behavioral economics

Fishing Lures Are Made to Catch Fishermen

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Archeologists say the oldest known fishhooks date back 23,000 years. They have no idea when one person first sold another one a fishing lure. But ever since then, it has been a truth that fishing lures are designed to catch fishermen, not fish. A useful corollary is lurking just beneath the surface.

Recently the Wall Street Journal wrote about a narrow investment sector that was getting flooded with money by investors starved for yield. ‘Direct lending’ allows investors to take on the role of lending money to middle-size companies. The article made the point that the flood of money had reduced yields as well as the safety of the loans—perhaps investors should look elsewhere.

As if on cue, we immediately received an email about a direct lending strategy ‘formerly available only to institutional investors.’ It is said to be an innovative way to generate current income.

After years of near-zero interest rates and lingering fears about the stock market, who isn’t looking for an innovative way to generate income—particularly with a strategy formerly available only to institutions?

Clearly, investment products are designed to catch investors, not investment returns.

Behavioral economists have amply demonstrated how prone we humans are to make irrational decisions—to do the wrong thing at the wrong time. The bane of investing is the tendency to buy in euphoria near the peak and sell in panic near the low. The crowd seems to miss on the timing, time after time.

You know our principles include the idea of avoiding stampedes. We know that going against the crowd can be rewarding—our approach is contrarian. When something we are doing becomes popular, we need to think about doing something different. And if everybody else is buying some sector or product, we are likely to be suspicious of it.

Market history is full of products that attracted lots and lots of money, but little in the way of returns. It is much like sporting goods stores full of lures that catch fishermen, not fish. Clients, if you would like to talk about this or any other pertinent topic, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Structured products typically have two components; a note and a derivative and a fixed maturity. They are complicated investments intended for a “buy and hold” strategy and offer protection from downside risk in exchange for forgoing some upside potential to achieve that protection. Principal protection may vary from partial to 100 percent.

Investing involves risk, including possible loss of principal.

Investment Success and EQ

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We write about productive investment attitudes and habits because we have seen first-hand their power to improve one’s position. Knowledge improves behavior, effective behavior increases account balances, growing balances raise our revenues. Everybody wins.

Behavioral economists have identified ways in which humans seem wired to make poor financial decisions based on emotions. We know from our work with you that this neither dooms our investment performance nor requires us to settle for mediocre results.

Communicating ideas and perspectives is therefore at the very heart of our enterprise. So we were excited to find the work of author Justin Bariso. He wrote the following concise wisdom about his field of expertise:

“Emotional intelligence is the ability to make emotions work for you, instead of against you.”

Some propose that emotional intelligence and its measurement, EQ, is more vital to success in business and life than one’s intelligence quotient, or IQ. This makes a great deal of sense to us, generally, although brains are wonderfully useful in our work, too.

We think Bariso’s statement has special meaning in the world of investing. Many people let emotions work against them; behavioral economics demonstrates this. Our approach, which explicitly seeks to avoid stampedes and embraces unpopular viewpoints, absolutely seeks to let emotions work for us. Emotions create anomalies in market prices, and that is where our opportunities live.

Legendary investor Warren Buffett once said, “Be greedy when others are fearful, and fearful when others are greedy.” Isn’t this just another way to say ‘make emotions work for you instead of against you?’

Clients, if you would like to talk about this or any other pertinent topic, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risk, including possible loss of principal.

Short Cuts

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When I was a child, a friend and I were off on some adventure or other. We arrived back at his home quite a bit later than expected. His mother was waiting, and demanded an explanation. My friend’s answer was Marx Brothers-quality dialogue: “We took a short-cut!”

His mother seemed to think that a short cut ought to reduce travel time, not increase it.

Some financial professionals and investment advisors take a very similar short cut. They adopt the view that it is either not possible to do better than the market averages, or not worth the effort of trying.

The reasons sound plausible, but may not stand up under examination. Human nature often encourages counterproductive behavior. We believe untrained human nature is a poor guide to investing; training and education may improve investor behavior, which may improve investment results. But the short-cutters seem to pander to human nature in its untrained state.

