The Benefits of Curiosity

“60% of the time, it works every time.” – Brian Fantana

Every day in the markets there are investors that are right but for the wrong reasons or wrong but for the right reasons.

Every week investors are bombarded with hundreds of opinions about what they should be buying or selling right this minute.

Every month investors open up their account statements and try to decide whether it’s time to buy or sell stocks because they’re excited or nervous.

Every quarter investment committees evaluate the latest performance numbers of their fund managers to make short-term decisions with long-term capital in hopes of beating their peers or benchmarks.

Every year $32 trillion of securities, roughly double the size of the U.S. economy, are traded back and forth between investors.

Meanwhile, resulting costs from all of this activity and restlessness are paid for by investors in the form of bid/ask spreads, commissions, poor market timing decisions and market impact costs. It’s a virtuous cycle that will likely get worse as it becomes easier and easier to trade whatever you want, whenever you want. The temptation to do something, anything, at all times will always be lurking.

One of the biggest reasons I think the amount of investor activity will only continue to grow is because we have more access to data, opinions and information than every before. In 1987, people had to learn about the 20% Black Monday crash in the stock market on the radio on their drive home from work. Today you can trade anytime you want by hitting a button or two on a tiny computer that never leaves your hand.

As with most things, there are pros and cons with the information age. I love the fact that research and analysis has been democratized these days. In the past, the large investment banks and mutual fund firms could tout their well-staffed research teams as a competitive advantage to attract clients. Nowadays, there’s an expert in almost every market, sector or strategy imaginable who’s willing to offer their opinions for free on social media, in a blog post, during an interview or on any number of financial websites.

The thing most fail to realize is that all of this information, research, data and analysis is completely useless without the correct context to be able to put it all into perspective. It’s dangerous to take everything at face value. Becki Saltzman recently wrote a great post that relates to this idea about the 5 phrases that are killing curiosity:

1. According to experts…
2. Studies show…
3. Research indicates…
4. Science says…
5. It’s a known fact that…

This is one of the reasons people are often so wrong about the markets. They take a single study, research report or market data point and then immediately make their conclusions based on that information. But as my friend Michael Batnick wrote in a well-researched piece today, this is careless and even lazy:

What I’m always trying to do is dig a little deeper and challenge people who draw lazy conclusions using single data points.

Saltzman continued by challenging the curiosity killers by offering 5 easy questions to elevate your curiosity:

1. Compared to?
2. As measured by?
3. Conducted by?
4. Tested on?
5. Is this bogus to begin with?

Curiosity requires persistence to question in the face of comforting curiosity killers. It requires a certain comfort living in the murkiness of the grey area, but ultimately it can make smarter decisions much clearer. It is clear that if we are truly in the age of information and accessibility, to survive with our good decision-making, judgment and critical thinking skills intact, we must also usher and welcome in the Age of Curiosity.

Most people don’t like to think this way because, frankly, it’s hard. There’s something to be said for going a step further and staying curious.

Sources:
5 Phrases That Are Killing Curiosity (Becky Saltzman)
Breadth and Major Market Tops (Irrelevant Investor)

Further Reading:
Torturing Historical Market Data

Now here’s what I’ve been reading lately:

  • Why even flat stock markets can be so frustrating (Fortune)
  • Pick a valid strategy and stick with it (Aleph Blog) but also see why people have such a hard time sticking to one model (Alpha Architect)
  • You really don’t need about 99% of all ETFs (ETF Reference)
  • Top 10 list of when not to invest (Rick Ferri)
  • Always take thing one bird at a time (Kirk Report)
  • Stop thinking about the markets as if they were human (Bloomberg View)
  • Seneca on the importance of performance reporting (Cordant)
  • Diversification is a long game (AAII)

Subscribe to receive email updates and my quarterly newsletter by clicking here.

Follow me on Twitter: @awealthofcs

My new book, A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan, is out now.

Share Button

20 People You Don’t Want to Invest With

I always find that it’s easier to use the process of elimination to figure out what works by first figuring out what doesn’t work in the hopes that all that remains is the good stuff. As Charlie Munger famously says, “Invert, always invert.” I have an entire section of my book devoted to negative knowledge because I think this topic is overlooked by so many. Continue reading

Share Button

How to Teach Your Children About Money

Last month I opened things up to my email subscribers by asking for any suggestions for future writing topics that I’ve yet to cover here. By far the most popular and repeated question came from parents and grandparents who would like to know how to instill good financial habits into their children and grandchildren. Continue reading

Share Button

The Importance of Intellectual Honesty in the Markets

Some of my writing and ideas here and on other media outlets have been called into question lately by some well-known trend following investors. I’m all about casting a skeptical eye on your own ideas because I think it’s important to be willing to admit your limitations, so I’m all about having a healthy debate. Challenging your own ideas is a huge part of the learning process. I’ll be the first one to admit there are no perfect strategies. Continue reading

Share Button

Seeing Both Sides of the Market Debate

Stocks have been on an absolute tear since they bottomed out in 2009: Continue reading

Share Button

The Problem With Bond Indexing

The Barclays Aggregate Index is basically the S&P 500 of the bond markets. Formerly the Lehman Brothers Aggregate Index before 2008 (you can thank Dick Fuld for that), the Barclays Agg is the bond index that all total U.S. bond market index funds are benchmarked to for tracking purposes. The biggest bond fund in the world, the Vanguard Total Bond Market Index Fund, with well over $100 billion in assets is set up to track the Barclays Agg. Continue reading

Share Button

How Badly Has The Fed Been Punishing Savers?

As discussed a couple weeks ago, it’s been over nine years since the Fed has raised interest rates. ZIRP has also now been in place since late-2008. Anyone who’s tried to earn interest in a money market fund, savings account or CD should understand the impact that these zero interest rate policies have had, as yields are basically non-existent. Continue reading

Share Button

A History of Gold Returns

Gold is one of those investments that attracts extreme viewpoints and ideological arguments that favor narratives over substance. I think the reason for this is because the U.S. was once on the gold standard, which was more or less replaced by the Federal Reserve as a form of monetary policy. Continue reading

Share Button

What’s The Biggest Risk Right Now?

One of the outcomes from the recent financial crisis is what I consider to be a hypersensitivity to risk by many investors who were caught flat-footed during the market crash. While managing and understanding risk is one of the most important jobs an investor has, I think many have taken things a step too far by trying to micro-manage every minor blip in the markets. Continue reading

Share Button

Luck vs. Skill in Active Management

In a post earlier this week I wrote about famed hedge fund manager Michael Steinhardt’s impressive track record from the late-1960s to the late-1970s. A few readers commented to me that nothing could be discerned from Steinhardt’s track record because it’s nearly impossible to separate luck from skill when making these types of historical performance comparisons. Continue reading

Share Button