The Cat’s Meow

Photo courtesy of Michele Trimarchi

Stevie Wonder sang about thirteen-month old babies and seven years of bad luck in his hit Superstition but who among us isn’t just a wee bit circumspect about certain things? For example, I’m cautious about people whose names start with ‘V’.

It all started in junior school with Velma. She was a chucky blonde bruiser to whom all of us 65-pound weaklings gave a wide berth. Years later, in my first magazine job, there was another troublesome V: Vivian, whose last name also started with a V for a double whammy. By coincidence, she was also a chunky blonde. Vivian acted as the editor-in-chief’s chief enforcer pouncing on unsuspecting editors over missed typos and other real or imagined editorial lapses.

I’m not the only one with name superstitions. One of my friends has had chronic issues with men named Chris. And another acquaintance has learned to avoid Steves altogether. And that’s just superstitions about letters and names! Add numbers, animals, eye and nose shapes, lines on the palm and ‘Do Not Cross’ lines multiply like Kardashians in a swag bag line.

Though we cling to them, it should come as no surprise that being superstitious is a form of idiocy. Idiots make bad investors.

A recent research paper looked at Tawainese stock traders. Among many Asian superstitions is a strong preference for the number ‘eight’ because it sounds like the word of ‘prosperity’; and, conversely, an avoidance of the number ‘four’ because it sounds like the word for ‘death’.

In Taiwan, retail investors are twice as likely to buy stocks whose prices end in an ‘eight’ than a ‘four’. This costs them approximately 8.8% (oops!) annually.

The researchers conclude that this type of superstition is a form of ‘general cognitive disability’. Yet it is one of scores of emotional and cognitive biases that many investors have. We prefer even numbers to odd ones. We prefer to invest in our home country stock market. We believe in lucky streaks (the ‘hot hand fallacy’), and so on.

This type of irrational, yet predictable, behavior makes us catnip to ‘quants’. These are the whiz kids who write algorithms that exploit our biases. Programmed stock trading swoops in and snatches victory from us as we’re counting our chickens.

The good news, according to the same study, is we learn from our mistakes. Getting repeatedly hammered in the markets, we mend our ways and superstitions loosen their grip on us. So don’t worry your pretty little heads about auspicious signs. Instead, follow in the footsteps of the greats: Buy Low, Sell High.

Kismet

Photo courtesy of Wendy

Jerry Seinfeld and Chris Rock do a funny and kinda deep riff on marriage on Comedians In Cars Getting Coffee.

Seinfeld says,”When you’re single you think, ‘I’ve really got to find the right person so my marriage works out.’ Once you really know how to do marriage, you could be with anyone…”

Rock turns to two women sitting at the nearby table and says, “Will you marry us?” and the women say, “Sure, our husbands wouldn’t care.”

“Yeah,” says Seinfeld, “our wives wouldn’t care either.”

When we contemplate getting married we look for the one. In Yiddish that person is called our bashert. It’s a romantic notion that somewhere in the big, wide world lives our Talmudic better half, someone who will complete us.

But as Seinfeld and Rock point out, being married is a skill. It’s like driving, once you’ve figured it out, you can do it with a shiny new Cadillac or a dusty old Chevy.

Could the analogy work for investing too? Do you really need to find the one portfolio manager in order to have success?

The investment industry likes to romanticize its brethren. Star stock pickers and asset managers receive glowing profiles in the business press and attract a devoted fan base. They’re courted by potential clients begging them to manage their money. But what if there is no equivalent to a bashert when it comes to investing?

A recent S&P Dow Jones Indices study reported in The New York Times, showed that active mutual fund managers underperform a series of random choices. Or, to put it another way, a blindfolded monkey throwing darts at the financial pages would have had a slightly better investment outcome than trained money managers in monkey suits. Yup.

So what does this mean?

First, get off your romantic cloud.  There’s no special someone who’s going to be your perfect portfolio manager.  Warren Buffett is as close to your money soul mate as they come and he’s not taking any customers. Everyone else is bound to disappoint you at least some of the time, just like your marriage partner does.

Second, always keep an eye on management fees. Low-cost , diversified index or mutual funds, or a low-cost portfolio manager is the way to go. Never over pay as this will erode your returns over time. (If your fancy investment firm includes a concierge service for sporting and cultural events, buy your own theatre tickets and pocket the fifty basis points.)

Third, did you know that from 1926 to 2013 US stocks averaged a 9.2 percent return? Ditto for Canadian and international stocks. Yes, the markets have been extraordinarily kind these past five years, especially for those who are at a later life stage and are cashing out. But, c’mon, 20-percent annually! That’s not sustainable. If your portfolio manager can get you a steady ten percent over the long-term, just say, “thank you” and go live your life.

As in marriage, when choosing an investment advisor it helps to have le coup d’oeil—a good eye. Then, as the song says, love the one you’re with.

