Do Statistics Help You Invest?


Not likely.

There are a range of investor skills.

The immensely skilled like Buffett, Munger, and Klarman put no faith whatever in things like the efficient market hypothesis and modern portfolio theory. They have learned these artifacts relate to the market and not to the business values they wish to concern themselves with.

The unskilled know little about the statistical approach and instead rely on hunches,gossip, and the wisdom of the television pundits.

The ones somewhere between are at risk

Why are statistical ideas risky

There is a long history of interpreting market activity using statistics. There is quite a large data set and often that actually holds truth. Market statistics are risky because they are influenced by emotions

Results are not like the familiar normal distribution. Bell curve. Market statistics are distributed very differently. Compared to the normal distribution, the curve is taller and more narrow with bumps on each end. The ends are interesting. Fear on the left and greed on the right.

Economists use well known techniques and the results are internally consistent. But there are some assumptions that matter.

There are flaws thinking that the market is like a Bell curve.

The Bell curve assumes events are independent of each other. Anyone who believes the market has no memory is not paying attention.

Second risk is a proxy measurement. Variability is not really risk in the conventional sense. If variability is an asset, like it is for the elite investors, risk has little real meaning.

Economists use averaging techniques to make complex situations easier to analyze. Market equilibrium ideas are not real world. Unusual and previously unseen events occur and matter. Black Swan ideas. Equilibrium ideas are comforting but unrealistic. The stock and bond markets are more complicated than a pro basketball game and no one talks about the equilibrium condition of the Warriors versus the Cavaliers.

Business schools like the statistical approach because it is easy to teach. A professor could teach it without any practical awareness of the market itself. An engineering professor or a math professor would have little difficulty.

So what’s the problem?

If you rely on information that is abstract, you will do badly when it is incomplete. Remember the idea from yesterday. The right level of generalization matters. You cannot express the stock market with a few numbers.  Averaging, proxy measures, and using incomplete statistical analysis don’t work reliably. It violates Einstein maxim.

A thing should be made as simple as possible, but not simpler.

Benoit Mandelbrot has found that chaos rules in the market. Order is the exception.

“If you are going to use probability to model a financial market, then you had better use the right kind of probability. Real markets are wild. Their price fluctuations can be hair-raising-far greater and more damaging than the mild variations of orthodox finance. That means that individual stocks and currencies are riskier than normally assumed. It means that stock portfolios are being put together incorrectly; far from managing risk, they may be magnifying it. It means that some trading strategies are misguided, and options mis-priced. Anywhere the bell-curve assumption enters the financial calculations, an error can come out.”

I wonder what he really thinks. Be very cautious.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

Posted in Investing, Personal Finance | Tagged , , | Leave a comment

You Can’t Do Everything At Once


A mathematician of our time.

If someone makes a list of the twenty greatest mathematicians of the twentieth century, Alexander Grothendieck is undoubtedly a name that will come up in the conversation. Some would argue it is a name that would come up in a list of the top one.

He made huge contributions to many fields. Using insights from several fields, he essentially changed the paradigm for those who followed.

It is often hard to follow a mathematician’s reasoning

Grothendieck’s math certainly fits that condition, but his method of reasoning about how to attack a problem is easily described and a bit subtle to apply. It describes the problem most people have with organizing plans of any kind. Especially financial plans.

Find the right level of generalization

For most of us that is a near-meaningless statement. 

Make sure you see the big picture, but with enough detail to make decisions. Most people get caught in details and miss some parts they need. 

We are caught up in specific tasks, methods, and resources. The idea of generality is supposed to fall out of all the specifics as they combine to govern our life. Specifics won’t take us there because they require a general purpose to establish their relevance.

Starting with tools and tasks ignores the ability to establish a strategic vision.

Strategy without action is not useful either

Strategy takes you nowhere by itself. Strategy helps assess wants and needs. You cannot have or do everything. It helps assess resources that can aid in the achievement of goals. It establishes priorities in both resources and time.

Strategy accomplishes nothing without action.

Finding the proper level of generalization

In the case of financial planning that involves finding a point where strategy, while incomplete, is well enough developed to recognize the problems and opportunities in the current situation. It need only be well enough developed to offer assistance in comparing the cost of possible solutions against the cost of doing nothing.

The first layer of any financial plan is control the uncertain

  1. Have a will and powers of attorney so there is action possible in times of trouble.
  2. Have a long very general view so you are always working toward something
  3. Have a short term plan. A budget
  4. Recognize that not every month is like every other. Have a cushion.
  5. Have an emergency fund to deal with large and unexpected variations
  6. Recognize the ability to earn money is your most valuable asset.Without income your plan will not succeed. Insure the money.

