Volatility: A Gray Area
Top 5 of the Week of July 16
Heading up our Top 5 this week, Morgan Housel—a partner at Collaborative Fund—examines the nature of long tails in investment and business. Bob Seawright, writer of the Above the Market blog, studies certainty in regards to Robert Burton’s book, On Being Certain. And The Financial Samurai Sam Dogen debates financial goals and families.
From Behavioural Investment, Joe Wiggins asks if volatility is risk. And from Of Dollars and Data, Nick Maggiulli discusses recognizing confirmation bias and how to avoid it…
Finding the Rare Long Tail
- Long tails are the niche marketable elements that all businesses, both public and venture-backed companies, thrive on
- And it’s not just businesses—sports, politics, careers, and even investors predominantly profit from the long-tail returns only in their ‘portfolios’
- Like Warren Buffett, we may own between 4-500 stocks in our lifetimes, but we’ll generate the best returns from around 10 of them because “long tails drive everything”
A State of Certainty
- Neurologist Robert Burton methodically demonstrates that certainty is a state of mind, one which doesn’t always represent objective truth
- Also, findings show that it’s difficult to identify any difference between our certainty surrounding things we’re convinced we’re right about and those we’re convinced we’re wrong about
- As investors, therefore, we should always be on the hunt for disconfirming evidence rather than settling for positive proof which ‘confirms’ our views even if they’re wrong
What are you certain about in the stock market? Share your comments in the section below
Millionaire Goals
- While it’s important to have your financial house in order before having children, there is substantial pressure from peers and the rising cost of living to have a high net worth first
- Indeed, money and stability are critical to raising a family successfully but the goal doesn’t need to be excessive to meet responsibilities
- Having a recommended net worth of 2-3 times your gross income is a reasonable, and much more feasible, financial guideline than waiting to be a millionaire first
Volatility: A Gray Area
- Investment risk is indistinct and largely undefinable as there are no exact methods or factors for defining it
- While volatility may be argued as “not risk” by many, that does not mean it isn’t a valid measure of it
- And though volatility shouldn’t be used as a sole focus, “ignoring it is equally naive”—as permanent capital impairment is undoubtedly influenced by investor reactions to price
A Better Way to View the World
- Our pre-existing views and cultural outlooks significantly influence us in helping us see what we want to see
- Known as confirmation bias, the concept is becoming more prevalent around us with digital systems constantly engaging us and curating content to our biases
- It’s very easy in this way to create a false sense of reality and only see opinions and information which agrees with our own
- Instead, aim for “strong opinions, weakly held”—to help you adapt and become a better decision maker
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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