The Brooklyn Investor: The Greatest Investment Book Ever Written

“Any time you extend your bankroll so far that if you lost, it would really distress you, you probably will lose.  It’s tough to play your best under that much pressure.”

This is exactly what Joel Greenblatt said in an essay soon after the financial crisis.  He was talking about how many people thought the error in their investment was that they didn’t foresee the crisis and so didn’t sell stocks before the collapse.  Greenblatt insisted that this couldn’t be done anyway and that the real error was that these people simply owned too much stocks.  If you own so much stock that a 50% decline is going to scare you and make you sell out at precisely the wrong moment (and as Greenblatt says, and Brunson says in this book, you are almost guaranteed to sell out at the bottom), then you owned too much stock to begin with.  Greenblatt said the mistake wasn’t that they didn’t sell before the crisis, but that they sold in panic at the bottom.  This was the error. So the key defense against inevitable (and unpredictable) bear markets is to not extend yourself so much that it will distress you when the markets do fall (and they will).  Buffett says that if it would upset you if a stock you bought declined by 50%, then you simply shouldn’t be investing in stocks.  As I like to say all the time, more money is probably lost every year in trying to avoid losing money in the stock market than actual losses in the stock market! via The Brooklyn Investor: The Greatest Investment Book Ever Written.

Everybody gets what they want

The revealed preference of the polity is to resist losses for incumbent creditors much more than it is to seek gains. In a world of perfect certainty, given a choice between recession and boom, the polity would choose boom. But in the real world, the polity faces great uncertainty. The policies that might engender a boom are not guaranteed to succeed. They carry with them a short-to-medium-term risk of inflation, perhaps even a significant inflation if things don’t go as planned. The polity prefers inaction to bearing this risk.

via interfluidity » Depression is a choice.

Interfluidity’s post reminded me of an interview with Ed Seykota, an early developer of computerized trading systems.

Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.

I know one trader who seems to get in near the start of every substantial bull move and works his $10 thousand up to about a quarter of a million in a couple of months. Then he changes his personality and loses it all back again. This process repeats like clockwork. Once I traded with him, but got out when his personality changed. I doubled my money, while he wiped out as usual. I told him what I was doing, and even paid him a management fee. He just couldn’t help himself. I don’t think he can do it any differently. He wouldn’t want to. He gets a lot of excitement, he gets to be a martyr, he gets sympathy from his friends, and he gets to be the center of attention. Also, possibly, he may be more comfortable relating to people if he is on their financial plane. On some level, I think he is really getting what he wants.

I think that if people look deeply enough into their trading patterns, they find that, on balance, including all their goals, they are really getting what they want, even though they may not understand it or want to admit it.

A doctor friend of mine tells a story about a cancer patient who used her condition to demand attention and, in general, to dominate others around her. As an experiment prearranged with her family, the doctor told her a shot was available which would cure her. She constantly found excuses to avoid appearing for the shot and eventually avoided it entirely. Perhaps her political position was more important than her life. People’s trading performance probably reflects their priorities more than they would like to admit.

Schwager, Jack D. (2012-01-09). Market Wizards: Interviews with Top Traders (Kindle Locations 3691-3705). John Wiley and Sons. Kindle Edition. 

Both these pieces suggest that perhaps we look too hard for the obstacles blocking our path to success whether it be in investing, our career, or in the workings of our political systems. We may be railing the market or against the machinations of an elite, exploiter class while failing to examine the revealed preferences inherent in the situation.

Howard Marks on Contrarianism

Contrarianism is very important but very difficult.  To make his point, he quoted David Swenson who runs investments for Yale’s endowment fund: “Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolio which frequently appear to be downright imprudent in the eyes of the conventional wisdom.”  However, if one wants to be a successful contrarian, one has to believe that conventional wisdom by itself is a bit of an oxymoron because what is conventional is often not wise because most people start believing in something only when it is the third stage of either market extreme.

Distressed Debt Investing: Howard Marks at NYSSA