The long run is too hard to see all at once.

No 25-year-old understands the retirement and estate situation. If the long run generalization is set too high they will be unable to see their immediate and valuable tasks as the priority. The wrong kind of life insurance is one example of a mistake. Get rich quick investment schemes another.

Know enough to be sure everything is included but not so much as to hide the important parts. Start with the most imminent tasks. Do not allow values for the distant future hide immediate steps. The other steps will become obvious as you go.

The long run doesn’t matter if the short run fails

Start with the obvious things. 

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

Posted in Personal Finance, Planning | Tagged , , , , , | Leave a comment

This Result Is A Product Of A Flawed System


This headline and its story came up in my Twitter Feed

Bell admits ‘error’ after it charged customer $6,474.17 when he went over data limit

 What is instructive about that? Everyone makes errors.

Try to imagine how this result can make sense to a corporate planner or an executive. It must be very easy to get customers at Bell.

The story shows that the error,  which Bell admitted, was not resolved in real time. I don’t know how complex the Bell accounting system may be, (I assume very) but I doubt there is any reason to expect it would take someone with access more than a day to resolve this problem. More likely not 30 minutes.

Why months and the expense of a lawyer?

Because the customer service system is built around metrics that are not client-centric. They are built around making sure that no customer can take advantage of the institution.

Think the government, airlines, and banks. Their customer service inertia is mind boggling. I have a letter on file from the Canada Revenue Agency that includes the thought, “We are very busy. We expect to consider your request in approximately six months.”

Client service is a profit center.

Despite the cost to do this right, in today’s highly competitive world, client service is cheaper than acquiring new customers from the pool of the ones that don’t know any  of your existing customers.

There is no shortage of lapses in customer care. Someone has suggested that you could eliminate drug usage if you made Comcast customer service the only supplier. Try not to be successful in spite of yourself.

Customer service must be responsive to customers not to the business.

One trick some institutions use to defeat you is indefinite postponement of action.

Every customer service department has two choices.

  1. Solve the problem
  2. Make the complainant go away

When running into type 2 responses, like Bell’s response above, keep careful notes and record telephone conversations. I don’t know all the rules about recording telephone conversations in other places, but in Canada as long as one party knows it is being recorded, it is okay. I like this approach. “Your system said you are recording this call for quality control and training purposes. I am recording it too.”

Why is customer service not responsive to customers?

Many people today want to cover up their mistakes instead of repairing them. Today’s connected world makes that a high risk approach.

As management specialist Edwards Deming pointed out 60 years ago, all quality problems are designed in. If businesses actually care about customer service failures, the first useful aspect of that concern is to be accountable.

Being accountable means fixing errors promptly. Accountability by multi-layer committee fails. The further away from the customers a manger is, the less urgency there is.

Design in authority for front line employees. If you train them well, a big if, they will act responsibly.

If you can’t trust them, there is something wrong with your training, your hiring,  or your supervision processes.

People expect reasonable customer service.

You will be taken advantage of a little because some of your customers are devious. You can deal with those easily enough.  Your accounting system can isolate them very quickly. It is wrong to assign a bad reputation to all customers for the sake of weeding out a small percentage.

If you don’t provide reasonable customer service, your only hope for long term survival is that none of your competitors figure out the value of it before you do.

No one wins the race to the bottom?

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

 

Posted in Insight to Business, Personal Finance | Tagged , , , | Leave a comment

How To Avoid Investment Problems


We are all emotional

Emotions drive action. Could be anger or fear or greed or almost any of the deadly sins. In times of market adjustments we tend to multi-task them. Weak decisions follow. 

Daniel Kahneman and Amos Tversky

These two are psychologists and had it not been for Tversky’s death, both would have been awarded the Nobel memorial prize in economics. Kahneman alone was. Their findings around decision making has become important as “Behavioural Economics”

A simple observation

When I first began to take the Chartered Accountants course one wise professor offered important advice for dealing with clients.

“There is such a thing as a paper profit, but all losses are real”

Losses trigger fear and insecurity

We act because that is what emotions make us do. If we all behave the same fearful ways, the stock market would quickly reach 0.00. Fortunately some people begin to see the futility of fear and start to buy when it is down enough. They are the semi-rational.

The rational held some cash when things were good, and more as they were more good. When the market took a hit they were ready.

A test

No doubt you are the superbly disciplined investor who has absolute emotional control. Seldom fearful. Never greedy. 

We’ll see.