Active investment managers typically underperform the market averages, and this is often cited as evidence “it is too hard to beat the market.” What many fail to see is that active managers have human beings as customers, so may include popular investments and avoid out-of-favor sectors in order to draw more funds to manage. These tactics, of course, may be detrimental to actual investment results.

So that human nature thing enters into that argument, as well.

Life is straightforward for the short-cutters. They typically avoid the hard work of researching specific investment opportunities; they spend no time reading SEC filings, press releases, and conference call transcripts. They have no reason to try to understand the role of emotion driving money into different market sectors.

Hey, it is a free country and we are glad it is. Each person is entitled to his or her own opinion; investors are free to use or ignore any advice or advisors.

The short-cutters have become very popular. At the same time, with your help, our business has continued to grow and prosper. We do not mind the existence of short-cutters; they may actually reduce the competition for favorable opportunities. But we do want you to understand what we are talking about, and why.

If you have questions or comments on how this may apply to your situation, please write or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The Giants Who Came Before Us

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 The work of Roger Babson contains countless worthwhile nuggets. He was a Wall Street pioneer a century ago, creator of the first investment research service, and philanthropist of note. A keen observer of business, the markets and the economy, and an original thinker, his words ring true today.

We see applications to the world of investing. For example:

“Experience has taught me that there is one chief reason why some people succeed and others fail. The difference is not one of knowing, but of doing. So far as success can be reduced to a formula, it consists of this: doing what you know you should do.

Thoughtful people understand the sentiment behind the old saying, ‘buy low, sell high.’ It has become a cliché. Yet in tumultuous and uncertain times when pessimism rules and stock prices have fallen, many people have trouble with step one: buying low. It turns out to be very difficult in practice.

We’ve also had conversations in the tough times with people who say “I know selling out now is the wrong thing to do, but that is what I want to do.” Clearly, this is a case of knowing what you should do—and doing the opposite! We illustrated how costly that can be here.

Without knowing Babson’s Rule, we have spent many years working to find or train investment clients who would do what they know they should do. You, our clients, are the best. We believe our efforts have been good for you-–and for us.

We will keep on working to find good opportunities, avoid threats where we can, and cultivate effective attitudes about investing—helping you do what you know you should do. If you would like to discuss your situation in detail, please write or call.


Securities offered through LPL Financial, Member FINRA/SIPC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stock investing involves risk including loss of principal.

Meet Your Partner, Mr. Market

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Suppose that you owned a partnership interest in a business, and that your business partner was readily available any day to either buy out your half of the business or sell his half to you—as long as the price was right.

Suppose, though, that your partner suffered from erratic mood swings. He can quote you the price he’ll buy or sell for any time, but his appraisals are always colored by his current mood. When business is good he over-values the business and offers you the moon for your half of the business; when business is poor he becomes pessimistic and offers to sell you his share for pennies on the dollar.

This is a metaphor Warren Buffett uses in his shareholder letters to describe the stock market from the investor’s perspective, dubbing our hypothetical business partner “Mr. Market.” As a stock holder you have an ownership interest of a tiny slice in a business. There is a market to buy or sell shares of the business at almost any time. But the price the market may give you depends on investor moods.

According to Buffett, if you understand the value of a business it’s in your best interest to take advantage of Mr. Market’s mood swings to trade when his prices are at their most irrational. However, he also offers this warning:

“But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.”

So when the market is in a frenzy of buying or selling, there may be opportunities to profitably take advantage of the stampede—but not to join it.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stock investing involves risk including loss of principal. No strategy assures success or protects against loss.

Human Nature Creates Investment Opportunity

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Economists like to believe that human beings act rationally. Those of us that know otherwise follow the theory of Behavioral Economics instead.

One of the key findings of Behavioral Economics is that the pain of a loss is twice as great as the pleasure of a corresponding gain. Rationally speaking, $5 is $5, whether it is gained or lost. But we still feel the sting of the loss as a bigger deal than the pleasure arising from the gain. This is human nature in its raw, untrained state.

