If I Had a Column in the New York Times I’d Be…

…Joe Nocera. Why? Because he just penned an article concerning why humans are the worst investors, a topic about which I’ve written about several times before. I love his subject matter: highly relevant, very interesting, offering both valuable historical context and pithy vignettes. And he provides a solid book review in the process. But my question remains: where’s my column? Some highlights from his article include:

Neither are the rest of us (“economic man” aka rational investors). That’s the thing about investing: we may
not have invented portfolio theory like Mr. Markowitz, but most of us
have some smarts, and we know, absolutely, what we are supposed to do
with our money. We’re supposed to diversify, shut out all the white
noise of the market, rely mainly on low-expense index funds, sell when
stocks are high and buy when they are going down. We should avoid the
herd instead of becoming part of the herd. That what economic man would
do.

But do we do that? Hardly. When it comes to investing, most of us
simply don’t act rationally. Small investors spend hours on chat
boards, where the herd mentality is fiercest. They can’t bring
themselves to sell losing positions, even when the stock is still going
down. They bet everything on one or two high-risk stocks. I do not
exempt myself from this behavior: a decade after the Crash of ’87, I
was loading up on tech stocks during the Internet bubble, even as I was
writing article after article about how the bubble couldn’t possibly
last. 

Having watched the way investors have behaved
since the Crash of ‘87, I’ve come to believe that most human beings are
simply not hard-wired to be good investors. In the 1990s, a new kind of
economics arose, called behavioral economics, which tried to show that
investors weren’t so rational after all. So I can’t deny that one of
the reasons I like Mr. Zweig’s book so much is he provides, at last, a
scientific basis for this theory. It turns out that there is a new
discipline called neuroeconomics, which combines biology, psychology
and economics and tries to understand why we make the often foolish
financial decisions we make.

********************

I came away from Mr. Zweig’s book feeling just the opposite, though:
that there is really not much hope that we’re ever going to get the
hang of investing. Humans are emotional beings, and that is always
going to get in the way. What sets apart investing geniuses like Warren Buffett  is precisely their ability to ignore their emotions —or, perhaps, to use them differently than the rest of us do.

********************

As our interview was winding down,
Mr. Zweig told me a story — “I think it might even be true” — about
Charles T. Munger, the Los Angeles lawyer best known as Mr. Buffett’s
sidekick at Berkshire Hathaway.
“A woman was sitting next to him at a dinner party in L.A.,” Mr. Zweig
said. “She turned to him and said, `You’re Warren Buffett’s partner,
and a great investor. Tell me, what is your secret?’”

Mr. Munger looked up at her. “I’m rational,” he said. Then he went back to his dinner.

I love that last story. True or not, it is the defining characteristic between Messrs. Munger and Buffett and the rest of investment-kind. But just as an FYI, here are some of my writings on the topic that dovetail with Mr. Nocera (and Mr. Zweig’s and Mr. Munger’s) central themes:

09/21/2006: Social Networking for Stock Picking? Give me a Break

It is particularly interesting to read some of the
comments to the TechCrunch article. The diversity of comments pretty
much represents that of the investing public - most comments have no
appreciation for history or empirical research, a few are so far off
the reservation (citing “wisdom of crowds” as the reason why such sites
make sense) as to hardly warrant comment while a few actually raise the
fundamental issues of indexing, risk management and diversification.
The feel one gets from looking at these sites is that investing is
somehow supposed to be FUN. For those of you who have lived in the
markets for a long time, we all know this to be the kiss of death.

Investing life should not about being the next Jim Cramer
- or if it is, may the force be with you. Investing in equities for
long term profits is HARD, and unless you are professional (and, I
might add, one of the few rare professionals whose record is
empirically proven to be due to something other than pure chance), then
it is best to get out of the way and to focus on the one thing that
really matters to building and preserving personal wealth - asset
allocation.

