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Jack Schwager on Market Sense and Nonsense

  
Education, Video
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This is Jack as analyst, not as trader interviewer. I think the insights herein will benefit investors especially over traders, although both are served well. Jack totally destroys the EMH in this book. He also debunks a great deal of conventional wisdom for the investor, which I think will be shocking at first. Why? Conventional wisdom “feels good” and to go against the grain so to speak as an investor takes a great deal of emotional intelligence — and a strong inner voice — which most investors don’t have. Good trading and investing oftentimes does not “feel” good at all. It’s much easier for a newbie or amateur to go with the crowd and succumb to one’s emotions. What feels safe is normally not a proper risk management decision for the untrained.

At the end of each chapter, Jack delineates several “Misconceptions” that I believe are worth the price of the book. One in particular deals with when it’s NOT a good idea to just blindly buy the S&P 500 after it’s gone up a certain amount.

Market Sense and Nonsense is an objective take on popular investment themes that is backed with a great deal of data to support its claims. I think the conclusions in this book will surprise most of its readers and that’s a good thing. At least they will be armed with strong arguments to bring up with their advisors.

Trading Wisdom

  
  Education
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There’s an old joke about the investor who never used any stop losses. His friend knew his big positions were getting crushed.

Out of concern, the friend asked, “How are you sleeping?”

“Like a baby” he answered.

“Really? You aren’t nervous or upset?”

“I sleep like a baby” he repeated.

“That’s amazing. I’d never be able to sleep through the night with those types of losses.”

“Who said anything about sleeping through the night? I said I slept like a baby: I wake up every two hours, wet myself and cry for 30 minutes before falling back to sleep.”

That’s why risk management is so critical: to save you from sleeping like a baby, and in the long run to save you a lot of money.

—There’s a reason flight attendants show you where the emergency exits are before takeoff. The same thinking should apply to investors. Prudent investors have a sell strategy in place beforethey get involved with a stock. Using any of these stop strategies helps keep your emotions out of the process when an investing emergency arises.

Louis Ehrenkrantz’ 7 Golden Rules for Investing

  
  Education
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First rule: develop a large appetite for
reading; it will hone your instincts for finding successful companies.

Second
rule: don’t overdiversify; ten stocks, in at least three sectors, are
enough for the average investor.

Third rule: stick with your winners and sell
your losers; do not automatically sell when a stock hits a target price, but
continue to hold it as long as it performs well and has good prospects for the
future.

Fourth rule: look for top-quality, out-of-favor companies; look for
companies that produce an array of high-quality products and/or services.

Fifth
rule: don’t worry about earnings if a company makes a popular product; strong
earnings growth will follow.

Sixth rule: don’t tinker with your portfolio; check
your portfolio’s performance only once or twice a year.

Seventh rule: don’t be
afraid to hold cash; it’s okay to be prepared to purchase stocks with
beaten-down prices after a correction.

Thoughts About Traders and Trading

  
  Education
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* Risk Management – If you lose 10% of your trading account, you need to make 11.1% on the remaining capital to get back to even. If you lose 20% of your account, you need to make 25% on the remaining capital to return to breakeven. At a 30% loss, you have to make 37.5% to become whole; at 40% loss, you have to make 67% to return to even. Once you’ve lost half your trading capital, you need to double the remainder to replenish your account. Much of trading success is limiting losses and avoiding those fat tails of risk.
* What is a Trader? – If you ask a trader what is a good market, he will tell you that it’s a market that has good volatility; a good market is one that moves. If you ask an investor what is a good market, he will tell you that it’s a rising market. Lots of people try to succeed as traders with the mindset of investors. It doesn’t work.
* Refutation – The story goes that Samuel Johnson, upon hearing Bishop Berkeley’s theory that objects existed in mind only, kicked a rock in front of him, announcing, “Thus I refute Berkeley!” The incident came to mind when I met with a trader today who trades very actively every day, has made money on more than 80% of days this year, and has made several million dollars this year. His performance was clearly documented by his firm and the firm’s risk manager. Thus he refutes efficient market theory. 
* Success – When I see traders like the one above (quite a few at his firm are up more than a million dollars this year), it’s an inspiring reminder that success *is* possible to those who work diligently at trading as a career. The support of a superior firm doesn’t hurt, either.

Stoploss for Traders

  
  Education
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There’s an old joke about the investor who never used any stop losses. His friend knew his big positions were getting crushed.

Out of concern, the friend asked, “How are you sleeping?”

“Like a baby” he answered.

“Really? You aren’t nervous or upset?”

“I sleep like a baby” he repeated.

“That’s amazing. I’d never be able to sleep through the night with those types of losses.”

“Who said anything about sleeping through the night? I said I slept like a baby: I wake up every two hours, wet myself and cry for 30 minutes before falling back to sleep.”

That’s why risk management is so critical: to save you from sleeping like a baby, and in the long run to save you a lot of money.

—

There’s a reason flight attendants show you where the emergency exits are before takeoff. The same thinking should apply to investors. Prudent investors have a sell strategy in place before they get involved with a stock. Using any of these stop strategies helps keep your emotions out of the process when an investing emergency arises.