Lucky Strike

 

Photo courtesy of Artotem

“Nobody gets justice, they either get good luck or bad luck.”

So said American actor and playwright Orson Welles who had generous helpings of both during his life with bad luck tipping the scales. (Read My Lunches with Orson for more on this fascinating and ill-starred man.)

One word that doesn’t come up a lot in investing circles is ‘luck’. But it should. Luck plays a bigger part in total returns than most of us would care to admit. It’s an especially crucial ingredient during our retirement years. And, unless you’re a rishi, it’s something you have absolutely no control over.

Students of finance learn about the Time Value of Money. This is the concept that present money is worth more than future money due to its earning potential. For example, if you have a million dollars today and invest it, it will grow to more than a million dollars in 20 years. Getting a million in 20 years time is therefore worth less than getting it now.  (Layperson’s Translation: “A bird in the hand is worth two in the bush”.)

If you have the good luck to retire on the cusp of a secular bull market, your investments will continue to grow even as you distribute them in the form of income and gifts. On the contrary, if you happen to retire when the market is tanking, (or inflation is growing), you’re going to burn through the funds much faster. This is part of what makes up the Time Value of Fluctuations.

Here’s a nifty example: Say your portfolio loses 5% this year. No biggie, right? Next year it’s going to have to make 5.3% to break-even. That’s achievable. Now let’s take a 30% loss. To break-even you’ll have to achieve a return of 42.9%. How likely is that? An 80% loss will require a 400% increase. (In other words, Game Over.)

Capital depletion, (through market crashes, inflation or a too-rapid withdrawal rate), means that, even when the markets bounce back, your particular bounce is going to be relatively small because you’ve got less capital to propel it.

So, what to do?

First, open a bottle of wine and pour yourself a glass. If you’re on the cusp of retirement, pray for a bull market that never ends or a large inheritance.

Or you can do the following:

1. Try not to exceed an annual withdrawal rate of 4%.
2. Find other sources of income like a part-time job, or delay retirement until you have a topped-up nest egg.
3. Make capital preservation a priority in the early years of retirement. Getting walloped in the first four years could permanently crush your portfolio. Some advisors even suggest moving all your assets into GICs and T-bills at first to ensure the safety of the capital. (This has tax implications so do the math first.)
4. Set aside 1-3 years of income in money market funds so you don’t have to sell assets at a loss during a market downturn.
5. If you don’t have a defined benefit pension plan, consider buying an annuity that pays out a steady income regardless of market conditions.

Luck is the ghost in the machine. You know it’s there. Don’t get spooked.

Lucky Star

Humans are a superstitious lot. There’s the gambler who believes she’s got a ‘hot hand’. The Italian family who eat gnocchi on the 29th of every month to attract money. The Latina who wears a pair of yellow knickers on New Year’s Eve to attract good fortune in the coming year. Every culture has its own charming delusions about how to bring more money into their lives.Hard-boiled, rational sorts, skip the gnocchi and the knickers all together and go straight to insider-trading.

Despite lip service on the many splendored blessings of living a modest, simple life, funny that no one has come up with charms for repelling money.

But are superstitions silly? Maybe they actually work.

A recent study looked at what people do to reverse the perception of bad luck. In all situations if someone thinks she’s jinxed herself, (for example, boasting that her driving record is accident-free), she will perform some kind of avoidant action. She will literally try to push the bad luck away. Hence, avoiding bad luck usually entails throwing salt over your shoulder, knocking on wood, or spitting.

The other side of the coin, so to speak, is performing actions that we believe will draw luck to us. These usually involve drawing something toward us. We eat something (e.g. lentils, gnocchi, grapes, poppyseed…), hold something, (e.g. silver coins), or put something on, (e.g. yellow knickers, certain gemstones and amulets etc.).

Will eating a plate of gnocchi with cash slipped under the plate make us an Agnelli-sized fortune? Probably not. But, chances are, it does work, just in smaller ways.

One of the 14 cognitive biases is called confirmation bias. Basically it’s a form of selective perception. For example, if you’ve been hankering for a gold Cartier Love bracelet, believing this is an iconic piece, then suddenly you’re going see them everywhere. Same goes for your favorite car model.

Now, what if you perform some propitious act: You put on a pair of yellow knickers, cook up a pot of gnocchi and follow with 12 grapes for dessert?

If you believe these actions are making you irresistible to Lady Luck, that’ll trigger your confirmation bias. So, now, when you run for the bus and the driver actually stops, you’ll attribute it to your actions. You’ll pay closer attention when your stock portfolio goes up. You find a quarter in the street. Gradually you’ll begin to perceive yourself as ‘lucky’.

And because everyone loves a winner, this newfound self-perception could actually make you ‘luckier’, giving you the confidence to take risks by expecting positive outcomes.

That’s the virtuous circle of positive superstitions.

(And homemade gnocchi is surprisingly easy to make.)

Salute and bona fortuna.