Excerpts
Headlines that induce fearfulness are often based on myths, not reason. Propaganda techniques, no the verifiable propositions of science, convey these ideas.
Erroneous, untested suppositions dominate the market today. Despite the advances that have come about in the four decades since efficient markets theory was developed, finance is still largely in the Dark Ages. The public is barraged with commentary from journalists who offer nothing but superstitions, descriptions, backward-looking observations, and interviews with fund managers struggling to keep up with the market averages.
Greenspan, 1999 release of a FOMC 1994 transcript: “As we look back on this, I suspect that there was a significant overshoot in the market. We pricked the bubble.” The horror! When did the stock market become the Fed’s business?
The old men at the Fed do not like to see ordinary people making money in the stock market.
Almost everything investors are taught about the relation between earnings and stock market returns, whether in business schools or on the stock market pages of newspapers, is wrong.
Why do people so readily embrace these fallacies? Like all propaganda, they have an appealing, superficial plausibility.
…the value boys, who still revere Benjamin Graham even though his methods enabled him to go broke at least twice and kept most of his followers out of the bull market of the 1980s and 1990s, when the Dow rose 14-fold.
Looking back in time, the P/E-returns link is nebulous. The P/Es of 30 that prevailed in 1929 and the poor returns in subsequent years are always cited as evidence of a predictive relation. But at the beginning of 1970, the S&P 500 P/E was 16 and the subsequent five-year annualized return was -6 percent per year. At the beginning of 1994, the p/E was 21.3 and the subsequent five-year annual return was 21 percent.
In sum, our studies show that the relation between P/Es and returns from 1950 to 2001 is completely consistent with randomness.
In the face of uncertainty, people have a need for understanding and control. They will latch on any explanation rather than go without one. An illusion of control is better than no perceived control.
The problem with many studies is that they used old data, and arived at formulas that were descriptive instead of predictive. For a theory to be testable, it must offer predictions.
The problem with technical analysis is that practitioners and advocates fail to follow standard scientific procedures in presenting and evaluating its techniques.
While players have memories, most people would agree that cards don't have memory. But do stocks have memory?
Each stock has a personality. The personality is from the traders and the market makers trading the stock. The key to intraday moves is to find the Ax. The As is the market maker or makers who have the orders on a big day (...) The besit is Fidelity; they blast stocks. The worst is Janus; they drip orders trough many different firms.
On a day-to-day basis, the market likes to throw out trick questions that will make monkeys out of people who rely on visual impressions of charts.
It is therefore not surprising that when market risk is perceived to be high, subsequent returns are indeed high. That is exactly what a high level of VIX indicates.
The key to a happy, successful life is to be humble about one's knowledge and open enough to admit the possibility of change and to adjust our thinking when facts contradict our beliefs. In the market, it means a determination to keep up with new ideas and academic theories that influence the practitioners and to have a procedure for judging and testing the work of others before touting it to us.
The cult of the bear: ...plays to the human need for certainty, control, and simplicity in a complicated world.
Hubris is the sin to which the great and gifted are most susceptible. (...) Self-confidence is prerequesite o success. Hubris, however, is an exaggerated self-confidence that is difficult to sustain in light of the facts.
Only in bull markets, it seems, do companies and businesspeople make the cover of "Time".
We studied every company featured on the cover of "Forbes" from 1997 through 2001. The results show that companies perform about 5 percentage points worse than the market in the month after making the cover, and in line with the market over the subsequent five monhts.
The more lords on board, the worse the stock performance over previous five years. Our observations on the relationship of lords and earnings raise the question of which causality runs. Was it the lords who caused the lackluster performance or the lackluster performance that prompted the companiesto use lords as window-dressing?
Considering the great gap between Graham’s theory of value investing and the chances of putting it into practice, it is not surprising that performance of the funds he managed was not attractive as legend would have it.
Graham always believed that a Dow of more than 100 was too high, and when it got there, he never again felt comfortable in the market. (…) Because he believed for so long that the market was overvalued, his investment performance did not measure up to a buy-and-hold strategy or any other sensible alternate strategy. In 1956, the year the Dow topped 500 for the first time, he left business for good and devoted himself to a life of pleasure.
Graham wrote in “The Intelligent Investor” that the one investment he made without following his own methods was the purchase of Geico.
Contrary to widespread belief, value socks have consistently underperformed growth stocks since at least 1956.
Whatever you do, never place too much reliance on scatter diagrams, correlations, or regression formulas. They are associations, not a proof of causation. Seemingly statistically significant correlations are often due to chance or hidden factors.
Such false conclusions built on one or more of the following flaws:
Failure to account for the possibility of randomness
Omission of a third variable that causes the other two.
Failure to consider mobility, or changes in the population itself
The fallacy of aggregation
Failure to take into account a change in the nature of one of the variables.
A random selection of U.S. stocks returned 1,500,000 percent in the twentieth century.
The difficulty of acquiring knowledge is compounded by the peculiar readiness of markets to follow the principle of ever-changing cycles: By the time an investor has identified the payoffs, as well as the likelihood of the tendency’s continuation, they are much diminished.
True, investments are a branch of the social sciences, not the physical sciences, and no immutable rules are to be expected. But the continual use of dubious methods and data, the avoidance of testing, the reliance on authority, the cultish reverence paid to celebrity investors, the pronouncements of selective gurus, and the attempts to mislead with propaganda, are far more widespread than in any other field.
Too much market forecasting is built on a framework of confusion akin to the forecasts of palm readers and storefront psychics.
One of the best things people can do to improve their investing results is to become familiar with the truth-seeking method that has permitted these achievements (“in science”): gathering facts, discovering regularities and patterns, forming theories, and testing predictions.
Money, like energy, does not disappear; it always goes somewhere.
For every investor who bought at the top, a seller on the other side of the trade got out at the top.
The removal of limit orders maximize the entropy in the system.
After trend-following has worked for a while, be prepared to reverse. After reversalists like me have had their day, be prepared for a major trend.
Most of us find it difficult to make two timing decisions-buy and sell- that both have above-average expectations.
On the proposition that markets vary in their degree of predictability:
This is the stance of those who model the markets and adjust their model to changing cycles. Predictability is itself viewed as a variable, with markets changing in the degree to which they can be predicted and in the elements that comprise valid predictions.
On the novel “Invasion of the Body Snatchers”
The story is about the danger of losing hope and passively accepting the status quo. If you succumb to conformity and stop thinking for yourself, the pod people will get you.
