behavioral economics

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 shorthand 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 those with some other traits or characteristic.

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.

Why Life in the 21st Century is So Grand

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People know why financial advisors invest time and effort studying the economy, markets and specific opportunities. The case for commenting and writing and posting in the 21st century media may be less clear. But there is a compelling reason why we are so engaged, one that has to do with your financial wellbeing.

One of the biggest factors in investment outcomes is investor behavior. The average investor (and some advisors) behave in counterproductive ways. They tend to buy at high prices in times of euphoria and sell at low prices in times of general despair or panic. We believe our clients are far from average, however, and we would like to keep it that way.

Our theory is that more communication leads to understanding, understanding leads to effective behavior, which in turn usually results in better outcomes. We have no guarantees about the future, but we are pretty sure the wealthier our clients are, the better off we will be.

If we take time to write down one or two of our stories every week, we can post them for any client to read any time, 24/7, at their convenience. There aren’t enough hours in the day to tell a story a hundred times in a week, but a hundred people can read the story at the same time here in the 21st century.

More communication is better communication, and there is a terrific side effect. Since some fraction of clients get some fraction of their information from our new media efforts, we have more time to talk one-on-one when that is needed. Whether you follow on Facebook or Twitter or subscribe to the blog, we have more time to talk.

More communication, more time, potentially better investment outcomes….life in the 21st century is incredibly grand. We’re glad you are with us.


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 loss of principal.

The Times, They Are A-Changing

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Forty years ago, poet Bob Dylan wrote a song that echoes a universal theme, the idea of constant change. One may trace this concept through all of history, from the ancient civilizations of Greece, Rome, Egypt, India and China down to our day. Dylan’s lyrics borrow from both the Bible and Aesop’s fables.

Yet there is a tension between constant change and our very human tendency to believe that current conditions and trends will continue. It is appealing to believe that we can know the future by extending past trends. When gasoline first hit $4 per gallon a few years ago, the media was full of predictions that the price would rise to $7.

We call this tendency “straight line thinking” because it involves looking back over a limited time to identify a straight line that can be extended into the future. Gasoline was $1.50 in 2002 and $4 in 2008; anybody could see the trend and many concluded that $7 gas was coming.

Yet nature abhors straight lines. When you open up your view to take in a longer time frame, you see cycles of up-down, up-down. Like the tides or the seasons, cycles seem to offer a more useful way to think about the world.

So our quest is to find good values, bargains, that may be due for a change in direction as the cycle turns. This contrarian method of investing is no guarantee of success. All of our clients have had the experience of owning a supposed bargain that became cheaper or even much cheaper. Yet it is the most promising way to approach investing, in our opinion.

Why is this? The first one now will later be last, the slow one now will later be fast, and the times… they are a-changing.


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 loss of principal. No strategy assures success or protects against loss.

Expecting the Expected

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In our quest to make sense of the world, one recurring theme is the potential gap between expectations and reality. We humans do one thing very well: we love to take things too far. Thus we have bubbles, manias, and fads, unrealistic expectations and the Kardashians.

When there is a universal expectation of something, the expectation can be said to be “already in the price.” If the expectation comes to pass, there will be little impact on the market. If reality unfolds differently, however, the market will move.

For example, several years ago when all the Washington news was about the “fiscal cliff,” the country needed Congress to do the right thing to avoid catastrophe. Congress ranks in public estimation somewhere lower than a snake’s belly, so the consensus expectation was for catastrophe. The markets performed poorly as a result.

But as the deadline approached, it seemed evident to us that expectations were SO low, there was very little chance that Congress could perform worse than expected. We expected Congress to produce a catastrophe, and that expectation was “already in the price.” If Congress either did as expected or better, the market might remain steady or go up. Since Congress could hardly do worse than expected, we felt that actual risk was lower than most others perceived.

This understanding enabled us to stay the course amidst great uncertainty, to our benefit.

One of the most-talked about issues today is whether or when the Federal Reserve Board will raise interest rates. We all know that this will happen sooner or later; this knowledge is presumably already in the market. Hence, we see little advantage in fussing over the probabilities.

When something happens that everyone knows was going to happen, there usually is not a big effect on the market. So we spend our time trying to find unexpected opportunities instead of expected problems.


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 economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Data vs. Wisdom

© Can Stock Photo Inc. / kentohIf you are an avid news reader, you are subject to a flood of information about the world. We read about everything from wars to weather, science, scandals, politics and gossip. This adds up to a wealth of data available to an informed investor to make decisions with.

Here’s the problem: most of it is useless. When you see a headline that seems to affect your investment choices, everyone else is seeing the same thing—and is already factoring that news into the stock price, good or bad. The entire vast store of public knowledge is of no use to us when the market condenses and distills all of that data into a single measure: the company’s publicly traded stock price.

Some economists go one step further and say that investment picking is fundamentally useless, because markets are so good at determining the fair price of an asset that it is impossible to find an undervalued asset. This is called the “efficient market hypothesis.”

However, we can see a flaw in this hypothesis: it rests on the assumption that human beings are rational. We’ve already noted that people are irrationally loss averse and prone to exaggerate market swings. When the stock market fell by 50% from June 2008 to March 2009, it wasn’t because half of our collective corporate wealth magically went up in smoke. We were seeing irrational market swings in action.

It is virtually impossible to beat the market using all of the data that goes into the market in the first place. Instead, we believe we can achieve positive results by using simple fundamental principles to avoid irrational stampedes and find undervalued bargains.


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

Behavioral Economics and The Price of Stability

Stone wall with gold letters spelling out STABILITYThe first theory of economists was that human beings act rationally. When they realized they needed a new theory, the field of Behavioral Economics was born.

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, if you earn $5 it should feel just as satisfying as if you earned $10 and then lost $5 of that—but we still feel the sting of the loss harder, even though the outcome is the same.

If people weigh these two otherwise identical outcomes differently, when it comes time to invest they will wind up paying more for $5 earned in stable investments than they would for $5 earned in volatile investments. There is no shortage of expensive products designed to pander to this tendency by selling the promise of stability at a premium.

The necessary conclusion we see—the one nobody else seems to—is that if the price of stability is too high, the potential rewards for enduring volatility must be larger than they otherwise should be.

These concepts shape our work, our strategies, and our tactics. “The pain of a loss” is determined by one’s mindset, training, and understanding. Many great investors (and many of our clients) feel no pain over short-term losses. Some are even gleeful at the chance to buy securities at bargain prices. One of our roles is to help you develop more productive and effective attitudes about investing, and we believe that by training yourself out of irrational pain over short-term volatility you can perform better in the long run.


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

The illustration is hypothetical and is not representative of any specific investment. Your results may vary.

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