A very interesting study was performed a while back that tested our human decision making process and information feedback loop.
A group of participants was divided into two groups. Each group was given the same exercises to complete with the understanding that they would be graded on results.
The difference between the groups, however, was that the first group was given a simple set of instructions and straightforward feedback, while the second group was provided with complex procedures and feedback.
As you might imagine the first group consistently outperformed the second.
Furthermore, the first group continued to improve throughout the process while the second stagnated. These results seem interesting and informative on their own. But here’s the truly amazing part ... before the participants received the results, group one participants (outperformance group) were given the option of changing their original answers using the complex set of procedures. Group one routinely chose the more complex system for reasoning – believing that system must be superior. And you guessed it ... their results worsened to the levels of group two.
This seems impossible to believe. They had an effective system producing strong results, yet chose to deviate only because their approach [seemed too simple?]
***
I recently read James Montier’s Value Investing: Tools and Techniques for Intelligent Investment. It’s a meaty book that compiles a lot of research. Much of it shows how we are our own worst enemy.
[A] chapter I like is “Keep It Simple, Stupid.” It illustrates another key point about the nature of investing: It pays to focus on a handful of essential details and ignore the rest. Montier shows us experiments in which people made worse decisions when given more information. For example, in one instance, researchers asked people to choose the best of four cars given only four pieces of information on each car. (In the examples, one car is noticeably and objectively better than the others.) People picked the best car 75% of the time. When given 12 pieces of information, their accuracy dropped to only 25%. The added information was more than just extraneous; it made their choices worse.
In the context of investing in stocks, it’s better to focus in on key variables that clearly matter and ignore the rest. My investment process aims to do that by boiling down the many details of investing in a company into four major areas. Too many details spoil the broth, but most investors haven’t learned this. “Our industry is obsessed with the minutia of detail,” Montier writes.
Sunday, March 28, 2010
the worst investor in America
U2 singer Bono's investments into Elevation Partners, which has offices in New York and Menlo Park, have helped make him the "worst investor in America," according to the online publication 24/7 Wall Street.
With large investments in Palm, Forbes, and Move.com -- "an unprecedented string of disastrous investments which even bad luck could not explain" -- Elevation Partners has earned the distinction of being "arguably the worst run institutional fund of any size in the United States," 24/7 Wall Street asserts.
Elevation bought 25 percent of Palm in 2007, and the company's stock has since tanked - down to $3.65 from $18 last September - after the company's efforts to regain mobile phone market share from Apple, RIM and other smartphone makers failed.
Elevation put $100 million into Move.com, which owns home and real estate websites, and company shares subsequently lost 50 percent of their value, 24/7 noted.
And recently, Elevation committed to investing $100 million in Yelp, the San Francisco online user generated business review site, with $25 million to the company and the rest to stockholders. Shortly thereafter, Yelp was hit with multiple lawsuits claiming that it sought to extort money from local businesses in exchange for manipulating reviews, a charge the company says is false.
[via chucks_angels]
With large investments in Palm, Forbes, and Move.com -- "an unprecedented string of disastrous investments which even bad luck could not explain" -- Elevation Partners has earned the distinction of being "arguably the worst run institutional fund of any size in the United States," 24/7 Wall Street asserts.
Elevation bought 25 percent of Palm in 2007, and the company's stock has since tanked - down to $3.65 from $18 last September - after the company's efforts to regain mobile phone market share from Apple, RIM and other smartphone makers failed.
Elevation put $100 million into Move.com, which owns home and real estate websites, and company shares subsequently lost 50 percent of their value, 24/7 noted.
And recently, Elevation committed to investing $100 million in Yelp, the San Francisco online user generated business review site, with $25 million to the company and the rest to stockholders. Shortly thereafter, Yelp was hit with multiple lawsuits claiming that it sought to extort money from local businesses in exchange for manipulating reviews, a charge the company says is false.
[via chucks_angels]
Wednesday, March 10, 2010
Carlos Slim overtakes Gates and Buffett
Bill Gates is no longer the world's richest man. Mexico’s Carlos Slim beat Bill Gates and Warren Buffett for the top spot on Forbes magazine’s annual list of billionaires, becoming the first person from outside the U.S. to lead the rankings in 16 years.
Though the software visionary's net worth rose $13 billion to a whopping $53 billion in the last year, he was ousted from the top of the money bin by Mexican telecom mogul Carlos Slim Helu, who took the No. 1 spot on Forbes' billionaire list this year, with a fortune of $53.5 billion.
The net worth of Slim, 70, who built a telecommunications empire after buying Mexico’s state-run phone monopoly two decades ago, rose $18.5 billion to $53.5 billion. Gates, 54, chairman of Microsoft Corp., fell to second as his net worth increased $13 billion to $53 billion. Buffett, 79, chairman of Berkshire Hathaway Inc., was third with $47 billion, a rise of $10 billion.
