The Wrong Way To Invest

The following excellent quote is from Barry Ritholtz:
Then there is that other group.  They are all conclusion, zero input. Process is irrelevant to them, Outcome is all.

They work backwards. They start with a conclusion, and sift through all the data to justify that conclusion. They do not change their minds. They do not care about facts or data or input. They never admit mistakes. “Truth,” as we have discussed in the past, is an irrelevant inconvenience.
They are ideological jihadists.
This group contains a mix of bad fund managers, perma-xxxxs, political ideologues, corrupted journalists, partisan hacks. They are prisoners of the cognitive biases that are so fatal to good investors.
Its called “reaching a conclusion” for a reason;  its how you end, not how you begin. We do not say “reaching for a conclusion” but that is how member of this group seem to operates
Mr. Ritholtz is a little harsh because it is a cognitive bias (something which we are hardwired to do) to try and look for supporting facts to our opinions. Most people do not even realize that they do this. It took me many years to learn to overcome this bias.

Readers might notice that I am constantly making lists of both the bull and bear cases. That is because I am constantly weighing the evidence, even if it goes in the face of a position I hold. That is the opposite of guests on CNBC who are always so certain about where every market and commodity are going.  I know many view it as a weakness or indecision but it is quite the opposite. I doubt I would be able to trade for a living if I operated in any other way.

6 comments:

Anonymous said...

Wise of you to withhold shorting over the past two sessions. From here on I will wait for more extreme indicators and avoid Mondays. The short did little damage actually, but the long positions that I parted with outperformed the market.
Praguer

jag said...

I find it amusing to see Ritholz rant about people stuck on some ideology.

He's had any number of posts on how the GSE's had virtually "nothing" to do with the mortgage debacle and he regularly ridicules sound, non ideological, points to the contrary.
He also ridicules anyone who has doubts about "climate change" (or is it global warming or climate disturbance?).

He often makes a lot of good points but for him to get huffy about people who are blinded by some bias is pretty amusing. He's shown exactly the same capacity on a number of occasions. Doesn't make him "bad" but he's not Snow White in this regard either.

Tsachy Mishal said...

It would not hurt Ritholtz to be a little more humble. But then his blog would not be as popular. Its better to be basher for ratings.

Ritholtz said...

Jag

I get huffy when people ignore facts because it disagrees with their preconceptions. The GSEs are a perfect example of the exact same point made here:

1) The data supporting the GSEs being a prime (or merely a major) cause of the crisis simply wasn't there. They were simply 2 more crappy banks.

2) That conclusion that it was all or mostly the GSEs fault was put forth by rigid ideological partisans who could not imagine the financial crisis being anything other than government caused.

Incidentally, the same groups (AEI, CATO, etc.) blamed the CRA, the FHA, even Acorn -- everything but the private sector.

3) I am no defender of the GSEs -- we very publicly shorted Fannie based upon their fraudulent practices and horrific balance sheet when FNM’s stock was in the $40s (it soon after collapsed).

There is no love lost between myself and the GSEs. For years, I have called them “Phoney and Fraudy.” Since George Bush and Hank Paulson nationalized them, I have accused the government of using these two as a backdoor bailout for banks — a hidden PPIP/TARP used to buy all the garbage mortgages that banks are desperate to get off their balance sheets.

But the people who want to disregards the facts because it interferes with their political agenda get in the way of the truth, of policy makers and others who want to fix what's broken.

I am happy to debate the causes of the crisis, and the roles of all of the various players anytime.

Please bring facts.

nicasurfer said...

The whole fact that everyone is so HUFFY make me sleep a little easier tonight.

jag said...

"They were simply 2 more crappy banks."

This is a fascinating conclusion. The GSEs had the implicit backing of the government. How is it "ideologically partisan" to suggest that when such crappy loans can find a home in the warm embrace of the government that the entire industry is massively skewed to further produce such entities? What is the "partisan" nature to this opinion?

Can my opinion be proven? No.

But can anyone prove that the motivation of people who suggest that the acceptance of such loans by a government backed entity was a critical (but not necessarily the sole factor) are unequivocally "partisan" because of this belief?

I think that is at least highly arguable. Ritholz is projecting a particular, underlying, motive onto ALL of those who dispute his interpretation of the situation.

As one who believes that GSE actions were critical to the crisis but certainly not the sole reason for the mortgage debacle I find it amazing that Mr. Ritholz "knows" my opinions are completely derived from a simplistic, partisan, agenda.

I may be completely wrong in my opinion. However, I don't believe that an event as complex as the mortgage debacle can be conclusively "proved" to be solely from one factor or another by anyone else either. I could be wrong in this opinion as well.

However, I would enjoy knowing how Mr. Ritholz can prove the opinions expressed above are somehow "partisan" and not just a form of reasoning with which he disagrees.