Confirmation Bias, Again

Jeff Saut quoted a couple of investment luminaries this week including one I know personally. From Ken Fisher in 1989 was;

Here’s the paradox: the odds are overwhelming I will end up richer by aiming for a good return rather than a brilliant return – and sleep better en route.

And from Benjamin Graham;

The essence of investment management is the management of RISKS, not the management of RETURNS. Well-managed portfolios start with this precept.

From John Serapere I would add;

75-50

I don’t remember hearing that when I worked at Fisher (for a few months in 2002) but long time readers will know that the above, even if worded differently, are cornerstones to my approach. The 75-50 refers to a portfolio strategy that targets 75% of the upside of the market and only 50% of the downside (do the math, it works).

In terms of people who read my site or others like it, many of you are do-it-yourselfers but may not necessarily be expert stock pickers (and you don’t have to be). The idea of going along for the ride during the up phases of the cycle and then being devoted to learning and understanding what causes large declines and seeking to take defensive action fairly early in the decline to avoid the full brunt of down a lot as I call it is not only valid, but I would say easier and places even less emphasis on stock picking which seems to be something many prefer not to do.

Another aspect to avoiding the full brunt of down a lot is it places less importance in being specifically correct while the market is going up. Generally speaking, I still believe that global equities (so choosing some countries correctly, and correctly avoiding some others) combined with a proper savings rate can get the job done for people with realistic ideas about spending. So if well selected countries can return 8-10% annually over the long term, that will include the booms, busts and everything in between. So just going long and holding on no matter what could work. For people, though, who do not want to see their portfolio cut half every so often who can take defensive action and either outperform by knowing when to get back in or can get to the same long term result with a much smoother ride even if they get back in “late.”

After a big move up people tend to discount the value of smoothing out the ride but I am telling you first hand (because people really do forget) there is panic at the bottom. If anyone is ever going to do the wrong thing it will be after the market, and by extension their portfolio, has cut half. For many people, avoiding the panic that goes with being down 50% could be a life/portfolio saver.

Yesterday after we parted ways with Pep (pictured with me at the ATM) we went to the town of Roslyn which is where the show Northern Exposure was filmed. This was one of my two all time favorite shows (the other being the shockingly profane Deadwood). The town is very much as it was when the show was in production. We got a bunch of pictures, needless to say. Dr. Fleischman’s office looks the same from the outside but is a gift shop inside. The guy who works there moved to Roslyn from New Jersey eight years ago because of his love of the show. I thought I was a fan until I heard that story. As a bit of hindsight bias, of course there was someone who rearranged his life for the love of the show.

We also got into Seattle and did some walking around. We hit Cafe Ladro at 801 Pine Street and they made a hell of a mocha.

8 Comments

  1. I have this noted on one of my word file:
    Jesse Livermore’s methods of trading in stocks [Paperback]
    Richard Demille Wyckoff (Author)
    http://www.amazon.com/gp/offer-listing/B00072Q2Y4/ref=dp_olp_new?ie=UTF8&condition=new
    1. Only trade the strongest stocks in the strongest industries.
    2. Stocks have seasons and know which ones are currently in fashion.
    3. Anticipate future trends.
    4. Get plenty of sleep.
    5. Have a full understanding of the current economic situation.
    6. Stay away from other people and influences to keep your mind clear.
    7. The big money is in the long swings.
    8. He let the ticker tape tell him what was really going on accumulation or distribution.
    9. Only trade a stock with a potential 10 point swing coming with a reasonable time.
    10. Get out of a stock if it moves against you 3 or 4 points.
    11. Pyramid buy your wins not your losses. Adding to winning positions for the first few points,
    12.Sell stocks that are not moving up and buy the current best prospect, keep your capital liquid and working.
    Jeff from Milan, Italy

    Reply
  2. That’s a nice synopsis of your philosophy, Roger.

    Let us know how Pep does!

