You Can Be Right And Still Be A Moron

I stumbled across a really good quote from Dr. Daniel Crosby’s The Laws of Wealth that I may have printed and laminated into a wall-sized poster:

… on Wall Street, doing what is “right” can lead to a negative short-term result and doing what is “wrong” can be spectacularly profitable in the short run. Consider the story related by Paul DePodesta, a baseball executive made famous in the book Moneyball. He says on his blog, It Might be Dangerous:

Many years ago I was playing blackjack in Las Vegas on a Saturday night in a packed casino. I was sitting at third base, and the player who was at first base was playing horribly. He was definitely taking advantage of the free drinks, and it seemed as though every twenty minutes he was dipping into his pocket for more cash.

On one particular hand the player was dealt 17 with his first two cards. The dealer was set to deal the next set of cards and passed right over the player until he stopped her, saying: “Dealer, I want a hit!” She paused, almost feeling sorry for him, and said, “Sir, are you sure?” He said yes, and the dealer dealt the card. Sure enough, it was a four.

The place went crazy, high fives all around, everybody hootin’ and hollerin’, and you know what the dealer said? The dealer looked at the player, and with total sincerity, said: “Nice hit.”

I thought, “Nice hit? Maybe it was a nice hit for the casino, but it was a terrible hit for the player! The decision isn’t justified just because it worked.”

My shorthand for the concept illustrated by DePodestra’s story is, “you can be right and still be a moron.” Perhaps you know a friend who gambled big on a single stock and made a great return. Results notwithstanding, your friend is a moron. Maybe you jumped out of the market right before a precipitous drop because of nothing more than a guy feeling. Lucky you, but you’re still a moron.

Exceptional investing over a lifetime cannot be predicated on luck. It must be grounded in a systematic approach that is applied in good times and in bad and is never abandoned just because what is popular in the moment may not conform to longer-term best practices.

Charles here. You could also sum this up with “don’t confuse brains with a bull market.”

We’ve all been there. You made a terrible trade based on faulty logic (or no logic at all). You misassigned probabilities or ignored the risk you were taking. You shot from the hip. And maybe it worked out. (I’m not picking on you, by the way. I’ve done it too…)

Just don’t learn the wrong lesson from it. A good outcome doesn’t mean it was a good decision. And plenty of good decisions have really lousy outcomes. Randomness is a big part of it. This is the nature of a world in which we have to make decisions with imperfect information.




The Most Important Asset


Note from Charles: My good friend Ari Rastegar wrote a really nice piece on getting the most out of your most valuable asset: yourself. It’s a good read, and something to get you energized for the week ahead. Hope you enjoy it!



Success as an entrepreneur or business pro depends upon identifying and attending to your most important asset. Don’t even bother thumbing through your business plan or re-reading your company mission statement to figure out what it could be. It’s YOU!

A business proposal sinks without a sound mind; a flawless strategy will fail miserably without an energetic leader; and a team will fall apart without morale and motivation. Taking care of your mind, body, and soul, what I collectively refer to as yourmost important asset, is critical to the success of any person in the world of business.

This is serious stuff. You can’t eat poorly, avoid exercise, and deprive yourself of emotional fitness and expect to achieve and sustain long-term success. Maybe some people can do it for the short term, but within time, they crash and burn. Why is it so difficult to eat a balanced diet, exercise, and feed your soul with thoughts of gratitude? Is it that we think we don’t have enough time, or perhaps we think it’s too complex? I’m here to tell you that it’s not. With a plan and purpose, you can see dramatic results. Instead of thinking of a lifestyle change as difficult or painful, think of it as training for life. When you trust in the fact that life is happening for you, not to you, it’s much easier.

The Magic of Threes.

Health and wellness is a three-legged stool. It’s attending to your body, mind, and soul for balance. Without one, you limp. Without two, you tip over. Try going all day without food, you’re not exactly pleasant to be around, right? Go weeks without exercise and then take the stairs to an important meeting. How long will it take for you to breathe normally again once you reach the top? Need a good night’s rest? Try thinking about your blessings for a few minutes before bedtime and see how you feel in the morning versus the day before.

Our lives are enhanced when you contextualize health and wellness within the metaphor of a three-legged stool. To illustrate, here’s a general list of what I do every day in the quest to take care of my most important asset: ME.

The Body.

I start every day the same: I down a large glass of water infused with lemon. This alkalizes my body and gets it hydrated and ready for action. I ascribe primarily to a diet where about 70 percent of what I eat is plant-based, non-processed food. Thirty percent of my diet focuses on high-quality protein, and I eat organic, local, grass-fed, and grass finished as much as possible.

I’m a boxer and I’m a yoga man. I don’t love weight training but I do believe in flexibility and agility. With boxing and yoga, I can be quick on my feet; explosive one moment and then calm the next.

I think you should shock your nervous system. This is why I engage in cryotherapy three to four times a week. By subjecting my body to three minutes of temperature that hits -240 degrees, I can heal my body and brain at an exponential level. Yes it hurts when I’m in the tank, but when I’m done, I feel like a king. 

The Mind.

