Author: Taking Care Of My Own Business

The Ostrich Effect

I initially wanted to put off writing about this fallacy, but I cannot avoid it. Psychologists use this term to describe the decision to ignore dangerous or negative information by “burying” one’s head in the sand—like an ostrich—and hoping it would disappear. The ostrich effect is one of the most ominous of fallacies, since it is the belief that things can be kept static by inaction. But making errors about the inside of our head does not change what is inside it. Everything is in motion.  Change is the law.  Stability and consistency are illusions.  When we want things to stay the same, we will...

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Let’s regress to the mean together

…but before we do that, allow me to elaborate a bit on it. Regression to the Mean (RTM) is the tendency for trends to flip with the passage of time; it’s nature’s way of levelling the playing field.  Most things on Earth revert to the mean over time and this includes investing as well. It means that whenever you hope that a very high investment return would continue, the odds would be overwhelmingly against you. I, personally, always want to consider the statistical phenomenon RTM as a possible cause of an observed change in my decision making process. Admittedly, that’s easier said than done, since our mind...

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The single largest risk to investors in today’s markets

…is themselves. That’s right, the single largest risk to investors is themselves. By that, I, of course, mean the influence of human emotion and psychology in decision making. It seems quite clear to me that humans are uniquely wired incorrectly for long-term investment success. When asset prices double, we want those assets twice as bad, but when asset prices drop in half, we want nothing to do with them. This intuitive behaviour, inherited from our ancestors, is a disadvantage in the modern world. We call far too many cognitive biases our own.  In this case, however, more doesn’t equal better.  They’re merely a...

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New year, new start, same old, but still the most accurate stock market forecast for 2016

At the beginning of each year, there are many pundits, experts, self-proclaimed gurus, and other suspicious characters who’d like to sell you stuff predicting the directions of the Stock Markets. As I personally have ample years of experience in the Stock Markets (and know for sure what’s going on),  I did get asked—by my three friends and my one wife—about my take on 2016. So after thorough research, I am absolutely confident about the high probability of my forecast. Here it is: In the next 12 months, the US-stocks will go up and they will go down.  As will...

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It’s that time of the year again

It’s that time of the year again when avalanches of New Year’s resolutions are launched with idealistic plans for drastic self-improvement in 2016. We resolve to quit drinking, smoking, or both.  We resolve to help others, and to spend more time with our friends and family.  We resolve to finally get out of debt, and immediately into building up a neat retirement nest egg.  We resolve to make it into the Guinness Book of Records for the most T-Shirts worn at once. We are great planners, but, regrettably, we are experts only at  planning, not on  planning. Why is that? Because we have the tendency to underestimate the amount...

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Diversify, diversify, and then diversify some more

Could we both agree on the following notion? That, in the investment field, there is no one instrument that can perform all the time, and that there is no one who can say with certainty—in advance—which instrument would perform best.  The future is uncertain and markets are random. As such, what Harry Markowitz demonstrated mathematically in 1952 still holds true: Putting all of one’s eggs in one basket is an unacceptably risky strategy, and diversification is the closest an investor can get to having a free lunch. Personally, when I’m in doubt, I always remind myself that I am an investor, not an entrepreneur.  There’s no need for me to put all my eggs in one basket....

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A few thoughts on our second brain

I can literally envision all you regular readers rolling your eyes at yet another “brainy” post and thinking: “Tacomob, haven’t you written more than enough about the brain already?  Isn’t there some other topic on your mind?” Of course there is, and that’s why I am writing about our second brain—the one below our shoulders. Ok, I know that that sounds absurd, but bear with me nonetheless. Can you recall a situation where you were extremely happy, or in love, or both?  And how was that feeling?  Did you have butterflies in the brain, or in the stomach? Situations like these demonstrate that there are processes in the vicinity of our stomach that impact our emotions. But is the gastrointestinal area the only receiver of...