Slim is the first person other than Gates, last year’s richest person, or Buffett to top the list since 1994, which was also the last time a billionaire from outside the U.S. led the ranking: Japanese real estate tycoon Yoshiaki Tsutsumi.
“We’ve been watching Slim for a while and kind of wondered when the stars would align and he would take over,” Forbes senior editor Luisa Kroll said in an interview today.
More than 80 percent of Slim’s holdings are held in five public stocks, she said. “His net worth really reflects how well those stocks are doing. Everything that he owns has done very, very well this year.”
Though the software visionary's net worth rose $13 billion to a whopping $53 billion in the last year, he was ousted from the top of the money bin by Mexican telecom mogul Carlos Slim Helu, who took the No. 1 spot on Forbes' billionaire list this year, with a fortune of $53.5 billion.
The net worth of Slim, 70, who built a telecommunications empire after buying Mexico’s state-run phone monopoly two decades ago, rose $18.5 billion to $53.5 billion. Gates, 54, chairman of Microsoft Corp., fell to second as his net worth increased $13 billion to $53 billion. Buffett, 79, chairman of Berkshire Hathaway Inc., was third with $47 billion, a rise of $10 billion.
Slim is the first person other than Gates, last year’s richest person, or Buffett to top the list since 1994, which was also the last time a billionaire from outside the U.S. led the ranking: Japanese real estate tycoon Yoshiaki Tsutsumi.
“We’ve been watching Slim for a while and kind of wondered when the stars would align and he would take over,” Forbes senior editor Luisa Kroll said in an interview today.
More than 80 percent of Slim’s holdings are held in five public stocks, she said. “His net worth really reflects how well those stocks are doing. Everything that he owns has done very, very well this year.”
Tuesday, March 09, 2010
one year after the bottom
If you'd asked anyone on March 9, 2009, what they expected next from the stock market, they might have said, "More misery."
The Dow Jones Industrial Average ($INDU) had fallen to 6,547, its lowest close in 12 years. The Standard & Poor's 500 Index ($INX) had dropped 7 points to 677, its lowest close since 1996. The Nasdaq Composite Index's ($COMPX) finish of 1,269 was its worst since 2002.
But the next day, officials of Citigroup (C), one of the nation's most troubled financial institutions, said it was enjoying its best quarterly performance since 2007, and the Dow jumped 379 points.
That was the start of one of the U.S. stock market's great rallies. Since the March 9, 2009, bottom, the Dow is up 61.2%. The S&P 500 is up 68.3%, and the Nasdaq is up 83.8%.
As of Monday, 489 of the 500 stocks in the S&P 500 are higher since the March lows. The average gain: 115.6%.
The Dow Jones Industrial Average ($INDU) had fallen to 6,547, its lowest close in 12 years. The Standard & Poor's 500 Index ($INX) had dropped 7 points to 677, its lowest close since 1996. The Nasdaq Composite Index's ($COMPX) finish of 1,269 was its worst since 2002.
But the next day, officials of Citigroup (C), one of the nation's most troubled financial institutions, said it was enjoying its best quarterly performance since 2007, and the Dow jumped 379 points.
That was the start of one of the U.S. stock market's great rallies. Since the March 9, 2009, bottom, the Dow is up 61.2%. The S&P 500 is up 68.3%, and the Nasdaq is up 83.8%.
As of Monday, 489 of the 500 stocks in the S&P 500 are higher since the March lows. The average gain: 115.6%.
Friday, March 05, 2010
Grace Groner
Grace Groner lived a frugal life in a one-bedroom home in north suburban Lake Forest.
But when she died at age 100 in January, her attorney informed Lake Forest College that Groner — known for buying clothes from rummage sales and walking instead of buying a car — had left her alma mater $7 million.
When the attorney told the school how much her donation would be, the college president said "Oh, my God."
The millions came from a $180 stock purchase Groner made in 1935. She bought specially-issued stock in Abbott Laboratories, where she worked as a secretary for 43 years, and never sold it, the Chicago Tribune reported.
The money Groner donated will be used for a foundation to fund student internships and study-abroad programs. The money should bring the school more than $300,000 a year.
[via chucks_angels]
***
Grace Groner was born in 1909 in rural Illinois. Orphaned at age 12 and never married, she began her career during the Great Depression. She became a secretary, lived in a small cottage, bought used clothes, and never owned a car.
When Groner died in 2010, those close to her were shocked to learn she was worth at least $7 million. Even more amazing, she made it all on her own. The country secretary bought $180 worth of stocks in the 1930s, never sold, and let it compound into a fortune. She left it all to charity.
