Category Archives: commentary

In Which I Gently Correct Mark Cuban’s Rant on Investing

even_mark_cuban_can_be_wrongMark Cuban, billionaire owner of the Dallas Mavericks, is pretty easy to like. He’s a smart, passionate, high energy guy and writes a really interesting blog. However, even smart billionaires are wrong from time to time.

In a post from earlier this year titled, “Wall Street’s new lie to Main Street – Asset Allocation,” Cuban gets a lot right, but misses a larger point. He starts strong:

The greatest lie ever told used to be Wall Street telling main street to “buy and hold”.  Of course that’s what they told you every chance they got. It’s not what they did.  The holding period for stocks dropped from 8 years in 1960s to 2 years in the 1990s and 8 months in the 2000s.   Today, stocks are bought and sold in milliseconds.  Which is one of the big reasons you don’t hear much about buy and hold any more. That and the fact it didn’t work.  I think individual owners of stocks  finally came to understand that old saying “Fool me once, shame on you. Fool me for 50 years, shame on me. “

This is true for the most part and something that I have made a note of in the past. Where he is off here is in his assertion that you don’t hear much about buy and hold any more. Shockingly, the old buy & hold zombie march is not only still going strong, but remains the standard Continue reading →

The Naive Question

If we weren’t already doing it this way, is this the way we would start?

This is Paul DePodesta of Moneyball fame asking what he calls “the naive question.” It’s a great question. Very often in business we do things a certain way because that’s the way everybody else does it. That’s the way they’ve always done it. To do it any other way would be crazy (even if it makes more sense).

This is one of the reasons that innovation is hard. Not only do you have to come up with something new, but then you have to convince people to go against the grain. You have to convince them that, just because everyone else isn’t already doing it doesn’t mean it’s a bad idea.

The forward pass in football started out as a novelty. Edison’s electric incandescent lamp research was derided as “a completely idiotic idea” by the chief engineer of the British Post Office. The Wright brothers were accused of perpetrating a fraud for years after the first flight at Kitty Hawk, despite scores of public demonstrations and photographic evidence. Scientific American, the New York Herald, the US Army and countless American scientists refused to believe a heavier than air craft could fly until Teddy Roosevelt ordered public trials in 1908.

Arthur C. Clarke wrote about the four stages of any new idea as follows:

  1. It’s nonsense.
  2. It may be real but it’s not important.
  3. I always said it was important.
  4. I thought of it first!

As investors, one of the hardest and most important things we can do is keep an open mind. Consider data and common sense and weigh them more heavily than tradition and convention.

(Source: http://www.youtube.com/)

Investing Is Not a Magical Pretend Business

It’s funny how a lot of the conventional thinking with regard to investing is focused on being deliberately ignorant and purposely conformist. The conventional mindset among both individuals and advisers is that we should just focus on asset allocation, periodic rebalancing and patience. That’s all. Just do that and watch the money come in, eventually.

In every other type of business venture, we prize creativity and innovation. A unique product or service can be a tremendous competitive advantage. Had Steve Jobs decided that his business plan was to do exactly what Michael Dell does, the story of Apple would have been much different. If Ford, Honda, Mercedes and Bugatti all built the same car at the same price, there would be no reason for more than one of them to exist.

Beyond being innovative, successful business owners tend to be proactive about protecting themselves against hazards that could have devastating consequences. They put locks on the doors, buy fire insurance and avoid extending credit to hobos. If water is pouring through a gaping hole in the roof of the warehouse, they fix it rather than blithely assuming that these kinds of events are normal and will eventually go away.

The standard approach to investing entails replicating a generic asset allocation plan then populating that plan with low cost index funds. Sometimes you rebalance the investments to stay in perfect conformation with the generic plan. If risks present themselves you must ignore them because the plan is a good one that has the approval of a guy that won a Nobel prize! You don’t know him, but trust me, he is very smart. In return for patient allegiance to the generic plan that everyone should copy, we expect a lifetime of returns that beat inflation.

Of course, many people want to take a more active role. Investments are selected by doing research. [Sarcasm Alert] They will do the hard work of uncovering gems by looking in Value Line for stocks with a low p/e. An adviser will make sure to stay on top of things by reading the reports written by the firm’s investment strategist – you don’t know him, but he is very smart. We will pick talented fund managers by reading information compiled by Morningstar. This is a good strategy because a lot of people aren’t willing to go all the way to the library to conduct research. [End Sarcasm]

The assumption that we deserve good returns by doing exactly what everyone else does, with information that everyone else already has, flies in the face of common sense. Doing this while purposely ignoring risk is lunacy. An adviser that is not willing to work hard enough or smart enough to create an innovative approach is a dead man walking. The traditional, generic approach isn’t worth paying for and will not last.

How To Sniff Out BS Research

Interesting article from Scientific American on how to evaluate whether or not an article or report is scientifically sound or just an attempt to justify a preconceived conclusion.

In other words, even if I can’t evaluate someone else’s raw data to tell you directly what it means, I can evaluate the way that data is used to support or refute claims. I can recognize logical fallacies and distinguish them from instances of valid reasoning. Moreover, this is the kind of thing that a non-scientist who is good at critical thinking (whether a journalist or a member of the public consuming a news story) could evaluate as well.

The ability to read and judge research critically is one of the most important skills an investor, or anyone for that matter, can have. Read it all here.

“It’s a Mathematical Inevitability”

It gets tiresome reading day after day on the ever deeper hole states, cities and other municipalities are digging themselves into. Tiresome, until Michael Lewis writes about it. In this case he covers California and a couple of cities that are already beginning to collapse.

The problem was going to grow worse until, as he put it, “you get to one.” A single employee to service the entire city, presumably with a focus on paying pensions. “I don’t know how far out you have to go until you get to one,” said Reed, “but it isn’t all that far.” At that point, if not before, the city would be nothing more than a vehicle to pay the retirement costs of its former workers.

Read the whole thing here: California and Bust