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A bit more of mental accounting

Recently there has been a lively discussion among the Singapore Financial Blogger Scene about ‘Net Worth’ and how it should/could/may be computed (here, here, and here). This showed me how imperfect and susceptible to bias we all are.  We are all in this together facing our cognitive illusions. Let’s check out one common bias known as the Mental Accounting Bias, which is the tendency to value some money less than others. One example of this is the “House Money” effect: In the event that you are gambling at a casino (a highly hypothetical scenario, because readers of financial blogs do know that the casino always...

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25 traits of the perfect stock investor

In the past year—since Tacomob has been up and running—not only have I shared my thoughts on the many biases that make us commit dumb mistakes with our hard-earned money, I have also shared many aspects of what we should not do—in order to safeguard our monetary resources. Thus, I thought it would be a good idea, after all that “negativity”, to share the aspects of what we should do—in order to be successful in investing. So, here are the traits of the perfect stock investor (“Rational Optimism”): (Biases mentioned in brackets are examples of biases that can be surmounted by each respective trait) 1) Able to sit quietly—alone—in...

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Another competitive edge of introverts

Do you know what is the central element of good decision-making? It is actually one’s ability to manage delay. Yes, our ability to think about delay is a central part of the human condition and it’s a gift, a tool that we can—and should—use to examine our lives. Life might be a race against time—at least that’s how it’s perceived by many—but it’s enriched when we rise above our instincts and stop the clock to process—and understand what we are doing and the reasons behind them. Because, like it or not, it would seem that the essence of intelligence is knowing when to think and act quickly, and when to think and act...

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Are you a ‘kicker’ too?

Have you ever had—while driving—that extraordinary experience where anyone driving slower than you is an idiot, while anyone driving faster is a maniac? That, my dear reader, is an example of the Correspondence Bias in full-blown action. Generally, this bias refers to the tendency to infer that people’s behavior corresponds mainly to their personality, despite their behavior being explainable by the situations in which they occur. In other words, we tend to see a far too direct correlation between people’s actions and their personalities. We wrongly assume that a person’s action is based more on what “kind” of person he/she is—rather than the social and environmental...

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Gentle Reminder of the Disposition Effect

A few weeks ago, I wrote herewithin about a natural phenomenon: When things go well, we tend to ascribe our success to our abilities—our disposition.  But when they go wrong, we tend to blame external factors—our situation. Finished.  Done.  Quick conclusion.  Move on. But wait a minute…could it be that that ‘quick conclusion’ was made at a time where we got tired of thinking? That type of quick conclusions means that not only are we unlikely to accurately assess our on-going level of ignorance, we are also unlikely to develop the appropriate methods to deals with it.  Hence, we’d never learn very much. So, if it’s luck rather...

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This happens to everyone of us

Ageing, that is. Humans have two things in common: We have a biased brain, and we grow older. Unfortunately, the fear of ageing these days is rampant, because we fear what we will become. My Claim “Being old is much better than you think.” Now, I’m not saying that because I am old; in truth, I am still young, having started on the second half of my life.  Thus, I cannot claim “having been there, done that” as yet. I came to that conclusion after reading about and listening to quotes from the people who have already been there and done that—those “age-experienced”—and have observed that growing older is...

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A little bit more information for you? No, thanks, I got plenty already.

In psychology, there is the term “Information Bias” which is the tendency to seek information when it doesn’t affect our actions. Nevertheless, more information isn’t always better. The instinctual shortcut that we take when we have “too much information” is to engage with it selectively—picking out the parts that we like—while ignoring the remainder.  In truth, that’s dangerous! How so? Because we tend to focus on those parts that narrates the world as we would like it to be instead of how it really is.  Thus, we ignore the risks that are the hardest to measure, even when they pose...

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The Seer-Sucker Illusion

“Imagine you pick 1 million random people from around the world every day,” said Toby McDade, chief investment officer of Momentum Fee Capital Management. “Some days, 51% would be in a good mood, 49% in a bad mood.  The next day, maybe it’s the opposite.  Other days, random chance could mean 8% of people are really pissed off for no real reason.  This is basically what the stock-market is on a day-to-day basis.” Asked what his clients thought of this view, Mr. McDade laughed. “Oh my God, you think I could tell my clients that?  How could I justify...

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