11/30/2006: Why I Hate Jim Cramer

So TheStreet.com issued a press release today saying that Jimmy Baby is going to spend less time on radio and more time in front of the camera. Hooray! Barf.
Now I don’t particularly like being the 300th person to pile on ‘ol
Jimmy, who has been taking some body blows as of late, but what I have
to say has a somewhat different spin that most of what’s out there. My
thesis: he is helping to perpetuate addictive, stupid, self-destructive
behavior, and he has to be stopped. Except now he is only getting a
larger platform. What does this say about our society? I’m not sure,
but I don’t like it. Professional investors love this, so they can make
money off of the sheep-like behavior of hopeful, drooling retail
investors. Sorry, pros, to be “outing” you. You must be paying Jimmy on
the side to keep him talking. What’s bad for retail is good for the
pros, that’s for sure.

His Mad Money bs is really no different than Philip Morris selling
cigarettes: they’re bad for you, they effect those around you, and you
shouldn’t smoke them. Jim Cramer: he makes you think you know what
you’re doing when you don’t, you tell your friends about it, when you
really should be in some good equity index funds and high-grade bonds.
But hey, call me a cynic, call me harsh. This is just one man’s view.

08/16/2007: Retail Investors + Complex Investements = Failure

When I hear of retail investors engaging in multi-legged option
strategies, trading foreign exchange and commodities and shorting
stocks, I cringe. How many lumps are people going to require to wake up
and grow a little humility? I get it - the psychological phenomenon,
that is - but I DON’T GET IT. There have been countless stories
documenting the sheer idiocy of so many retail investors, being in way
over their head and getting killed. So why do people continue making
the same mistakes? For the exact opposite reason of why Warren Buffett
really is a once-in-a-generation type investor: discipline.

Discipline, especially when it goes against one’s native instincts,
is hard. When your friend brags about a particular stock or strategy on
the golf course, you are jealous, right? And when you hear stories of
people making tons in _____ (choose your era - tech stocks,
commodities, currencies, gold, etc.), regardless of a lack of
documentation (self-reporting is notoriously poor as people tend to
remember wins and forget losses), you want in, right? It is very hard
to be the tortoise when you are seemingly surrounded by hares.

08/19/2007: Retail vs. Institutional Investors: Compare and Contrast

Ergo, carrying a card that reads “Institutional Investor” does not
somehow imbue you with skills and abilities that automatically make you
successful, just as being labeled “retail” does not, by definition,
correspond to the word “idiot.” My belief is that almost all investors,
be they retail or Institutional by stripe, are not good. Those who can
generate true, sustained, statistically-significant outperformance over
long periods of time are rare. No, more than rare. But I care less
about the failures of Institutional investors as people because they,
quite frankly, make a lot of money as a group, while retail investors
span the economic strata. This is why I choose to write about retail
and my wish for them, as a group, to think smart, be humble, and take a
rational and serious (read: “This is not fun - this is business”)
approach to investing. If this is arrogant, so be it. Excuse me. But I
think someone without a vested interest needs to write this stuff
because it is a perspective too often lost amidst the hype.

09/23/2007: Bridging the Gap Between Economic Models and Reality

While discussions of utility
in neoclassical economics are generally absent of behavioral impacts,
and merely seek to quantify rational trade-offs among economic goods, utilitarian
explanations take into account consumer psychology and offer a more
robust framework for understanding motivations and their implications
for policy-making. Preference utilitarianism,
as put forth by Peter Singer, seems to be the most useful model for
understanding the behavior described in today’s article than more
classical economic frameworks. It takes into account the uniqueness of
each individual’s perspective and validates their actions as being
rational - for them. And this happens to describe the world in which we
live, a world that is perceived differently by each economic actor.

********************

There is a psychological barrier to taking a loss, admitting a mistake,
even if it is economically prudent to do so. How many people do you
know that held on to stocks from $60 down to $1, even when they really
thought they should get out at $30? I personally know dozens. The
concept of sunk costs
gets thrown out the window when emotions get involved. As I’ve written
previously, humans are not wired to everywhere and always make rational
economic decisions, though they are wired to always seek to maximize their utility. A discussion of consumer behavior in the absence of psychology and utility is almost valueless, IMHO.

So thanks for the interesting and well-written piece, Joe. Next time you need a quote please feel free to give me a call. You know where to find me.