    Reply
  3. yesterday was his first day. he needed to show that he is very ball obsessed, this is step one to know if he has potential to be trained.

    we heard late last night he exceeded expectation as far as ball obsession which is of course encouraging.

    Reply
  4. and also in clue that Joellyn has at least an inkling…

    Jeff, great list, thank you

    Reply
  5. thanks Rick, we’ve been moving around some but are already headed back today at noon. will hike around downtown until then, we had Thai food last night in W Seattle w/my wife’s cousin and girlfriend

    Reply
  6. From the mouth of Mr. George Soros:

    “Markets are designed to allow individuals to look after their private needs and to pursue profit.It’s really a great invention and I wouldn’t underestimate the value of that, but they’re not designed to take care of social needs.”

    Reply
  7. Roger a dog question:

    We have two dogs. One is absolutely ball obsessed. Could play ball forever and has dozens of them at her disposal.
    The other dog has no interet whatsoever in balls.
    Which direction should they be heading as far as training? Thanks.

    Reply
  8. re the dog training question, what do you want your dogs to do? one playing ball and one not can be fine unless you want/need something else. Let me know and i’ll ask Joellyn

    Reply

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Confirmation Bias, Again

Jeff Saut quoted a couple of investment luminaries this week including one I know personally. From Ken Fisher in 1989 was;

Here’s the paradox: the odds are overwhelming I will end up richer by aiming for a good return rather than a brilliant return – and sleep better en route.

And from Benjamin Graham;

The essence of investment management is the management of RISKS, not the management of RETURNS. Well-managed portfolios start with this precept.

From John Serapere I would add;

75-50

I don’t remember hearing that when I worked at Fisher (for a few months in 2002) but long time readers will know that the above, even if worded differently, are cornerstones to my approach. The 75-50 refers to a portfolio strategy that targets 75% of the upside of the market and only 50% of the downside (do the math, it works).

In terms of people who read my site or others like it, many of you are do-it-yourselfers but may not necessarily be expert stock pickers (and you don’t have to be). The idea of going along for the ride during the up phases of the cycle and then being devoted to learning and understanding what causes large declines and seeking to take defensive action fairly early in the decline to avoid the full brunt of down a lot as I call it is not only valid, but I would say easier and places even less emphasis on stock picking which seems to be something many prefer not to do.

Another aspect to avoiding the full brunt of down a lot is it places less importance in being specifically correct while the market is going up. Generally speaking, I still believe that global equities (so choosing some countries correctly, and correctly avoiding some others) combined with a proper savings rate can get the job done for people with realistic ideas about spending. So if well selected countries can return 8-10% annually over the long term, that will include the booms, busts and everything in between. So just going long and holding on no matter what could work. For people, though, who do not want to see their portfolio cut half every so often who can take defensive action and either outperform by knowing when to get back in or can get to the same long term result with a much smoother ride even if they get back in “late.”

After a big move up people tend to discount the value of smoothing out the ride but I am telling you first hand (because people really do forget) there is panic at the bottom. If anyone is ever going to do the wrong thing it will be after the market, and by extension their portfolio, has cut half. For many people, avoiding the panic that goes with being down 50% could be a life/portfolio saver.

Yesterday after we parted ways with Pep (pictured with me at the ATM) we went to the town of Roslyn which is where the show Northern Exposure was filmed. This was one of my two all time favorite shows (the other being the shockingly profane Deadwood). The town is very much as it was when the show was in production. We got a bunch of pictures, needless to say. Dr. Fleischman’s office looks the same from the outside but is a gift shop inside. The guy who works there moved to Roslyn from New Jersey eight years ago because of his love of the show. I thought I was a fan until I heard that story. As a bit of hindsight bias, of course there was someone who rearranged his life for the love of the show.

We also got into Seattle and did some walking around. We hit Cafe Ladro at 801 Pine Street and they made a hell of a mocha.

Submit a Comment

Your email address will not be published.

WP-SpamFree by Pole Position Marketing