a whole less expenses and fees with very few exceptions. Further, it is this realization that can cause those pursuing active strategies to switch to passive in order to gain that which has been lost to expenses and fee .
Readers may not agree with your style, but at least your analysis is thoughtful and well-reasoned.
I get so bored with bloggers who post daily articles on etfs that outperformed last week or that will crash next week because their charts are in a descending triangle (or some such nonsense.) Twice this weekend I read that the easy money has already been made in this advance. Huh? It was easy to buy while the world's financial system was collapsing??? Sheesh, how shallow. Can cash is trash be far behind?
Thanks for thinking out loud for us, Roger, even if you don't like golf :)
Buy & Hold works simply because there is nothing better, but the asset allocation has to be conservative with equity capped at 50% max. Otherwise, bear markets will hammer the portfolio and end up with no return from equity as it happened for the last 10 years. The only other reliable tool available to control risk is the inverted yield curve but that can only predict recessions, not events like 1987 and 9/11. Then of course diversify globally and avoid straying too far from the global index.
All the rest is NOISE and unless an advisor or RIA has information that the rest of wall street does not have, how can you expect them to outperform the market? One cannot and the wise advisor will own up to this.
Yesterday you taught by showing how your patience and reason used when dealing with a mistake turned a disaster into a small loss. The lesson was a good one.
You forget the readers do not want lessons and do not want fish handed out. They want you to fillet the fish, superbly cook it and serve it on fine china. Even then you should expect a lot of complaints (you wonder why I write anonymously???).
I do not know why you write this blog, but I am very thankful that you do. As Jeff from Milan pointed out he has learned a lot from this blog and I think those sentiments are shared by many of us.
to be clear this post tries to explore a reasonable critique.
as for why this blog, there is persoanl satisfaction, it has opened doors that were worth opening and if the observations made are useful to anyone then all the better.
Off point. I think. CSFB came out with their institutional investor real estate data for July. Interestingly, they included a survey of the top 50 U.S. real estate market consulting agents regarding builder preference (publicly traded companies). Pulte, Toll Brothers and D.R. Horton rated high. NVR,WCI Communities and KB Home the worst. KB was, by far, the worst. Since over 40% of new homes are sold through an agent, this is a meaningful list (the complete roster is posted on Seeking Alpha).
Several bloggers have made a case for a chain of events of a social nature that would determine the state of housing. Marriage was one of those frequently mentioned "states", which reminded me of an old Benny Hill skit, as follows:
Moderator: What is a bachelor?
Contestant: A man who has not considered marriage.
Moderator. Oh, I'm sorry, you're incorrect. It is a man who HAS considered marriage.
T
I too echo the sentiment of the many who appreciate this blog.
It's a nice change of pace as Roger writes honestly and openly about successes/failures/ points inbetween. I like the main focus staying on process as well as dissecting new products.
It's also a break from other mindsets. As much as I enjoy reading Barry's Big Picture and Zero Hedge, the comments are just to same-think and negative.
Well thought out and realistic, heck I even agree with most of it but I can't let it influence me or I would sell everything and buy a bomb shelter.
Jeff from Milamn, Italy: have a fun vacation but please: "I sure have done better than the husmans, yamada's and the ritzholt"
JH fund OK, but I don't think Louise Yamada manages money and how do you know what Barry's fund did?
To be even clearer: That's a photo of the Red Sox dugout (after the game) the night of June 26th, 2008...
I wrote the post from yesterday that is the subject of today's discussion. In no way was I trying to be disrespectful. I was only pointing out that many academic studies have shown that behavioral biases can cause serious damage. I think honest self-examination is very useful. I have converted to passive investing because I know many of the emotional and cognitive biases were causing me to lag market returns even though I thought I was a very smart and informed investors. It always helps to wonder who is on the other side of a trade...and since most trading is institutional, I don't really think I stand a chance.
I think everyone here can agree that the sum total of all active and passive investing is the market by definition (and that is before expenses). I just happen to believe that passive investing can for sure add the average cost of active funds to my returns. Compounded over time, that is serious for sure money.
I guess it is right for me and all things considered, I am pleased with how I have fared over the last two years.
I just threw something out there for discussion.
The majority of folks who have been converted from cash positions to" buy and hold" were not the readers of this blog, but the individuals who purchased mutual (OEF) funds after advise from the media through their 401K's and IRA's. Those individuals have been slaughtered the past two years. They were victims because while they practiced buy and hold, their fund managers were doing what ever made sense for the quarterly reports to their fund holders. It is a rare fund that practices anything approaching buy and hold. The small minority of the investors who actually try to manage their portfolios are the readers of this blog, and we thank you, Roger, for writing your thoughts and actions in an honest manner. Anon 11:38, I took your post in the proper light. We are all subject to relative bias, and a decision to hold on will be influenced by many factors. The RIA has the additional duty to report his results to his client, which has got to be difficult when the Great Correlation destroys your well laid plans. Roger, I hope you will continue to post on your views on fixed income options as you see them, and how you handle your successes and your failures. Your thoughts on these topics provide me with a useful perspective through the eyes of an investment professional.
Re the steroid use by sports professionals, why does that surprise anyone? They have a short professional life, huge returns on the line, and steroids provide an edge for performance. It's surprising they all did not use drugs for enhancement.
Sam
As an attorney I can easily recognize the BS of another - and boy was that a load of SH_ T!!! - and maybe he could take a bath and comb his hair before his next press conference -
per "roids"...
I think (but then who cares what I think?)anyway, how about we have
a "Roid League" and pay the players minimum wage...just a thought.
signed,
Bactocash
I guess the "anchoring" comment is meant to say that one should not just focus on the possibility of an active management process to miss huge market crashes, but to also look at the costs associated with that approach? Hopefully this is a correct interpretation of that comment.
I am not sure that Roger can be charged with anchoring in this instance because I am sure that avoiding massive drawdowns is very important to his clients. Avoiding crashes in portfolio value isn't one subordinate goal among many - but probably at the top of most investors minds when they seek out an advisor.
If one is committed to passive investing there are of course good static portfolios that are designed to avoid big drawdows such as the Permanent Portfolio and related approaches. If you're willing to introduce mechanical systems such as stop-loss selling or SMA crossing checks then you can also limit drawdowns for many other portfolios without going fully active.
I guess the "anchoring" comment is meant to say that one should not just focus on the possibility of an active management process to miss huge market crashes, but to also look at the costs associated with that approach? Hopefully this is a correct interpretation of that comment.
I am not sure that Roger can be charged with anchoring in this instance because I am sure that avoiding massive drawdowns is very important to his clients. Avoiding crashes in portfolio value isn't one subordinate goal among many - but probably at the top of most investors minds when they seek out an advisor.
If one is committed to passive investing there are of course good static portfolios that are designed to avoid big drawdows such as the Permanent Portfolio and related approaches. If you're willing to introduce mechanical systems such as stop-loss selling or SMA crossing checks then you can also limit drawdowns for many other portfolios without going fully active.
Anchoring.
Investors with this bias are often influenced by purchase "points" or arbitrary price levels and tend to cling to these numbers when facing questions like "should I buy or sell?" This is especially true when new information about the investment complicates the situation. Rational investors treat this new information objectively and do not reflect on purchase price in deciding how to act. Investors with the bias place undue emphasis on statistically arbitrary, psychologically determined anchor points. Decision making therefore deviates from rational. Basically, the investor ignores the concept of "sunk costs."
Short summary of a very destructive behavioral problem to afflicts almost everyone, some more than others.
The fantastically wonderful Coffee Song!!
http://www.youtube.com/watch?v=k0k97U6LlYk
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