Every morning, I engage in transcendental meditation, which is a practice of effortlessly being, not doing. I learned about the importance of meditation from Ray Dalio, who is arguably the greatest hedge fund manager, ever.

I also practice priming, a 10-minute exercise of emotional conditioning that puts me in an optimal psychological state of confidence and gratitude, and allows me to laser focus on my goals. This is a daily discipline I learned from one of my mentors, Tony Robbins. During priming, you breathe profoundly and put yourself into a state of gratitude and thoughtfulness. I think about my blessings and visualize my short- and long-term goals as already achieved.

The Soul.

I’m a faith-oriented man of God and believe in the divinity and unity of all major religions. My whole life is centered on God. I have a chapel in my office, which is a dedicated area for us to meditate and pray. As a company, we begin each day with prayer and end each day with thankfulness for all our blessings received. By showing gratitude, we are not focusing on self but instead are acknowledging our blessings and privilege to serve our clients.

However, There IS Balance.

My mind and body are a gift from God and it is my job to protect, care for, and honor them. It‘s also important to know that I practice moderation in all things, including moderation, and to me this means balance.

I follow this routine most of the time, because it’s important to let loose, relax on your diet, and goof off. I make sure to include those moments. I watch shows on Netflix, I’m addicted to ice cream, potato and egg breakfast tacos are my vice, and I’d eat French fries every second of the day if possible. I’ve even been known to gorge Sour Patch Kids.

I simply believe that you have to be moderately immoderate. If you do everything perfectly, if you follow every single rule, you take the joys out of life. From a physiological perspective, if you make your body so efficient, you’ll kill your immune system. You have to toss your routine a wrench every now and then. Just not every day.

I attribute my success to the fact that I don’t believe in diet. I believe in nutrition. I don’t believe in exercise. I believe in training for life.

I run a multi-million dollar private investment firm. I have a family, I have friends, and I have my health. Most importantly, my fortune comes from hard work, training, and the belief that my most valuable asset is myself. Follow my line of thought, and I’ll bet you’ll achieve greatness too.

Ari Rastegar is the founder and CEO of Rastegar Capital. With more than a decade of experience as an entrepreneur and real estate professional, he founded Rastegar Capital to provide access, transparency, and service to investors interested in commercial real estate investments located within the United States.

Photo credit:

The Bangladesh Butter Indicator Says Buy!

Get ready to buy. Our most reliable technical indicator—one that has historically been 99% accurate—is  suggesting that stocks are poised for a major breakout.

Bangladesh butter production surged in February, as moderating grain prices allowed Bangladeshi dairy farmers to boost production by getting higher milk yields from their existing stock of cows. Meanwhile, butter production in neighboring India dropped significantly in February, as a change in government farm subsidies forced Indian dairy farmers to cull their herds. With Bangladeshi butter production set to rise further, we should be looking at a massive rally in the S&P 500 throughout March and April.

By now, I sincerely hope you realize I’m joking.

Whether the S&P 500 goes up, down or sideways over the next two months will have absolutely nothing to do with the Bangladesh butter indicator. But in a paper published two decades ago, David Leinweber and Dave Krider found that butter production in Bangladesh had the tightest correlation to the S&P 500 of any data series they could find. It wasn’t GDP growth…it wasn’t earnings…it was Bangladeshi butter, which “explained” 99% of the S&P 500’s movements.


The authors weren’t quacks. They knew the correlation was a random coincidence and completely meaningless. But they published the paper to get a good laugh and to make an important point about number crunching. Correlation does not mean causation, and if your model doesn’t make intuitive sense, it’s probably bogus.

I’m not bashing quantitative models here. Done right, they can help you build a really solid trading system. Various value and momentum models have been proven to work over time. But the trading system needs to reflect some sort of fundamental reality or it’s one (small) step removed from voodoo.

Adam touched on the same idea two weeks ago in Economy & Markets. As Adam wrote, “Computers, databases and statistically sound algorithms can only refine the discovery and implementation of a fundamentally sound investment strategy. At the end of the day, computer algorithms or not, you still need a rock-solid investment strategy.” The model isn’t the strategy. It’s a tool to help you execute; nothing less, nothing more.

Whenever you see someone touting a trading strategy, ask them to explain why it works. Back-tested returns aren’t good enough. If they can’t explain the fundamentals behind their model, it’s probably a matter of time before they blow up.

Oh, and one more thing about Bangladeshi butter. Leinweber wrote in Forbes a few years ago that he still gets phone calls—20 years later—asking for current butter production figures.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

Forecasts are Useless

It’s tough to make predictions.  Especially about the future.

The quote above is alternatively attributed to the physicist Neils Bohr and to the New York Yankee catcher Yogi Berra.   But it is nonetheless true, particularly in the financial markets.

Of course, that doesn’t seem to stop us from trying.

I bring this up because Barron’s recently polled its “10 Street Seers,” an elite group of Wall Street strategists, to get their forecasts for S&P 500 year-end value, the 10-year Treasury yield and more.  The results were a little underwhelming.

On average, the analysts expected the S&P 500 to rise by 65 points—or about 4% from current levels.  The most bearish analyst saw the S&P 500 shedding 33 points. The highest forecast was also the most popular; three out of the ten saw the S&P 500 adding 117 points to 1750 by year end.  The entire range of forecasts was only 150 points; not a lot of independent thought here.

The forecasts for the 10-year Treasury yield were even less diverse.   The average forecast was for a 0.12% rise in yield.  Four of the ten analysts had a target yield of 3%, and the range from highest estimate to lowest estimate was a pitiful 50 basis points.

These are ten extremely bright people with ten forecasts that are noteworthy only for their lack of originality.  What gives?  Why the excessive conservatism?

Wall Street analysts aren’t that different from the rest of us.  They suffer from a recency bias, or a tendency to give a disproportionate importance to recent events. Yet at the same time, they have a tendency to anchor and adjust their forecast rather than start a fresh forecast with revised assumptions.  And capping it all off, they are prone to groupthink and herding behavior.  And finally, there is what I like to call the “save your ass” bias.  If a forecaster makes a bold call—and turns out to be wrong—he is probably going to be out of a job.  This incentivizes them to make their forecast within a tight band of acceptable, consensus thinking.

All of these combine to make a foul cocktail of conflicting mental impulses that give us forecasts that are consistently too bland to be useful.

I have a piece of advice: Don’t waste your time forecasting. 

You should have a basic understanding of the macro environment you are in, and you should have an opinion of, say, the direction the stock market or interest rates are likely to go.  But this kind of thinking shouldn’t occupy a lot of your time, and there is no value in being overly precise in your estimates.

Instead of focusing on the precise interest rate, think in terms of contingencies.  What would happen to my portfolio if interest rates shot higher?  And what can I do to mitigate that risk?  And importantly, at current market prices, am I being compensated adequately for the risks I’m taking?

As a practical example, I expect bond yields to fall from current levels, as I believe that the tapering fears are vastly overdone.  But I also know that I could be wrong about that.  To protect my Dividend Growth Portfolio from this risk, I am focusing on companies with a history of aggressively raising their dividends rather than focusing on high current yield.

As they say, past performance is no guarantee of future results.  A company with a long history of paying dividends can abruptly stop. We saw plenty of that in 2008 and 2009.  But I would trust a good company’s dividend record before I put my faith in a Wall Street forecast.

This piece first appeared on MarketWatch.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management.  Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.”

The Importance of Scaling

My style is a little different from most contributors to TraderPlanet.  At heart, I’m a value investor, and my holding periods for quality stocks can be months, years, or even decades under the right set of conditions.

This is not to say I’m an ideological believer in “buy and hold” investing, however.  Absolutely not.  But I am a big believer in letting a solid investment thesis play itself out.  If a stock is attractively priced and I judge it to have appealing prospects going forward, then I feel no need to sell it simply because it has enjoyed a recent run-up in price.

But while my approach to the investing process is different from that of a short-term trader, I’m a big believer in a concept that many successful traders follow: scaling.

When you scale in or scale out of a position, you enter it and exit it in stages rather than in a large lump sum, and there are several reasons why this is a good idea.  By taking a small initial position, you can test out an investment idea before committing a large sum of money to it.  This was a favorite tactic of Jesse Livermore, the legendary trader who was the inspiration for the fictitious biography The Reminiscences of a Stock Operator

For me, it is more a case of managing my psychological temperament.  Nothing is more frustrating to me than committing a large allocation of my portfolio to a well-researched position only to see it take an immediate nosedive.  I may eventually prove to be right, and the trade may still end up being as profitable as I hoped.  But seeing a new position in the red rattles me and distracts me from the task at hand of managing the overall portfolio.

It is also a way for me to split the difference during times of indecision.  If a stock looks fundamentally sound and attractively priced,  my head tells me to buy.  But if a stock has already had a large run-up or if the market doesn’t “feel” right, my gut tells to wait.  When I have a conflict between my head and my gut, I split the difference by entering a position in increments.  If the stock continues to rise, I have exposure.  But if there is a pullback, I also have my powder dry to take advantage of it.

The same is true of exiting a trade.  I hold several positions I’d love to hold forever.  But now and then, one of those stocks will get a little on the pricey side, or the position will grow to become too large relative to the rest of the portfolio.  In these cases, it makes sense to take a little money off the table.  A trader would call this taking profits; an asset allocator would call it rebalancing.  I call it being prudent.

I’ll leave you with an example.  Mortgage REITs recently took a beating in the market, as investors feared that a hike in bond yields would wreck their book values.  I took the view that any reduction in book value was already reflected in the stock prices of the REITs; as a group, they traded well below their stated book values.

But after the bloodletting in the sector, my gut felt queasy about allocating a large chunk of capital to something that volatile.

Splitting the difference, I’ve been averaging in to the UBS E-TRACS 2x Mortgage REIT ETN ($MORL) over the past month.

Incidentally, I recommended mortgage REITs in TraderPlanet three weeks ago.  I’d like to reiterate that call today.

Disclosures: Sizemore Capital is long MORL.  This piece first appeared on TraderPlanet.