Category Archives: investment theory

One Question That Makes All The Difference

The Daily Barometer (Oregon State University student newspaper) recently ran a story about a student club that aims to deliver real world experience in the area of portfolio management and stock analysis. The OSU Foundation lets the club manage ~$1.4MM of real money, so it’s more than just a theoretical exercise. It sounds like a pretty good program and the members appear to be earnest and passionate about participating. One part of the article in particular caught my eye: Continue reading

Three Ways To Ruin Your Edge

In The Pruning Effect we looked at actual results generated by a strategy designed to deliver a lopsided relationship between the size of gains relative to the size of losses. This asymmetry of returns results in a statistical advantage over time which is the key in separating investing from gambling.

Possession of a statistical edge is a vitally important factor in sustaining performance over an investing life that can span many decades. Luck can help you out here and there, but luck is unreliable. A good plan is one with rules that can be measured and replicated. A good plan is a prerequisite for long term results but it is just that – a prerequisite. People with good plans fail all the time, not because of their plan, but because they are people that suffer from human nature. Here are three ways we traditionally blow our edge and sabotage a perfectly good plan: Continue reading

The Pruning Effect

I’ve talked and written at length about the necessity of recognizing that we are imperfect and how our natural tendency to fight that reality harms us as investors. When we deny that a loss is really a loss (see The Paper Loss Fallacy) we allow the problem to potentially grow into something meaningful and dangerous. By becoming comfortable with the reality of imperfection we give ourselves the opportunity to keep losses small while letting winners grow unconstrained. Rules that allow for the generation of a lopsided relationship between the size of wins and losses are the key to generating long term growth.

Recently I conducted a review of a client account that has been here since January 2008. Every transaction was examined Continue reading