In talking about what I learned in the last 10 years, which I wish had been more, I concentrated on four factors. Everything is deception. Fear creates tremendous non-random underperformance. The purpose of markets is to take from the weak. The cycles are ever-changing (they recently changed again for bond stocks) and the solution is to buy and hold. I quantified several aspects of the fear of underperformance and alluded to a study by Mr. Curve that by selling at the fear point, traders lose 4 percentage points a year. That's big.

I'm reading some books on fear. Namely The Science of Fear by Daniel Gardner. The great praise it received is that it's as good as Gladwell. My goodness, at least it had no references so far to the Expert. However, I came across an idiot reference to one of the contrived Kahneman references that supposedly shows that fear is ubiquitous. The naval research bureau which reached such height with Osborne's stock market work, swings to the other side of the pendulum by supporting the masters of part whole biased answers to contrived question. The Kahneman group asks students: "heads you win 150, tails you lose 100." Would you take it. Amazingly to those who wish to show that rationality don't exist, the students don't take it. With these kinds of ridiculous questions and the choices to the answers are again designed by Pam Alikes to guarantee that the hypothesis will be chosen, the supposed irrationality is built; :"Why Investors Make the Wrong Choice".

What kind of world do we live in when the very rational response of students that they don't have 100 bucks to lose, or their liquidity doesn't permit it relative to frat parties, beer and dates, leads to a whole science of behavioral irrationality which Arnold Zellner tells me is called the promiscuous science around the faculty clubs at Chicago.

Gary Rogan writes: 

Everything makes perfect sense especially the buy and hold conclusion and the fear factor, and the useless behaviorist bias experiments and the whole aura of ridiculousness of the same behaviorist conclusions being rehashed as new science for over 30 years, but I'm still searching for some way to see whether markets have a purpose. To me they seem to just exist. What gives them purpose? Why do they have to have any more purpose than the ocean which you can surf, in which you can swim and fish and ride boats, or drown or lose a house if it's next to it?

Anatoly Veltman adds: 

An intriguing subject to be sure, and I'm certain that someone will be able to quantify fear. Personally, I only get fearful at dizzying new highs — not at scary lows. But yes, the mass psychology seems to err on that count.

I don't know what to do about buy and hold, fully four years and counting of correctionless appreciation. In the current case from 667 to over 1700 so far… I suspect individual stock picking is of increased importance at this point, as I don't believe the indexes' survivorship bias provides any edge during the Bullish phase.

This time it may be different, as I've noticed marked difference in Chair's attitude toward commodities and Gold in particular. I recall stopping by the Junto in early summer 2007 to quite an ear full about stocks having risen 10000 over half century, but Gold barely a handful. And good meal at a favorite SF eatery only a three fold or so. I couldn't understand why this statistic made a Bullish case for stocks and not Bullish for commodities, at that junction. But in the course of this year, Chair has appeared partial to any sweet dip in Gold. I can only suspect, that the liquidity opium has rightfully impressed just about everyone on the planet. And little distinction is being made any more about what exactly to buy and hold! A true contrarian might begin to suspect that, maybe…nothing? Might be soon, too. Are market manipulators really bigger than market - this seems to be the question to answer in 2013. And yet, over the centuries, all of this may just prove statistical noise.

Commenter Kevin adds:

"Everything is deception". Is that in markets…or life…or both! I kind of know the answer but the latter is kind of depressing. What's real!?

Gary Rogan writes:

The trick is to fear neither the highs nor the lows, that's what buy and hold is all about. They are just blips on the exponential rise towards infinity. That's for stocks, not gold or anything that's in it's final form. The ability of people to create more wealth will increase until everything collapses, hopefully many many years from now, but commodities are just things that are produced for as little as someone can figure out how to produce them. Yes, they are a hedge against all the currency debasement and gold is special, but there is no intelligent force making them better and better. I like the lows because then I can buy, but that's not essential. Sooner or later this market will crash hard, but when? And then it will get a hold of itself and will resume it's climb up. And unlike the bond rates it won't be for a few decades or a few years but forever, sort of.

Gary Phillips comments:

Or perhaps the optimists edge is the next piece of low hanging fruit to be picked and traded out of the market.

Sam Marx comments:

With so much apprehension at this point may mean that the S&P has further to go up.

Anatoly Veltman adds: 

Why not Sam. Yet up how much before down how much? Is 17 trillion deficit realistically manageable just like the 3 trillion was — within the economy that haven't been pacing near that? Eventually, something will have to be cut — and the spiral will quickly shave some 90% off the top. And of course, the records will be regained again over decades, and compound again. Alas, a pattern like THAT only loosely resembles commonly defined drift. I put forward that it's extremely rewarding to partake of drift from any cyclical bottom; but also that records can't serve as bottoms, by any reasonable method.

Stefan Jovanovich adds: 

Vic, you said: 

1. everything is deception

2. fear creates tremendous non-random underperformance

3. the purpose of markets is to take from the weak

4. the cycles are ever changing

5. the solution is to buy and hold

That is an excellent concision. I suggest the challenge is to buy and hold, over any chosen time frame.

If I might add my own, they would be:

1. understanding is itself a necessary self-deception c.f. Hume's Inquiry

2. fear in investing comes from envying other people's successes and wanting, out of envy, to ridicule other people's failures

3. the purpose of markets is to test everyone's strength of mind — the rich can be as weak-minded as anyone else

4. cycles exist because we need to see patterns which may, or may not, actually be there - see 1 above

5. only the steadfast survive the second-by-second test of not knowing whether or not there is a spoon





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