Suppose at a New Year’s Eve party you discover I am an investment advisor. You like what I seem to know and you offer me a deal. You will give me $100,000 to invest as I see fit for 12 months. Next New Year’s Eve we will meet and review the outcome.

Next year your $100,000 is worth $2,000,000. You are understandably pleased and agree to commit the money for another year.

At the end of the second year, your account is $300,000.

The test: 

After the second year, would you introduce me to your friends as the guy who tripled your money in two years?

I doubt I would even be your friend any more

Objectively, triple your money in two years is an amazing result, but losses are real, regardless of how they came to be.

Understand that your emotions get in the way and they are triggered by the vagaries of the stock market’s pricing mechanism and the pundits who take advantage of our fragile emotional nature.

The more often you look, the more often you will be disappointed.

A second Kahneman observation. 

A loss is feels about twice as bad as a gain of the same size feels good.

We are all emotional. You need a defense. Have reasonable objectives. Don’t pay much attention to the pricing noise. An advisor could help.

It is hard for you to soothe yourself.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

Posted in Investing, Personal Finance | Tagged , , | 1 Comment

Simple Is Hard Enough


We are all busy people

People deal with busy by reducing the workload and by completing tasks. Toronto psychologist Jordan Peterson has pointed out that stress is often the result of an accumulation of small undone tasks.

The key to stress reduction then becomes reducing the undone task list.

Pushing the task forward fails

It may get it off your desk for now, but it is in your mind and it is certainly on the undone task list. The key to solving the problem is to determine why it is undone and why you cannot finish it and put it away forever.

Or maybe decide it need not be done at all. 

Decisions and risk

Some people hate making decisions and doing things when

  1. They don’t know what to do
  2. They might be wrong. Fear of error
  3. There might be a better answer yet to be found. Fear of missing out.

Overcoming fear

Items 2) and 3) are straightforward to think about, but the cure is harder to implement. People overcome fear by doing things and learning from the outcomes. If you never make a decision you will learn very little. 

The first is the hardest. 

Designed in obstacles

Item 1) above is a problem when the situation has become more complex than is required. Some people think complexity is sophisticated. Others like a somewhat more costly, but simpler answer.

I know you think simple should be less expensive, but it seldom is. Simplicity is a great value and must be compensated. For example, you could run your own investment account.  Maintain proper diversification and hold appropriate liquidity. Be steely-eyed and disciplined about what you do and don’t do. Spend some time reporting for taxes and calculating the deposits that will become the accumulation needed for future use.

Probably the cost of the Prozac needed to keep you calm in volatile times is covered under your group benefits so is not really a cost at all.

Simple says pay an advisor and go play golf.

Complex is a trap

It begins when you pay more attention to tactics than to strategy. All tactics are complicated. Tactics keep changing. New laws, new products, new techniques.

Worse yet, complexity has more variables. More variables means more ways to analyze. More illusory patterns to see. More ore for data mining. 

Strategy is simpler.

Find who you are. Find what you want and when. Allocate resources. Find ways. Choose and implement. 

Strategy is effective because it shows you about tactics. Ideally provided by others. You just make the decision as to what and when.

Strategy is general and easily understood. Almost everyone has the same general goals. I want to be safe. I want to independent. I want to enjoy my lifestyle. I want my children to do well.

On the other hand, tactics are complicated, ever changing, and require monitoring.

The biggest planning mistake.

Start with a perfectly good tactic and bend your strategy to make it work for you. No tactic is trustworthy until it attaches to a well formed strategy. 

Reducing costs, like paying less for investment Fees, saves money tactically and has a strategic cost. Usually, you must do more yourself. It is not a rational hope to get something for nothing.

Do it yourself is complex. When you look at adding complexity to save cost, you are ignoring all of the solution’s other inputs. Money is only one element. Try to value time, skill, worry, flexibility, and ability to understand what you are doing. Understand that what you are doing should tie tightly to your simple strategy. Know how to find and assess the whole range of tactics. 

The simplest planning advantage.

Hire a guide.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

Posted in Decision Making, Personal Finance, Planning | Tagged , , , , , , | 1 Comment

Understand What Planning Is About


 All successful plans begin in the heart. 

It is where they should begin too. What hopes, fears and expectations outline your life goals? How do you feel about risk? How will you cope with the growth/security conflict? Do you understand how the present connects to both the past and the future? Can you make decisions? Are you disciplined and organized?

The second level is defining and clarifying.

Devising a strategy. 

The clarification step answers questions. Not many and all from the same family. The “W” family.

What is your lifestyle now?  In money. The money you do not lose to the government, save o reduce debt is consumed.  Lifestyle. How will it change in future?

