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Sir Earnest Shackleton’s expedition to be the first to cross Antarctica in 1914 turned into a 20-month ordeal trapped in an ice pack, their ship crushed, and the desperate attempt to save themselves as the pack broke up. It’s a story of endurance and survival.
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Behavioral advantages arise out of the manifest tendencies of large numbers of people to react in predictable ways to certain kinds of situations. So we know that people are risk averse. We know that their coefficient of loss is about two to one – which means that they feel the pain of losing a dollar twice as intensely as they feel the pleasure of gaining a dollar.
People overweight the most recent information. They overreact to dramatic information, or dramatic circumstances. They tend to have what’s called outcome bias, which is they judge things on their outcome, and not on their process. So a lot of these behavioral elements are things that you can actually identify and exploit to your advantage if you are aware of them – and aware also that no matter how much you’re aware of them, you’re not immune to them yourself. You really have to have a sense of discipline and patience, and understanding in that. — Bill Miller (source)
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Predictions for the stock market surface around the turn of every calendar year. It’s an annual tradition for financial institutions. They can tout their “expertise” to clients and others who want reassurance on how the market will perform over the next 12 months.
There’s just one problem. Market predictions are almost always wrong — spectacularly so. It’s no different from the pundits that pop up every year with their failed claims of impending market doom. Sure, they may get it right eventually, but when the same prediction is made every year it’s no more expert than a broken clock.
Predicting the future is hard. Predicting the future of markets — market crashes much less the general direction of markets — is even harder.
Why is it so hard? Because markets are complex dynamic systems. Much like naturally occurring catastrophes, many complex systems tend toward a state of criticality. Wildfires, earthquakes, epidemics, avalanches, and stock markets are complex systems that self-organize toward a state of instability and sudden change.
A good example of this was found when analyzing avalanches using a sandpile game. Picture a pile of sand. One tiny grain of sand is dropped onto the pile, one at a time, to see how long it takes before the pile collapses. They tracked the frequency and size of each collapse and found the cascades to be unpredictable. Continue Reading…
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Investors are right and wrong all the time for the wrong reasons. We all know people who got famous in our business for being right once in row. The correctness of a decision cannot be judged merely from the outcome. Good decisions fail all the time. Bad decisions work all the time. Randomness alone can produce just about any outcome in the short run. It is for reasons like these that we must be leery about attaching great importance to short-term performance.
Instead you must appreciate what Taleb in his book calls alternative histories — the other things that reasonably, probably could have happened. The difficulty of seeing events as nothing more than part of a range of possibilities must be dealt with, and if we can understand that, then we reduce the significance we attach to the events that actually happened. If short-term outperformance or underperformance is of limited relevance, what matters? Long term, it is not who can only do it once or who can do it for a year. It is who can do it for 10 years or maybe 20. These are the people who are worth our attention. — Howard Marks (source)
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Walt Disney wanted a second chance to recreate Disneyland the right way — bigger, better, and with total control of the surrounding environment. He found that opportunity in Florida. The story of Walt Disney World is one of big dreams, secrecy, and financial ingenuity.
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What the economists call fabrication or demand in use is inversely correlated with price. Or, more simply, you know, if gasoline prices go up, other things equal, you’re going to drive less. So price and demand are inversely correlated: basic economics. And that’s the way it is for things that are used. But in financial markets, it isn’t the case. That actually, demand is positively correlated with price. More people buy things when they go up; if stocks start to go up, more people want them than if they’re going down. The higher they go up, the greater the demand for them. That’s why you see people chasing mutual fund performance; it’s why you see the bubbles that you saw in technology and Internet stocks where all the money flowed in after they’d gone up a lot… It’s been very well established that demand follows price. — Bill Miller (source)
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