"The only function of economic forecasting is to make astrology look respectable." - John Kenneth Galbraith
So now that we've covered what Warren Buffet was doing in 1974 and 2008, let's explore how a few others may pick their stocks, provided of course they decide not to follow Warren's model.
Let's turn again to our favorite contrarian thinker, John Kenneth Galbraith. You'll remember the first quote of his covered here as, "The majority is always wrong."
So what did we see early last week? A never ending cascade of prognostications about 2009. (See "Four Stocks", "Sirius' Future", and "Expecting a Massive Rally.") Unfortunately, I even got caught in the fray, publishing our blog roll of good news chants for 2009. Rah, Rah, 2009 is here!
But what would Galbraith do? (WWGD?) Judging from his now famous quote, he may have just turned to the stars. You may find this humorous, but by doing some very cursory web research, one finds that "Astro investing" is not so out of this world.
In fact one website of particular note, claims that when consistently tracking the stock picks of an expert stock analyst, an astrologer, and a five-year old girl, the "expert" picker lost pitifully, the astrologer posted the second best (worst) returns, and the five year old girl emerged as the leader.
Further, there appear to be high priced newsletters proporting these gains from glaxy gazing. There is even a home study course. (I haven't reviewed any of these newsletters or products, so buyer beware!)
But you ask does anyone in the mainstream really believe in this stuff? Astonishingly, I turn to the NY Times archives, and their Astro investing club article magically appears!
So we all made our prognostications last week. And I am sure that all the astrologers did the same. But the good news is -- sorry Mr. Buffet -- if you have a five year old daughter, her views may just outperform us all...
Monday, January 5, 2009
Making Astrology Look Respectable
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Van Tharp in "Trade Your Way to Financial Freedom" uses an Astrological trading system as one of his cases in point.
ReplyDeleteSuccess in investing is similar to that of trading, meaning that your risk should be minimised to maximise your profits.
Case in point:
1. A trader will use 1% of their bankroll on an investment. That minimizes the risk they take.
2. An investor will diversify their holdings so as to not get bushwhacked as often as buy and hold investors so often do.
And does any investment system you know of use a five year old girl, but also those 2 techniques in order to not get bushwhacked?
ReplyDeleteGNE
Dr. Laugh,
ReplyDeleteHave a look at this article about risk:
http://www.nakedcapitalism.com/2009/01/myth-of-riskometer.html
There is a widely held belief that financial risk is easily measured – that we can stick some sort of riskometer deep into the bowels of the financial system and get an accurate measurement of the risk of complex financial instruments. Such misguided belief in this riskometer played a key role in getting the financial system into the mess it is in.
There is no such thing as "minimizing the risk they take."
Sure there is a way to minimise the risk.
ReplyDeleteIn fact, there are two very clear ways to do this - since you didn't bother to put your name on your comment, I'll keep it simple so you can follow along.
1. No investment is worth more than 5% of your total investment capital.
That allows you to hedge your investments and take advantage of the big moves in individual sectors when they happen.
2. "The Taleb Barbell" (name is mine) as he outlines in The Black Swan and it boils down to this idea:
Take 95% of your capital and put it in Treasuries or some other form of Government backed security.
The other five percent is invested in the market.
This allows the investor to be both hyper aggressive and hyper conservative at the same time.