What do you want? Could be debt free, or financial independence or future income. Maybe money for family or children.

What do you have to get it with? Money at hand. An inheritance, future income and savings. Maybe sale of an asset.  Maybe a business

When do you need it? This will modify both the amount you set aside and how you invest.

Who is involved? Spouse, children, business partners, employees, maybe parents. Will the involvement change over time?

Where will you be in future? How will that affect the price of your lifestyle?

An advisor can help here by identifying conflicts and voids.

There are two more  “W” questions.

Why? and why not?  These help you with the next step. How do you get what you want?

Tactics. 

Financial tools are the way. Like with other tools, craftsmen can help. They have more tools available and know when they apply.

Tools address risk –  insurance or moving money from today to the past to pay debt or to the future for future use.  Tools are the distilled experience of what works. They address efficiency.

Why helps select tools better. Why not gives you confidence that you have not missed something important. All tools must specifically attach to a strategic purpose. Without a strategic vision you cannot assess the value of a tool.

Working together, strategy adds effectiveness and tactics add efficiency.

The third tier is logistics.

Assigning resources, acquiring tools and preparing a method of monitoring outcomes. Some logistical steps are quite difficult. Do-it-yourself is not advised. Tax plans, wills and powers of attorney, estate plans, trusts, and even cash flow budgets work better if they are efficiently executed.

All plans evolve

The three Rs govern evolution.

  1. Record results.
  2. Review results in the context of the strategy, resources and possible tactics.
  3. Revise objectives to meet new realities, amend tools, increase or decrease asset allocation.

Planning is simple. 

Little more than common sense. Getting a plan to evolve to a desired outcome is organized common sense. Keeping a plan current and effective is a little harder, but not impossible.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

Posted in Personal Finance | Tagged , , , , , , | Leave a comment

The Tea Ceremony


How hard is it to make good tea?

In China, Japan, Korea, India and Viet Nam, the tea ceremony is a formal cultural activity. It is highly stylized, even ritualized, process of preparation, presentation and enjoying tea. It has survived for centuries. Things that last have value.

Tea is not that hard. What else is the ceremony for?

It seems to be about tea, but is much deeper.

In fiction, especially movies, a MacGuffin is a plot device that serves as the focus of attention or desire. It is usually presented without explanation of its purpose. The Maltese Falcon is a classic MacGuffin. So are the artifacts in the Indiana Jones series

Tea is a MacGuffin in the same sense. It is not being pursued for itself. The tea ceremony experience is the important part.

The idea of the ceremony is to address what is beautiful in an otherwise not beautiful world. The tea ceremony highlights the value of refinement, simplicity, and inner peace.

People who have enjoyed the ceremony discover much about themselves. It is like meditation, in that all extraneous thoughts are extinguished. The simplicity of tea, carefully crafted and artfully presented is obvious, but the deep meaning is there too.

There will never be a fast food tea ceremony.

Fast food tea ceremony is an oxymoron. As with all good restaurants, speed is not a priority. Speed is not an acceptable substitute for quality. Speed seldom provides an experience.

I know a restaurateur who no longer opens for lunch because customers do not want to be in the restaurant for the time it would take to prepare, serve and consume his idea of a good meal.

He refuses to deal with the concept

Good food takes time to prepare. Yours will be ready in a moment.

How like planning

Plans are not the purpose. Just as tea is not the purpose. No plan ever works. Plans are useless by themselves, but the process of creating plans is crucial. No plan is once done, done forever.

The process, like the tea ceremony, seems complex, foreign, and bound to ritual and tradition.

The process, like the tea ceremony, provides insight, understanding and peace of mind.

The process, like the tea ceremony, helps us understand ourselves and eventually we come to notice that is the most important part.

Planning lets us escape the tendency to see the world as linear.

Phil Knight of NIKE seems to have it figured out.

I was a linear thinker, and according to Zen linear thinking is nothing but a delusion, one of the many that keep us unhappy. Reality is nonlinear, Zen says. No future, no past. All is now.

Anything that lets us reflect on reality in a calm way improves our lives. If all you want is a hot drink, the tea ceremony is not for you. If all you want is a financial tool, then holistic planning is not for you.

Can you describe what you want?

Can you describe what it would mean to have it. If you cannot describe its meaning, it is a MacGuffin. A MacGuffin is something the protagonist pursues, but the specific nature of what is being pursued is not important to the plot. Achieving it would be u satisfying.

Focus on meaning.

People who know what they want, what it means to them, and what they have to get it with,  tend to succeed.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

Posted in Personal Finance, Planning | Tagged , , , | Leave a comment