Category Archives: strategy

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 →

The Big Win

One of my favorite finance guys is Ramit Sethi, writer of the “I Will Teach You To Be Rich” blog (and book by the same name). We disagree sharply on investment strategy, but I love his overall philosophy of focusing on the “Big Win.”

For example, instead of spending time writing yet another austere budget that will undoubtedly be abandoned in a few weeks, spend that limited time and willpower on Continue reading →

The Correlation Problem

What are the odds of flipping a fair coin and getting tails four times in a row? There are 16 possible outcomes for four coin flips:

H H H H   H H H T   H H T T   H T T T
T T T T   T T T H   T T H H   T H H H
T H T H   H T H T   T H H T   H T T H
T H T T   T T H T   H T H H   H H T H

The odds of flipping four tails in a row are 1 out of 16, a 6.25% (or .5^4) probability. Unlikely, but not that unlikely. In a hundred coin flips, the odds say that you’ll probably see it happen six times.

Now let’s say that you have an investment approach that you feel confident will produce Continue reading →

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 →