Confounding this finding is an extremely pertinent point, one that is ignored by the academics and the finance types who trade off their work. They treat a temporary decline as a loss. There is no shortage of expensive products designed to pander to this tendency by selling the promise of stability at a premium.

In the real world, many successful investors treat a temporary decline as either an opportunity, or a matter of no long term consequence. For most of us it takes education and training to overcome our behavioral tendency to feel the pain of a loss over short-term volatility. We’re here to help you with that.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Niche Market of the Mind

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In every field of human endeavor, it seems that the best of the best are specialized. From the doctor who specializes in one form of cancer to the CPA who works mainly with trucking companies, specialists rule. In business, the short-hand term is ‘niche marketing.’

Financial advisors may work with people of a specific religion, those with shared hobbies or interests, people who work in a particular field or for a certain company, or a wide variety of other traits or characteristics. If you know us, it should not surprise you that we are different.

Our niche market encompasses retirees and workers and truck drivers and executives and nurses and engineers and teachers and accountants and married couples and widows and single people. At first glance, this may seem to be a poorly defined client group.

But our clients represent a very well-defined group. It is a niche market of the mind.

We work hard to qualify clients by productive attitudes toward investing—and we are not afraid to try to train clients if the right attitudes don’t come naturally. A tolerance for volatility and a fundamental confidence, as a society, we stumble our way through our problems are two of the elements we need to have.

The rewards for pursuing this niche have been amazing. While other advisors cope with massive defections from informed strategy when the outlook darkens, our clients tend to stay the course. We avoid the curse of ‘cash on the sidelines,’ waiting and waiting for that comfortable moment to get back in the game after selling out. We never promise stability, so we spend less time apologizing for the inevitable volatility. In short, we can do our best work for people who are in the best position to profit from it over the long haul.

Is it always easy? Is it always fun? Of course not. The market goes up and down, and ‘up’ is a lot more fun than ‘down.’ Pessimism and optimism ebb and flow, and it can be tough to buck the crowd. Any rational person has to scratch their head in the toughest times and wonder whether they are doing the right thing. But together we have tended to make appropriate decisions.

Good information communicated well helps drive effective behavior. Behavior can help determine investment outcomes. Good outcomes can increase account balances. And we get paid on account balances. This is why we are doing what we do.

We don’t care if you engineered the truck, or drive the truck, or own the trucking company…if you have what it takes to invest successfully, we specialize in you. This is why we strive for a niche market of the mind.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Things Warren Buffett Never Said

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Warren Buffett may be the most famous investor in the world. The annual meeting of his company is known as ‘Woodstock for Capitalists,’ and is attended by 40,000 people. Countless articles, essays, and books have been written (including by us) about the things he has said.

As far as we know, nobody has ever written anything about things Buffett NEVER said. But here are our top three things Buffett never said:

1. “The stock went down, so I sold it.” Buffett knows the market goes up and down. He studies companies, not stock ticker symbols. When the fundamentals are in place, he buys. Then he holds. Then he holds some more. If the price declines, he typically buys more. This is what ‘buy low, sell high’ is all about.

2. “I’m waiting to invest until we get more economic data to clear up the uncertainty.” In his seven decades of investing, Buffett has noticed that uncertainty is always with us. He reads and studies ceaselessly, and when he finds something to buy, he buys it. Frequently, this turns out to be when the price is depressed because of temporary factors. Others are paralyzed by uncertainty when Buffett is taking action.

3. “A lot depends on what the Federal Reserve does next month.” Buffett has run his company for more than five decades, while seven different people held the chairmanship of the Federal Reserve Board, through innumerable cycles of Federal Reserve tightening and loosening. He can tell you what he paid for his stake in Coca Cola and when it was purchased. He probably cannot say what the Federal Reserve did at the meeting before, or the meeting after, the transaction. Why? Because it doesn’t matter in the long run.

Warren Buffett does not wear a halo. He is a human being and that means he makes mistakes. But he has made more money investing than any other human being on the planet. We think it pays to listen to the things that he has said. But there may be even more value in understanding the things he never said.

If you would like to discuss these concepts or your specific circumstances at greater length, please write or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Stock investing involves risk including loss of principal.

They Say You Can’t Handle the Truth!

