The Big Picture for the Week of February 6, 2011

A heckler left a stupid comment (that I did not allow to be published) on a post from 2005. And while the comment was stupid the post was interesting and one I did not remember. The post was short, here it is in its entirety;

CNBC Asia had a very interesting interview with Vernon L. Smith who won the Nobel Prize for economics in 2002.

I have to admit I am not familiar with Mr. Smith or his work. Among other things now he is on the Board of Advisors for LGT Capital Partners (aka the Bank of Liechtenstein). His interview was about behavioral finance and the mistakes that individual investors make. He said investors often assign emotion to the market as the market is good or bad and that too often people end up chasing the market. He said sometimes the market goes up and sometimes it goes down and that if normal volatility bothers you, you should own index funds.

He is a big believer in diversification and does not think that short term trading makes sense to do because it is too difficult.

As I say I was not familiar with him before I saw the interview but it appears I have stolen all of my material from him except for the ponytail and the bolo tie (humor attempt).

I imagine I posted it because it made a lot of intuitive sense to me, and it still does. It got me thinking about over time things that change and things that don't with regard to investing and enduring in the market. The original post is almost six years old which is not an insignificant length of time. It may not be enough time to be right about something but it is enough time to be wrong.

It could be reasonably argued that the world is a much different place than when that post was first published. We've hopefully all learned a few things in that time. Perhaps the last few years reinforced a few things for you and maybe you've given up on a few ideas that proved out flawed one way or another. If you isolated flaws, were they flaws of expectations?

The notion of diversification got beat up pretty good because "all correlations went to one" leaving no place to hide. This was one I got right. Nothing is going to escape a real worldwide panic like we had in 2008 and into early 2009. I've spelled out the details of this enough that I won't repeat other than to reiterate the importance of proper expectations. From the top down when just about everything is going down that means just about everything is going down. That may seem snarky but it isolates the idea that in a real bear market hiding out in "quality dividend paying stocks" or foreign stocks will not reasonably offer positive returns. You might be lucky enough to go down less but being up 10% in your portfolio is not a realistic expectation for a down 30% world.

Kareem tweeted yesterday that he is "100% cancer-free." Not too shabby.