Words I Seldom – If Ever – Read in the Financial Media

19 Jan

From the WSJ’s article about record (since 5/2009) flows into equity funds “Here Comes the Dumb Money!” (I totally dig the title btw):

These flow numbers are volatile, and spikes of this size have almost always been short-lived in the past few years. It will take several more weeks of such inflows before any sort of trend can be declared.

Be still my heart/mind! A caveat! From the WSJ! Progress!?

I  cannot tell you how many articles I read each and every day that effectively extrapolate trends from single (or painfully limited) data points without any such caveat. Well over a dozen if not some multiple of that.

So-doing is an example of several particularly dangerous types of cognitive bias including but not limited to anchoring (the common human tendency to rely too heavily, or “anchor,” on one trait or piece of information when making decisions), contrast effect (the enhancement or diminishing of a weight or other measurement when compared with a recently observed contrasting object), focusing effect (the tendency to place too much importance on one aspect of an event; causes error in accurately predicting the utility of a future outcome) and others.

Trends are important – as are identifying and acting upon them – but every single day I see traders, journalists, pundits, etc calling out trends too-early based upon obviously limited data.

The trend may be your friend, as they say, but if the trend you’ve identified isn’t actually a trend, then your friend it shall not be.

I learned this lesson the hard way when I watched my college $ go *poof* when the tech bubble burst.  I used it to my advantage when I shorted some retail/apparel in 2008 and finished the year with double-digit gains in my personal account while the S&P 500 nosedived ~50%.  Unfortunately, I wussed-out on the huge upward-trend since March, 2009 as my macro outlook – based on the data I follow – was and still is a bit less rosy than valuations across a variety of sectors/firms have and continue to imply. Whoops!?

The point is simple: Don’t jump to conclusions based on headlines. Drill-down and dig a little deeper into the details.  That’s what John Paulson and other fund managers did before the housing bubble burst, and last I checked, that approach worked out pretty, pretty well for them

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One Response to “Words I Seldom – If Ever – Read in the Financial Media”

Trackbacks/Pingbacks

  1. Thursday links: not without risk Abnormal Returns - January 20, 2011

    […] Retail investors are back, kinda.  (MarketBeat also Stone Street Advisors) […]

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