WHAT FREUD COULD TEACH BUFFETT: THE FOUR PILLARS OF BEFI

Transcription

1 WHAT FREUD COULD TEACH BUFFETT: THE FOUR PILLARS OF BEFI

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3 FUNCTIONAL FICTIONS: OUR GREATEST ADAPTATION

4 THE GREATEST MYTH OF ALL

5 OLD, HUNGRY AND IMPATIENT

6 CORPSES, CRACK AND (NO) CLOTHING

7 FEAR IS FOREVER

8 JUSTICE IS SERVED

9 177 WAYS TO BE WRONG

10 OUR FOUR BIGGEST ERRORS Ego Information Emotion Conservation

11 EGO: PAPER OR PLASTIC? Making a paper bag takes three times the amount of water as a plastic bag Only 24% of people reuse paper bags versus 67% reuse of plastic bags Paper production creates 70% more air pollution than plastic It takes 91% more energy to recycle a pound of paper than a pound of plastic

12 EGO: WELL REGULATED MILITIA? 98% of guns used in the commission of a crime are stolen Over 100,000 people successfully defend themselves with a gun each year 9 times out of 10 gun owners defend themselves without firing a shot More people drown each year than have been accidentally shot since 1980 Kitchen knives kill ten times as many people each year as assault weapons

13 CONSERVATION Overvalue what we own Fail to see inaction as a form of action Confuse what I know with what is good

14 ATTENTION Linda is 31-years-old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations. Which is more likely? (1) Linda is a bank teller. (2) Linda is a bank teller who is active in the feminist movement.

15 ATTENTION: SALIENCE RULES

16 EMOTION Bilingual folks make better investment decisions when thinking in less fluent language 15 neurotypical participants were outperformed by 15 brain damaged peers on investment task Ariely study rules from cold state disappear in hot state The key: Becoming a functional sociopath

17 Psychology seems to lie behind all the ways that potentially improve stock market returns. T h e L i t t l e B o o k o f A l t e r n a t i v e I n v e s t m e n t s

18 4 CS OF BEHAVIORAL RISK MANAGEMENT CONSISTENCY (all 4) CONVICTION (Ego) CLARITY (Attention) COURAGE (Emotion)

19 CONSIS TENCY PROCESSES BEAT PEOPLE

20 Y O U R E S T U P I D T O O

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22 WILLPOWER IS NOT ENOUGH 77% OVER 50%

23 THE MAGIC IS GONE... Automatic 84% Benchmark 63% Discretionary 58%

24 CONSISTENT: RULES MANAGE BIAS Rules dramatically outperform discretion and do so at a significant discount. 100 Chart Title 80 R U L E S W I N O R = R U L E S W I N Series 1 Series 2 Series 3 EXPERT WINS 0 Rules vs. Discretion

25 35% RETURNS DON T LIE...we slavishly follow the model. You do whatever it says no matter how smart or dumb you think it is. And that turned out to be a wonderful business. Jim Simons, Renaissance Technologies

26 CONVICTION FOCUSED ENOUGH TO BE WORTHWHILE, DIVERSIFIED ENOUGH TO BE HUMBLE

27 LIONS, NOT... 8% of ETFs are high conviction 23% of mutual funds are high conviction 1.28% average expense ratio...scarecrows Howard Top picks outperform by 6% per annum Yeung et al. Top 5 holdings outperform by 5.72% Petajisto True active beats by 1.26% per year Active managers do not lack brains, they lack courage

28 GOLDILOCKS DIVERSIFICATION 1 Hubris Just 30 Index Right 500

29 PASSIVE IS A FICTION % of additions are tech % of additions are tech Broke rules to add AOL The question is not if but how?

30 A BEHAVIORAL GLITCH ~50% tech stocks ~40% financials Cheap, small stocks outperform Indexing overweights big, expensive stocks

31 CLARITY COMPLEX DYNAMIC SYSTEMS REQUIRE SIMPLE RULES TO AVOID OVERFITTING

32 COMPLEXITY KILLS: 1961 VS 1970

33 TALEB ON CLARITY Both governments and universities have done very, very little for innovation and discovery, precisely because, in addition to their blinding rationalism, they look for the complicated, the lurid, the newsworthy, the narrated, the scientistic, and the grandiose, rarely for the wheel on the suitcase. You ve likely seen an invention or idea and thought, Why didn t I think of that?! The reason you didn t may have a great deal to do with trying too hard.

34 THE IKEA EFFECT Group A Recent college grad Stable job with upper middle class salary Last three months has not paid $5,000 bill Group B Do a little work to find out if $5,000 or $10,000 bill has gone unpaid 71% vs. 24% - More effort = Worse Outcome

35 C L A R I T Y : % I N C R E A S E I N E F F I C A C Y O F J U D G M E N T S B Y D O I N G L E S S

36 YEAH, BUT WHAT ABOUT US? More information =more confidence More confidence = riskier bets More confidence leads to difficulty inverting

37 COURAGE OUSNESS DO WHAT IS BEST AND FEELS WORST

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39 COURAGE: BE PATIENT WHEN OTHERS AREN T V e r y P a t i e n t Impatient Patient H y p e r a c t i v e 0 Total Returns by Activity Level

40 FUGEDABOUTIT

41 WE RE GETTING STUPIDER South Sea 720% Tulips 1500% Amazon 7500% (73% or recent high) Yahoo! 18,000% (25% of 1999 high) Qualcomm 22,000% (50% of 1999 high)

42 COURAGE: ACT WHEN OTHERS ARE COMPLACENT THE REAL GROWTH OF $ Real Growth of $ Present 1.35

43 $%&! HAPPENS Every single G7 country has experienced equity market drawdowns of 75% or more

44 VA L U AT I O N S A R E P O T E N T I A L E N E R G Y. M O M E N T U M I S K I N E T I C E N E R G Y.

45 NOCTURNE VALUATION INDEX Zero to One Hundred gauge of broad market valuation based on three popular measures. Score is created by averaging historical percentile ranks. NMR = next month return. O P T I M I S M E Q U I L I B R I U M P E S S I M I S M % NMR % NMR % NMR

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47 YOU CAN BE RIGHT AND STILL BE A MORON

48 THERE IS HOPE! Ego (Diversify) Attention (Simplify) Emotion (Be a Contrarian) Conservation (Automate)