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The conventional wisdom in the investment business is that you can’t handle the truth. Our whole business is built around the idea that you CAN handle the truth. Some were born that way, and others may be trained to handle the truth. The stakes are quite high, because those who can handle the truth about investing may be more likely to enjoy success at it.

We humans do have some tendencies which are both deeply rooted and counterproductive to informed investing. The easy path for us would be to pander to those tendencies, affirm them, pat you on the back and take your money. Here are some examples of that:

“They” (the adherents of flawed conventional wisdom) promote the idea that the pain of a loss is twice as great as the pleasure of a similarly sized gain.

“They” speak of temporary downturns as if they were actual losses, a disservice to long term investors.

“They” promote the idea that arithmetic works against investors, since a 20% loss must be followed by a 25% gain in order to break even.

“They” sacrifice total returns on the altar of expensive new products or stagnant investments in the hopes of reducing volatility.

We, on the other hand, believe you can handle the truth. Our experience confirms this. Here is the truth:

1. Long term investing always involves living with volatility, there is no way around it.

2. The ‘pain of a loss’ is optional—it may be offset by the joy of finding bargains, or ignored in the confident knowledge that downturns are temporary. The economy and markets always muddle through and eventually recover.

 3. According to Standard & Poor’s records, over the century’s experience with the Dow Jones Average, so far every 20% loss has been followed by a greater than 25% gain.

4. Investing for the long term in accordance with proven principles, using timeless strategies and timely tactics, in a manner that can get you to your goals, is the right way to do it.

We believe that people who keep some money in the bank, and who know where their needed cash flow will come from, can usually live with our methods and strategies with at least some part of their wealth. And we know that others may not be able to do it. Some lack the confidence that the system will endure, others just cannot tolerate fluctuating account values. It takes all kinds to make the world.

Our aim is to add value to those who can handle the truth, as we’ve defined it here. We work hard to educate and train and impart perspective and context…and it has worked. As always, if you have questions or comments, please write or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss.

Don’t Let Your Anchor Drown You

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When the market has been volatile and seems to be trending lower and account values are shrinking, we frequently look back to the high point, and shiver at the loss since that time. Some clients have told us what their accounts were once worth, and what they are worth now, in order to get across how the losses are affecting them. It is not good fun for anyone. Behavioral economists refer to the first number in those comparisons as the “anchor.”

Since the beginning of 1950, using the S&P 500 Stock Index as a proxy for the broad stock market, there have been 16,630 trading days. On just 1,175 of those days was the market trading at a new high—about one day out of 14. On the other 15,455 days, one could have bemoaned the “loss” from the prior peak. In other words, 93% of the time, one could say money had been lost.1

But in this same period, the S&P rose from 16 to 1,880!1 Does it really make sense to say we were losing money 93% of the time, when we ended up with 117 times what we started with? We think the final destination is far more important than the ride we took to get there.

Of course, this time feels different. Mainly because it is here, right now, in our faces. And for some fraction of that 93% of the time, the change from the prior peak was just a little bit. So we went back and figured out what part of the time the market was down more than 10% from its prior peak—in ‘correction’ territory, as the gurus would say.

Surprisingly, the market was in correction territory, down more than 10%, on 6,372 days—right at 38% of the time or about three days out of every eight.1 A lot of misery was endured (or ignored) on the way to that 117-fold gain.

So thinking about the broad market, the S&P 500 Index, it might not be appropriate to anchor to the 16 point reading back in 1950. That was a long time ago, after all. 1960, at 55 points, might also be too far back. The right anchor, depending on your age and length of investment experience, might be the 80 points in 1970, or the 120 point level reached in 1980, 350 points in 1990, or the 1400 point level from the year 2000. The anchor that could drown you is that last high point—2130 points in May of 2015.

In Outcomes May Vary we wrote about the consequences of selling out at low points. Usually, those who do so are anchored to the last peak, focusing on paper losses. That is why we are encouraging thoughtfulness is choosing anchors. Write or call if you would like to discuss your situation.

1. Original research, based on analysis of historical records of Standard & Poor’s 500 Index.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.