Thoughts on Investing

Thoughts on Investing from George Carlin

“People who see life as anything more than pure entertainment are missing the point.” ~ George Carlin

Lesson #1: If you take everything you read as serious-minded information, well, the joke may be on you.
Humor is an effective tool for reflecting upon our own folly; entertainment provides greater access to truth than seriousness because it disarms the audience and allows for truth to present itself in a more subtle way. When we laugh, we often laugh at ourselves:  The words humor, humble, and human all have the same root meaning.

In different words, the ego is often removed when information is received as entertainment.  For example, reading about how some brilliant money manager outperformed the S&P 500 Index can be boring and thus fail to be instructive.  But an article about how a monkey can “pick stocks” better than a money manager is funny and we remain engaged.  Therefore it can be illustrative and illuminating.

“Death is caused by swallowing small amounts of saliva over a long period of time.” ~ George Carlin

Lesson #2: Don’t confuse causation with correlation (and don’t be too quick to attach meanings to patterns).
Pattern recognition is too easy and therefore susceptible to error; attaching the correct meanings to them is the real challenge.  The most useful meanings (and profitable decisions) are often found in the failures of patterns. For example, if the collective trader herd expects a particular price movement based upon a pattern-detected support level or resistance level, and the price moves beyond that level, many traders are forced out of their positions, which often provides fuel for prices to move in the new, unexpected, more profitable direction.  However, if you see the failed pattern as a temporary fluke, the opportunity for greater returns is missed.

“Think of how stupid the average person is, and realize half of them are stupider than that.” ~ George Carlin

Lesson #3:  Never underestimate the irrationality of the investor herd.

OK math people, Carlin should have used “median” instead of “average” but you get the point, which is to never underestimate the prevalence and resilience of stupidity.   This extends upon Lesson #2: It is easy to recognize the folly of crowds but it is difficult (and dangerous) to predict its depth and duration.
Why did so many investors buy the Facebook IPO?  How can “Here Comes Honey Boo Boo” average more than 2 million television viewers per episode? There is fundamentally little difference between the attraction to the next hot stock idea and the attraction to watching humans behaving badly.

“Some people see the glass half full. Others see it half empty. I see a glass that’s twice as big as it needs to be.” ~ George Carlin

Lesson #4: Framing an investment strategy based upon either/or scenarios is not always prudent.

This is a wonderful lesson in perspective.  It is important for a trader to remove him or herself from the dichotomy of bull or bear, right or wrong, which is often amplified by media noise.  For example, in hindsight, it is clear that it was not wise to either completely go with the “Sell in May and Go Away” seasonality or to completely go against it.  Instead, it was something in the middle that fortunate traders found to be most successful.

The S&P 500 Index fell 9% from May 1 to June 1 and it rose 13% from June 1 to October 1, 2012.  Therefore the most successful trades this past summer were framed by neither the glass-half-full nor the glass-half-empty perspective; it would have been outside of the either/or box, which is often the case.

“What if there were no hypothetical questions?” ~ George Carlin

Lesson #5: Are hypothetical questions harmful, helpful or neither one?

Financial news headlines, such as “Will the Halloween Indicator Work This Year?” and “Should You Buy Apple Now?” are hypothetical questions disguised as useful information; they may be of practical use but only if you are able to transform the abstract ideas into concrete decisions.

Cleverly using a hypothetical question to determine the usefulness of hypothetical questions is not only humorous but it is reflective.  Do the “What if” articles commonly found in financial columns help you or do they cloud your mind with doubt about the future?