Now meet Richard Fuscone. He attended Dartmouth and earned an MBA from the University of Chicago. Rising through the ranks of high finance, Fuscone became Executive Chairman of the Americas at Merrill Lynch. Crain's once included Fuscone in a "40 under 40" list of successful businesspeople. He retired in 2000 to "pursue personal, charitable interests." Former Merrill CEO David Komansky praised Fuscone's "business savvy, leadership skills, sound judgment and personal integrity."
But Fuscone filed for bankruptcy in 2010 -- the same year Groner's fortune was revealed -- fighting to prevent foreclosure of his 18,471-square-foot, 11-bathroom, two-pool, two-elevator, seven-car-garage New York mansion. This was after selling another home in Palm Beach following a separate foreclosure. "My background is in the financial-services industry and I have been personally devastated by the financial crisis," Fuscone's bankruptcy filing allegedly stated. "I currently have no income."
These stories fascinate me. There is no plausible scenario in which a 100-year-old country secretary could beat Tiger Woods at golf, or be better at brain surgery than a brain surgeon. But -- fairly often -- that same country secretary can out-finance a Wall Street titan. Money is strange like that.
... basic behavioral differences are what separate the Grace Groners from the Richard Fuscones. Groner clearly understood patience. She understood frugality. She understood the value of a long-term view and how to not panic -- if only subconsciously. Fuscone, it seems, didn't. (To be fair, it's unclear exactly where his financial troubles came from.)
The traits most important to mastering your finances aren't typically taught in finance courses. You're more likely to see them in a psychology class. They include things like patience, an even temper, being skeptical of salesmen, and avoiding over-optimism. A lot of people miss this because it's not intuitive. But I think it explains, better than anything else, why so many people are bad with their money. And it extends beyond novices. The majority of highly educated, well-trained investment professionals perform abysmally. This has little to do with their understanding of finance and lots to do with the inability to control their emotions and behaviors.
But when she died at age 100 in January, her attorney informed Lake Forest College that Groner — known for buying clothes from rummage sales and walking instead of buying a car — had left her alma mater $7 million.
When the attorney told the school how much her donation would be, the college president said "Oh, my God."
The millions came from a $180 stock purchase Groner made in 1935. She bought specially-issued stock in Abbott Laboratories, where she worked as a secretary for 43 years, and never sold it, the Chicago Tribune reported.
The money Groner donated will be used for a foundation to fund student internships and study-abroad programs. The money should bring the school more than $300,000 a year.
[via chucks_angels]
***
Grace Groner was born in 1909 in rural Illinois. Orphaned at age 12 and never married, she began her career during the Great Depression. She became a secretary, lived in a small cottage, bought used clothes, and never owned a car.
When Groner died in 2010, those close to her were shocked to learn she was worth at least $7 million. Even more amazing, she made it all on her own. The country secretary bought $180 worth of stocks in the 1930s, never sold, and let it compound into a fortune. She left it all to charity.
Now meet Richard Fuscone. He attended Dartmouth and earned an MBA from the University of Chicago. Rising through the ranks of high finance, Fuscone became Executive Chairman of the Americas at Merrill Lynch. Crain's once included Fuscone in a "40 under 40" list of successful businesspeople. He retired in 2000 to "pursue personal, charitable interests." Former Merrill CEO David Komansky praised Fuscone's "business savvy, leadership skills, sound judgment and personal integrity."
But Fuscone filed for bankruptcy in 2010 -- the same year Groner's fortune was revealed -- fighting to prevent foreclosure of his 18,471-square-foot, 11-bathroom, two-pool, two-elevator, seven-car-garage New York mansion. This was after selling another home in Palm Beach following a separate foreclosure. "My background is in the financial-services industry and I have been personally devastated by the financial crisis," Fuscone's bankruptcy filing allegedly stated. "I currently have no income."
These stories fascinate me. There is no plausible scenario in which a 100-year-old country secretary could beat Tiger Woods at golf, or be better at brain surgery than a brain surgeon. But -- fairly often -- that same country secretary can out-finance a Wall Street titan. Money is strange like that.
... basic behavioral differences are what separate the Grace Groners from the Richard Fuscones. Groner clearly understood patience. She understood frugality. She understood the value of a long-term view and how to not panic -- if only subconsciously. Fuscone, it seems, didn't. (To be fair, it's unclear exactly where his financial troubles came from.)
The traits most important to mastering your finances aren't typically taught in finance courses. You're more likely to see them in a psychology class. They include things like patience, an even temper, being skeptical of salesmen, and avoiding over-optimism. A lot of people miss this because it's not intuitive. But I think it explains, better than anything else, why so many people are bad with their money. And it extends beyond novices. The majority of highly educated, well-trained investment professionals perform abysmally. This has little to do with their understanding of finance and lots to do with the inability to control their emotions and behaviors.