Abnormal Returns is on a week-long break this week. That does not mean that we are content-free. As we did last year we asked a panel of independent bloggers a series of questions. This year we crowdsourced the questions from readers who won a copy of the Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere for their efforts. We hope you enjoy these posts. Feel free to chime in with your own answers in the comments.
Check out the answers to yesterday’s question: If you could work, without pay, with any investor or trader for one year, who would it be?
Considering all the topics you have written about, which you you think is most underappreciated or overlooked by the majority of investors? (submitted by Davis)
Answers in order of response (first to last):
Phil Pearlman (Phil Pearman): Distinguishing Noise from Signal. People just love to attend to noise and my protestations are likely for naught.
Steven Place (InvestingWithOptions): Everyone’s out looking for the one shiny tip or tactic that will push them over the edge into greatness. There is no edge– success in trading isn’t a binary outcome, it’s a continuum. Focusing on consistent improvements will get you where you need to be, but it won’t be overnight.
Bob Seawright (Above the Market): If by “investors” you mean “professional investors,” they tend to overlook (often intentionally) a preliminary and fundamental examination of active management, its challenges and obstacles. If “investors” is more broadly construed, I think they tend to overlook why they are investing, which often means that they have no way of evaluating how they are doing and what their risks are.
Zack Miller (Tradestreaming): The fact that individual investors can win by creating smart strategies that ape professional investors.
Robert Sinn (The Stock Sage): Even though it has seen increased attention recently, I still believe that noise reduction and curation of ones sources has a long way to go.
Todd Sullivan (Value Plays): Rail traffic/Temp employment. If you had cut off all communication with the outside world & only looked at those two indicators over the last 4 years, you would have known both the timing of the economic recovery and you would have known a “double dip” was simply not going to happen. Yet, every day we sees more second and third tier metrics being used because they back to bias of the person using them….. It is simply, rails & temp employment ….if you want to get fancy, add car sales housing starts.
Ivan Hoff (Ivanhoff Capital): Empathy gap. There are so many people that know how the market works and what impacts their behavior and yet very few are able to consistently apply that knowledge in practice. Discipline is a rare asset in the investing world.
Roger Nusbaum (Random Roger): I’m not sure I have a great answer here. I write a lot of posts about life issues as I believe it is very important to really understand what matters to you (too many people don’t) so that you can invest in a manner that truly is suitable.
Scott Bell (I Heart Wall Street & MyGDP): Everyone is fed up with the investment banks but they still have their assets there. The trend is clearly intact: index funds and the independent advice model are winning. Regional and online banks, like ING Direct, are becoming more robust everyday. I’m just surprised we haven’t seen a bigger/faster shake up from investors voting with their feet. Maybe Facebook will finally be the last carrot Wall Street dangles in front of main street.
Jay (MarketFolly): Knowing which hedge funds to track. Many people want to know what SAC Capital, RenTec, and Soros Fund are investing in. The problem is hedge fund tracking only works if you’re following the right funds. People get caught up in the big names when realistically SAC trades too frequently, RenTec is a quant (who knows why they buy anything) and Soros holds hundreds of a positions. Readers want updates on the ‘famous’ names, overlooking advice to the contrary.
Kid Dynamite (Kid Dynamite’s World): My readers seem to enjoy my non-finance topics: raising hens, gardening, my dogs, making beer – these are the important things in real life: trading is just playing a video game for money. I hope that readers, in addition to appreciating my writing on these topics, realize that they are the topics that really matter in the end.
Jared Woodard (Condor Options): The role of luck. We’re hard-wired to tell linear stories and to give ourselves credit for everything.
Tom Brakke (the research puzzle): Creativity is a very underrated skill in the investment world and in short supply among individual and professional investors alike.
Interloper (The Real Interloper): The concept that the issues in finance are systemic, based on established incentives, rather than individuals. Those people who think the removal of Jamie Dimon will fix things should watch The Wire again – Avon goes down and Marlo steps right in (not that I’m equating selling heroin with finance. Mostly)
Rob (TechInsidr): I think my writings on the cloud, specifically writeups about VMWare and Rackspace, are often overlooked by the majority of folks. These themes are still extremely prevalent today and are forever altering the course of enterprise computing. I see a very bright future ahead for these cutting-edge companies.
CJ (Crackerjack Finance): Most underappreciated are themes regarding real investment over time. The investment world has an unhealthy focus on the “current quarter” and trading strategies. The next set of big returns will come from longer-term investment related themes.
Toby Carlisle (Greenbackd): The impact of cognitive biases and behavioral errors on investors, including value investors, which leads everyone, including value investors, to overpay for growth. Did I mention that value investors also suffer from cognitive biases?
Walter (Sober Look): Japan’s fiscal crisis.
Sean McLaughlin (The Minimalist Trader): I write (not as much as I should) about Minimalism in trading and investing and I think traders and investors overlook the need to keep trading simple.
Eddy Elfeinbein (Crossing Wall Street): How many great companies there are that aren’t followed by any Wall Street analyst.
David Merkel (Aleph Blog): The difference between time- and dollar-weighted returns. The more volatile the investment, the worse the average investor does versus buy-and-hold investors. People buy and sell at the wrong times; this exercise quantifies it.
Josh Brown (The Reformed Broker): When I write industry stuff, most people who are non-industry don’t seem to care or understand the ramifications.
Jeff Miller (A Dash of Insight): Correlation and causation. This is the best example of where the day-to-day flow of information leads people astray. Everyone knows that correlation does not necessarily imply causation, but that is where the analysis stops. Most observers have a sloppy and careless view of evidence. If it fits the pre-conceived thesis, they are on board! I wrote extensively and carefully about the Fed an QE, which they see as moving rates by only ten bps or so – a mild effect. The market sees QE as a direct infusion into equities.
Brian Lund (bclund): Motivation. Why do you trade or invest? Yes we all know, because you want to make a ton of money – that’s obvious – but what other issues, some of which may be hindering your abilty to make money, does trading satisfy for you? Are you trying to prove something to somebody? Are you trying to show how smart you are? Do you trade because it’s a cool thing to say at a party? Are you trading because you are an action junkie? I think most traders would be shocked if they took a hard look at why they are trading, and I find that the most successful traders are the ones who are passionate about trading itself, and find their reward in the pursuit of excellence in it.
Tim (The Psy-Fi Blog): Ah … an easy one. Most investors fail to account for their own flawed psychology in their investing approaches. Even people with basically sound strategies are fooled into emotionally compromised trades by short-term market or macroeconomic issues. The second biggest problem of all is developing a sound strategy, the biggest one is sticking to it.
Jeff Carter (Points and Figures): Market structure. They don’t know they are getting ripped off.
Eric Swarts (Market Anthropology): The low interest rate environment & why it will last longer than almost everyone believes.
Thanks to all the bloggers for their participation. Stay tuned for another thought-provoking question tomorrow.