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Skills Versus Behaviour

…….Behavior, in business and investing, is the art of putting skills to use. It’s probably the hardest part of this game. It’s not analytical. It’s often counterintuitive. But it’s the secret ingredient most of us are after. Skills should be praised. But skill without the right behavior often has a ceiling and an expiration date.

It’s an important distinction to make because of how we think about performance. Bill Gates writes often about the importance of measurement when pursuing goals. Hard to argue. But skills are easier to measure than behaviors. Behaviors can be hard to define, and often manifest in the things you don’t do. The relative ease skills can be measured over behavior means we sometimes chase and reward the wrong traits. Google learned this when it eventually devalued SAT scores for job applicants, realizing it had little predictive signal of a hire’s subsequent career success….

More here – Collaborative Fund

When to let go

One of the qualities that impresses me most about people is their resilience – that ability to hang in the fight for a time long after most would have quit. And then if things have not gone their way to pick themselves up and start again. If we take a broader perspective human history in all its facets is only advanced by such people – those who stick with a situation and by simple dint of personality push through.

However, there is a dark side to this and it is the holding the line or clinging to a belief long after it should have become apparent that that they were wrong. We have all known people who have stuck with relationships or jobs long after the point of no return had been reached. And in some cases it undoubtedly not because of their resilience but rather that a change is simply too frightening or they actually lack the resources to take the plunge. But many hang in like a demented barnacle often as if to simply spite themselves – their own ego drives them towards destruction.

This ego driven headlong dive towards self destrution fascinates me because for many years I have been following the fate of John Hussman the manager of Hussman Strategic Fund. Hussman is a former professor of economics and international finance at the Uninversity of Michigan. So in an academic sense he is no fool but as is so often the case smart people use their intellectct to defend their emotional failings.

To begin to understand why I find Hussman an interesting case study we first need to understand the investment approach that this fund adopts. The following is from their prospectus –

The Funds portfolio will typically be invested in common stocks favored by the Hussman Strategic Advisors Inc, the funds investment manager , except for modest cash balances arising in connection withe Funds day to day operations. When market conditions are unfavourable in the view of the investment manager , the fund may use options and index futures , or effect short sales of exchange traded funds (‘ETFS’) to reduce the exposure of the Funds stock portfolio to the impact of general market fluctuations. When market conditions are viewed as favourable, the Fund may use options to increase its exposure to the impact of general market fluctuations.

This all sounds reasonable, it is a basic stock portfolio that at times undertake some form of hedging to reduce the impact of market fluctuations. And this approach found great success during the GFC. As can be seen from the chart below this fund easily outdistanced the S&P500 and the funds under managed grew to US$6.7 billion. Since then the fund has shrunk to approximately $US365M.

Hussman GFC

The reasons for this contraction are instructive and can be found in the funds prospectus. The fund speaks of hedging exposure in unfavourable market conditions. To those of us on the outside this means market downturns as defined by some form of collapse in the trend. This is something that is easily quantifiable and therefore is binary in nature. In my simple world the market is either going up or down. However, Hussman and his management team have a narrative and the narrative is that despite the market going up continually since the GFC all stocks are overvalued. So whilst they may be invested in these stocks they also have in place hedges of equal sizes. Hedging is a drag on performance – it costs money and this cost translates to poor performance. Since the GFC Hussman’s funds have lost on average 2.1% pa whilst the market has gained 2.3%.

Hussman Ten Year

Since the bull market began Hussman has been calling for a slide in the overall market to match that experienced during the Great Depression and he has positioned his fund accordingly. This internally driven narrative is directing the investment strategy which in in turn pushing the fund into the ground.

He has issued a never ending stream of warnings about the market –

November 2010: Bubble, Crash, Bubble, Crash, Bubble…

March 2011: Anatomy of a Bubble.

March 2012: A False Sense of Security.

November 2013: A Textbook Pre-Crash Bubble.

July 2014: Yes, This Is An Equity Bubble.

October 2015: Not The Time To Be Bubble-Tolerant.

October 2016: Sizing Up the Bubble.

March 2017: The Most Broadly Overvalued Moment In Market History.

March 2017: Expect the S&P500 to Underperform Risk-Free T-Bills Over The Coming 10-12 Years.

