SubscribeIdiotic Investing: Paul B. Farrell is Hunting Swans
January 19, 2009 6:01 pm
Just a couple of weeks ago, I was astounded by the blabber and blather that our dear old friend Mr. Farrell was presenting regarding Lazy Portfolios. Yes, those again….
He even wrote a book touting the merits of a strategy that essentially employs “buy-and-hold” a.k.a “until-death-do-us-part” strategy. According to the publisher’s review:
Farrell persuasively argues that the strong long-term performance of these funds, even during hard market times-along with the strong performance of other Vanguard index funds such as those for large-cap and small-cap value-proves that “the only rational strategy” for the vast majority of America’s 94 million mutual fund investors is “a simple buy ‘n’ hold strategy” that diversifies portfolio assets across multiple categories of assets.
In his recent MarketWatch article, the idea of portfolio protection from random and unusual events is discussed. But I cannot help to wonder how this idea co-exists withe a Lazy Portfolio concept. One is looking to time the market and the other strategy says that timing is impossible.
Here is an excerpt:
Yes, there’s a test. We call it the “Black Swan Test.” It can predict your chances of making money on the next big meltdown, which will be far more damaging than the combined impact of the 2000 dot-com crash and the current subprime/banking meltdown that so far has cost American investors over $10 trillion.
The Black Swan Test will help you predict your chances of making money in what many are now reluctantly saying may turn into the Great Depression 2. Nassim Taleb, an options trader, mathematics professor and author of “Fooled By Randomness” and “The Black Swan,” says “Black Swans” are rare events with three defining characteristics:
- The event is highly improbable and unpredictable
- It will have “massive consequences”
- And, afterwards, experts invent reasons why it was predictable, not random
Taleb also implies a fourth characteristic. There are “two kinds of these rare events: the narrated Black Swans that are present in current discourse and you are likely to hear about on television, and those that nobody talks about … that you feel ashamed discussing in public because they do not seem plausible.”
Either way, whether we talk too much about a Black Swan coming or not at all, the evidence indicates that the vast majority of investors end up doing nothing in advance to protect themselves against the “massive consequences” when a Black Swan finally triggers a meltdown. And that includes “investors” like our Treasury secretary and Fed chairman, who failed the test.
If you can stomach more of this, here is the link: MarketWatch/Farrell on Swans.
Okay, I admit it…I am perplexed. If we are to be lazy investors, then how are we supposed to protect ourselves? I thought that did not matter as we are supposed to buy-and-hold.
He goes on:
Okay, why does all this matter? How will this choice help predict the next meltdown and bear-recession? And what does it tell us about the past, the dot-com crash and today’s subprime-credit meltdown? More importantly, what does your answer to this “Black Swan Test” say about your chances of winning or losing when the next big one hits?
Winning or losing? That is simple to answer. Lazy investors/Lazy Portfolios WILL LOSE – they have no choice.
If we are supposed to protect ourselves against these difficult/hard to predict events, how then are we supposed to be lazy? Paul….HELP! What are you talking about? No wonder that most investors end up doing nothing and then sit on a pile of rotting and expired corporate promises. If we are to accept this caliber of advice, investors will inevitably end up confused and holding a boatload of capital losses (unrealized of course)!
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Here is how we do it. Not a lazy bone in our strategy - See the 14 minute virtual tour
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6 Responses to “Idiotic Investing: Paul B. Farrell is Hunting Swans”
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I think I can help you out Andrew, you seem to be unable to understand "paper loses". To be fair I share your inability to grasp the concept. Fortunately my parents have it down so at least I can relate what they do. Anytime the market goes down that's just a "paper loss", so they keep their money in and wait for a recovery. This way my parents never lose! Like I said I don't fully understand this advanced financial strategy so I'm curious to see what they do this Spring when they start paying for their new house to be built…
Joshua – they never lose? A losing position may not be a realized loss, but it is a loss just the same.
I suggest you & your parents take some time and work out how much it takes to regain percentage losses. For example, a 50% paper loss needs to make a 100% gain just to get back to break even; if it ever does.
Do your parents have a history of picking winners that move 100%?
People often have difficulty admitting they're wrong or maybe the circumstances just changed and the investment/trade just didn't work out as planned. Investing/trading deals in probabilities. Money management is a difficult yet essential lesson to learn to be successful.
I suppose that the house they build is not going to be made of bricks? ( kidding)
It is human nature to rationalize. That is a bad trait we have. The good news is that many can learn and change…
Andrew
No disagreement here. Good stuff
Andrew
Mr. Farrell, what kind of silly books are you writing? They will just make people lose their funds instead of earning some money. Please burn all of your books right away!
Relax VPro, how many stocks were down 40, 50, 60, even 70% around march 2009 from their 2008 highs? A lot, and most of them climbed back all the way. You can philosophize about TARP, bailouts and QE, the point is that recently coming back from a – 50% like it was just a hiccup is pretty common. It also matters where they were before the drop: at a reasonable level, or way overpriced, much easier to go back to reasonably priced than to way overpriced.