Monday, September 10, 2007

Black Swan - CNBC killer?

Thanks to this post by Matt McCall of DFJ Portage Ventures, I could read this splendid write up by Michael J Mauboussin of Legg Mason Capital Management on Strategies. Find the link in Matt’s post.

Stowing away some startling insights for my own recall and for you, my readers.

- The difference in [investment] return has nothing to do with knowledge; and everything to do with emotional and psychological factors. (Curtis M Faith – Way of the Turtle)

- What separates the good from great investors is not knowledge or raw smarts, its but patterns of behavior.

- All investors must be alert to black swans – events that are outliers, have an extreme impact and are explained only after the fact. We get closer to truth if we focus on`falsification’ (seeing one black swan) instead of `verification’ (seeing lots of white swans does not allow for the statement all swans are white; but seeing one black swan does disprove the theory).

- Cognitive errors including loss aversion are often the source of sub-optimal investment decisions. They tend to focus on frequency [of losses/gains] than on its magnitude. Buffet distinguishes between experience and exposure. Experience looks to the past and tries to predict the future. Exposure, in contrast considers the likelihood and impact of an event that history, especially recent, may not reveal.

Great nuggets of wisdom…. I had never been a fan of quant models of investing. (Confession : I had consulted on a quant venture some time back for a friend from the hedge fund world. But that I did for a living… can’t thrust personal beliefs on clients) My logic – no model can predict a million minds and their billion different views that spur investment decisions. Now I am a total heretic. Buffet, Taleb, Mauboussin, Matt and now I, give you one more reason why you should stop watching CNBC that gives rebirth to the breed of analysts that should have long been dead and gone…

No comments: