Top 5 of the Week of June 4
Daniel P. Egan, on his self-named blog, heads up our Top 5 this week with a look at our aversion to algorithms. From Collaborative Fund, Morgan Housel discusses the problem with forecasting. And Rick Bookstaber, author of The End of Theory and the blog, This is the End, examines the hidden issue with passive investing and index-hugging.
The Reformed Broker Joshua Brown debates new edges you can take in investing. And Todd Wenning, writing for Intrinsic Investing, expands on the 2018 Great Moat Debate…
- Despite the fact that any data-calibrated model or algorithm is far more skilled at decision making, humans will choose a human forecaster over one
- We would rather avoid the unknown of an algorithm and believe that humans can improve over time—where algorithms cannot
- Humans are also algorithm averse due to the fact that they offer no narrative and they thrive in the grey, boring element of prediction; that of being systematic
Are you algorithm averse? Share your comments in the section below
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Who to Hold Accountable…
- Forecasting is difficult for many reasons, including the level of complexity involved, the changing nature of the future, and the lack of marginal cost
- This is true for economic forecasts, investing assumptions, production manufacturing predictions, and marketing campaigns too
- The problem arises in forecasting when people, faced with proof that demonstrates they’re wrong, remain immovable anyway
- To avoid this, hold yourself accountable for your forecasts by defining what being wrong will look like
One Directional Problems
- Many don’t realize that there is a hidden risk in passive investing and index-hugging portfolio management
- The result of such approaches is a lack of diversity and perspective—in relation to biological systems this is the equivalent of being asexual
- Asexuality can lead to elements dying off in biological systems, sexual reproduction breeds diversity which improves survival characteristics
- In investing, this is the same as leaving little room for adaptation should anything go wrong
Gain an Investing Edge
- While these may not be the most renowned or distinguished edges that you can put into practice, they will surely boost your client’s returns in the long-run
- Start by not suggesting trades just to keep your client’s engagement and interest up, instead, be boring
- Go a step further and be transparent about how risk and reward go hand-in-hand—don’t attempt to soften the truth
- And finally, instill the sense that all the extras that come with wealth are not necessarily additive
- The recent debate about economic moats has been ongoing with Elon Musk claiming that they are “lame,” while Warren Buffett defends that “there are some pretty good moats around”
- It could be argued that some businesses have been too legacy-moat focused and failed moats are fairly easy to highlight
- Moat-based frameworks still hold a valid place for evaluating business quality, but with more companies having more intangible business assets, it’s perhaps time to change the way they’re analyzed
Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form—and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.
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