May 2017: This Time Is Not Different Because This Time Is Always Different.

June 2017: Two Supports Kicked Away Already.

July 2017: Salient Features Of Bull Market Peaks.

August 2017: Imaginary Growth Assumptions and the Steep Adjustment Ahead.

These market calls have an almost plaintive  nature about them, as if he is desperate for the market to agree with him and his thesis. All of this is driven by a desperate need to have the narrative proved correct, once again such a desire is more reflective of ego than common sense. To the astute trader such behaviour is incredibly strange since being wrong is part of being a trader. But so too is the ability to adapt and learn from being wrong, there is resilience and then there is suicidal behaviour that has a very intriguing tone to it. And Hussmans behaviour has a strange tone of self destruction about it.

If there were a cornerstone to trading it would be the ability not only to be resilient when in drawdown but also to accept that we get things wrong. Sometimes there is a flaw in our methodology that we have not seen and that we simply have been lucky up until this point. This does raise the question of when do you know you have entered this spiral of self destruction and to my way of thinking the answer is not that hard. If you have been losing money for the better part of a decade then it is fairly obvious that there is something seriously wrong in your methodology.



The new astrology

Since the 2008 financial crisis, colleges and universities have faced increased pressure to identify essential disciplines, and cut the rest. In 2009, Washington State University announced it would eliminate the department of theatre and dance, the department of community and rural sociology, and the German major – the same year that the University of Louisiana at Lafayette ended its philosophy major. In 2012, Emory University in Atlanta did away with the visual arts department and its journalism programme. The cutbacks aren’t restricted to the humanities: in 2011, the state of Texas announced it would eliminate nearly half of its public undergraduate physics programmes. Even when there’s no downsizing, faculty salaries have been frozen and departmental budgets have shrunk.

But despite the funding crunch, it’s a bull market for academic economists. According to a 2015 sociological study in the Journal of Economic Perspectives, the median salary of economics teachers in 2012 increased to $103,000 – nearly $30,000 more than sociologists. For the top 10 per cent of economists, that figure jumps to $160,000, higher than the next most lucrative academic discipline – engineering. These figures, stress the study’s authors, do not include other sources of income such as consulting fees for banks and hedge funds, which, as many learned from the documentary Inside Job (2010), are often substantial. (Ben Bernanke, a former academic economist and ex-chairman of the Federal Reserve, earns $200,000-$400,000 for a single appearance.)

Unlike engineers and chemists, economists cannot point to concrete objects – cell phones, plastic – to justify the high valuation of their discipline. Nor, in the case of financial economics and macroeconomics, can they point to the predictive power of their theories. Hedge funds employ cutting-edge economists who command princely fees, but routinely underperform index funds. Eight years ago, Warren Buffet made a 10-year, $1 million bet that a portfolio of hedge funds would lose to the S&P 500, and it looks like he’s going to collect. In 1998, a fund that boasted two Nobel Laureates as advisors collapsed, nearly causing a global financial crisis.

The failure of the field to predict the 2008 crisis has also been well-documented. In 2003, for example, only five years before the Great Recession, the Nobel Laureate Robert E Lucas Jr told the American Economic Association that ‘macroeconomics […] has succeeded: its central problem of depression prevention has been solved’. Short-term predictions fair little better – in April 2014, for instance, a survey of 67 economists yielded 100 per cent consensus: interest rates would rise over the next six months. Instead, they fell. A lot.

Nonetheless, surveys indicate that economists see their discipline as ‘the most scientific of the social sciences’. What is the basis of this collective faith, shared by universities, presidents and billionaires? Shouldn’t successful and powerful people be the first to spot the exaggerated worth of a discipline, and the least likely to pay for it?

More here – Aeon

How much did Plato know about behavioural economics and cognitive biases? P

In his essay ‘On Being Modern-Minded’ (1950), Bertrand Russell describes a particularly seductive illusion about history and intellectual progress. Because every age tends to exaggerate its uniqueness and imagine itself as a culmination of progress, continuities with previous historical periods are easily overlooked: ‘new catchwords hide from us the thoughts and feelings of our ancestors, even when they differed little from our own.’