Effectiveness Is the Measure of Truth

  
  Education
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In trading as in life, effectiveness has to be the measure of truth. If something doesn’t work, there is no point in continuing to do it. Misperceptions, false unconscious or conscious beliefs, and unhelpful behaviors can contaminate and desecrate your most sought after results.

Imagine the frustration of a trader who perceives that a market is changing direction when in fact it is persisting in its original thrust. Or consider, for further example, an investor who bought into the belief that buy and hold is a valid investment strategy. That investor had to have experienced devastating losses over the past year. Or ponder the trader who repeatedly fails to utilize stop losses and experiences numerous outsize losses because he won’t accept a loss.

When you choose effectiveness as your measure of truth, you can learn from your mistakes. You can make plans, take action, receive feedback, and assess the results. You can revise your plans, take new actions, receive new feedback, on and on, until you find a viable strategy that will work most of the time.

When you fear loss, when greed overcomes you, when you get reckless, or when you hesitate, you become grossly ineffective. When you’re confused or ambivalent yet think you need to take action, you do yourself no good. In each case you need to sort through your thoughts, develop a clear focus, search for the high probabilities, and take prompt and calm action. (more…)

The Five Investing Essential Truths

  
  Education
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5-number

Markets are notoriously hard to read and people see only what they themselves want to see.

Bulls will find reasons why certain stocks will go higher, while at the same time, Bears will find many reasons for the same stocks to go lower.

The seldom-admitted truth is that most of the time, markets exist in some indeterminate state!

The main thing is that you cannot trust consensus and you cannot rely on the “Establishment.”

You can’t find refuge in the herd and you must resist the urge to join the crowd.

Your passion of the moment will most certainly create a disaster over the years!

On the other hand, if you do stick with the following five essential truths, you do stand a better than average chance to invest profitably:

1. Markets are unpredictable and ill-suited to forecasts.

2. Long-term fundamentals are key.

3. Investor emotion leads to volatility.

4. Valuation discipline should guide investment selection.

5. Perspective and patience are always well rewarded.

 

The Crowd Speaks Technical Analysis

  
  Education
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Nice write-upcrowd on the benefits of adding some technical analysis to a rational, fundamental worldview by Anthony Bolton, the recently retired manager of the top-performing Fidelity Special Situations fund. A few excerpts (emphasis mine):

 My contention is that if you are trying to predict the mass action of thousands of investors, most of whom are investing on a rational or logical basis, you won’t be able to do this by taking the same logical approach as everyone else. (more…)

12 Points about About Investing from Howard Marks

  
  Education
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MUST READ1. “The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.” Psychological mistakes are at the same time the biggest source of danger for an investor and the biggest source of opportunity when other people succumb to those mistakes.  If you can keep your head about you when everyone else is losing theirs, you can profit in ways which beat the market. Howard Marks: “The absolute best buying opportunities come when asset holders are forced to sell.”

2.  “Rule No. 1:  Most things will prove to be cyclical. – Rule No. 2:  Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1.” Nothing good or bad goes on forever.  And yet people extrapolate sometimes as if a phenomenon will go on indefinitely. “If something cannot go on forever it will eventually stop” famously said Herbert Stein. Situations in which mean reversion does not happen are rare enough as to make a mean reversion assumption a consistent friend to the investor.

3.  “We don’t know what lies ahead in terms of the macro future. Few people if any know more than the consensus about what’s going to happen to the economy, interest rates and market aggregates. Thus, the investor’s time is better spent trying to gain a knowledge advantage regarding ‘the knowable’: industries, companies and securities. The more micro your focus, the great the likelihood you can learn things others don’t.”  Focusing on the simplest possible system (an individual company) is the greatest opportunity for an investor since a company is understandable in a way which may reveal a mispriced bet. Howard Marks puts it simply:  “We don’t make macro bets.”

4.  “We can make excellent investment decisions on the basis of present observations, with no need to make guesses about the future.”  This video has excellent material from Marks on why trying to make macroeconomic predictions is bound to fail:   https://www.youtube.com/watch?v=2It1fzcBoJU  If great investors like Marks, Buffett, Munger, Lynch etc. can’t make macro forecasts, do you think economists can? If you do believe they can, “Where are the economists’ yachts?”  Howard Marks notes that anyone can be right “once in a row” especially when the range of possible outcomes is small.

5.  “There are two essential ingredients for profit in a declining market: you have to have a view on intrinsic value, and you have to hold that view strongly enough to be able to hang in and buy even as price declines suggest that you’re wrong. Oh yes, there’s a third; you have to be right.”  Being a contrarian for its own sake is suicidal. Not being a contrarian at all means by definition you can’t outperform the market. Being genuinely contrarian means you are going to be uncomfortable sometimes. Howard Marks adds:  “To achieve superior investment results, your insight into value has to be superior. Thus you must learn things others don’t, see things differently or do a better job of analyzing them – ideally all three.” (more…)

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