Behavioural economics is one of the major intellectual developments of the past 50 years. The work of the psychologists Daniel Kahneman and Amos Tversky in particular is justly celebrated for identifying and analysing many of the core biases in human cognition. Russell’s insight, in fact, bears a strong resemblance to what Kahneman calls the availability bias. Because the catchwords and achievements of contemporary culture are most readily called to mind – most available – they tend to dominate our assessments. The fact that Russell’s articulation of this idea is much less familiar than Kahneman’s is itself a confirmation of Russell’s point.

But the richest precedent for behavioural economics is in the works of ancient Greek philosophers. Almost 2,500 years before the current vogue for behavioural economics, Plato was identifying and seeking to understand the predictable irrationalities of the human mind. He did not verify them with the techniques of modern experimental psychology, but many of his insights are remarkably similar to the descriptions of the cognitive biases found by Kahneman and Tversky. Seminal papers in behavioural economics are highly cited everywhere from business and medical schools to the social sciences and the corporate world. But the earlier explorations of the same phenomenon by Greek philosophy are rarely appreciated. Noticing this continuity is both an interesting point of intellectual history and a potentially useful resource: Plato not only identified various specific weaknesses in human cognition, he also offered powerful proposals for how to overcome these biases and improve our reasoning and behaviour.

More here – Aeon

This Article Won’t Change Your Mind

….The theory of cognitive dissonance—the extreme discomfort of simultaneously holding two thoughts that are in conflict—was developed by the social psychologist Leon Festinger in the 1950s. In a famous study, Festinger and his colleagues embedded themselves with a doomsday prophet named Dorothy Martin and her cult of followers who believed that spacemen called the Guardians were coming to collect them in flying saucers, to save them from a coming flood. Needless to say, no spacemen (and no flood) ever came, but Martin just kept revising her predictions. Sure, the spacemen didn’t show up today, but they were sure to come tomorrow, and so on. The researchers watched with fascination as the believers kept on believing, despite all the evidence that they were wrong.

“A man with a conviction is a hard man to change,” Festinger, Henry Riecken, and Stanley Schacter wrote in When Prophecy Fails, their 1957 book about this study. “Tell him you disagree and he turns away. Show him facts or figures and he questions your sources. Appeal to logic and he fails to see your point … Suppose that he is presented with evidence, unequivocal and undeniable evidence, that his belief is wrong: what will happen? The individual will frequently emerge, not only unshaken, but even more convinced of the truth of his beliefs than ever before.”

More here – The Atlantic

Hindsight Is The Perfect Investment Tool

I got bounced the table below the other day for comment which is interesting because my comments are generally so what. I have no idea where it came from so cannot vouch for its veracity. So treat it with the usual caution you apply to something you have not generated yourself.

Asset comparison

I am not certain what the value of such tables is unless it is to convince us all to put our energies into investing a time machine so that we can go back in time and load up on Bitcoin, although this in the manner of all paradoxes would probably remove the value of the event. However, the table does serve some instructional value in that it only tells part of the story – so I have redone the chart and added in the MaxDD for each instrument over this time frame.


For shits and giggles I have also added to the table the total Division One Prizes for Powerball since 2010, as you can see it is a very tidy sum. There are two issues that need to be addressed. The first is the obvious statement that the past is not the future. The failure to understand this is a mistake I used to see brokers make all the time. Periodically our research department would produce a list of the best performing stocks on the ASX, the dealers would then be encouraged to get on the phones and sell these stocks on the basis of what they had done in the past. Clearly this reflects a breach of the past is not the future doctrine and is something that is even reflected when performance results are presented to retail investors. These investors are constantly warned that past results may not be reflected in future results and this is a reasonable warning.

The other point that needs to be made about this sort of table is that the trajectory of the price of an instrument in obtaining those returns needs to be considered. You have to ask yourself whether at any pint during your investment in Bitcoin whether you could stomach an 80% drawdown. My guess is that most would not be able to hang on through this sort of event, even if they were informed that price would recover.

The Final Clarke and Dawe


General Advice Warning

The Trading Game Pty Ltd (ACN: 099 576 253) is an AFSL holder (Licence no: 468163). This information is correct at the time of publishing and may not be reproduced without formal permission. It is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.