Economic Rockstar

Connecting Brilliant Minds in Economics and Finance

094: Daniel Crosby on Stock Market Investment Errors and the Price Earnings Ratio

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094: Daniel Crosby on Stock Market Investment Errors and the Price Earnings Ratio

Dr. Daniel Crosby is a psychologist, behavioral finance expert and asset manager who daniel crosby economic rockstarapplies his study of market psychology to everything from financial product design to security selection. 

Daniel is author of 2 books – The Laws of Wealth: Psychology and the secret to investing success and You’re not that Great. He is co-author of the New York Times bestseller Personal Benchmark: Integrating Behavioral Finance and Investment Management.

Dr. Crosby is founder of Nocturne Capital. His ideas have appeared in the Huffington Post and Risk Management Magazine, as well as his monthly columns for WealthManagement.com and Investment News.

Daniel was named one of the “12 Thinkers to Watch” by Monster.com, a “Financial Blogger You Should Be Reading” by AARP and in the “Top 40 Under 40” by Investment News.

Daniel was educated at Brigham Young and Emory Universities.

Economics:

Volatility, stock markets, behavioral finance, investments, human error, behavioral bias, money, confirmation bias, loss aversion, price earnings ratio, CAPE, Quantitative Easing and central banks.

Economists:

Benjamin Graham, Christopher Geczy, Jeremy Siegel, Robert Shiller and John Paulson.

We lose 13% of our IQ when we are under stress, so even if you know all of these great lessons about the way the markets work, you tend to have least access to them when you need those lessons the most. – Daniel Crosby

5 consistent factors that underlie the 100 ways that we can make mistakes:

1. Ego – The belief that we are special or different.

2. Emotion – Allowing our feelings to drive our perception of risk.

When we’re in a good mood, the world seems to be a safe place to be. Equity markets seem to be a safe place to be. The opposite is also true.

3. Conservation – A preference for the status quo & Asymmetry – the way we see loses versus gains.

We are much more upset with a loss than a similarly sized gain.

4. Information – We have too much data available for our brains to absorb.

The Fed releases 45,000 pieces of economic data each month. There is no way that we can comprehend all of that. We have information processing problems and we mis-weight data.

5. Attention – Salience trumps probability.

The more vividly we’re able to think  about something, the more probable it seems

Books:

Links:

Weatherman, Michael Fish gets it wrong with the 1987 Storm in England

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016: Jack Schwager on How You Can Become a Market Wizard with Fundseeder.com

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016: Jack Schwager on How You Can Become a Market Wizard with Fundseeder.com

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Jack Schwager is a recognized industry expert in futures and hedge funds and the author of a number of widely acclaimed financial books. Mr. Schwager is one of the founders of Fund Seeder (FundSeeder.com), a platform designed to find undiscovered trading talent worldwide and connect unknown successful traders with sources of investment capital.

Previously, Mr. Schwager was a partner in the Fortune Group (2001-2010), a London-based hedge fund advisory firm. His prior experience also includes 22 years as Director of Futures research for some of Wall Street’s leading firms, most recently Prudential Securities.

Mr. Schwager has written extensively on the futures industry and great traders in all financial markets. He is perhaps best known for his best-selling series of interviews with the greatest hedge fund managers of the last three decades: Market Wizards (1989), The New Market Wizards (1992), Stock Market Wizards (2001), Hedge Fund Market Wizards (2012), and The Little Book of Market Wizards (2014).

His other books include Market Sense and Nonsense (2012), a compendium of investment misconceptions, and the three-volume series, Schwager on Futures, consisting of Fundamental Analysis (1995), Technical Analysis (1996), and Managed Trading (1996). He is also the author of Getting Started in Technical Analysis (1999), part of John Wiley’s popular Getting Started series.

Mr. Schwager is a frequent seminar speaker and has lectured on a range of analytical topics including the characteristics of great traders, investment fallacies, hedge fund portfolios, managed accounts, technical analysis, and trading system evaluation. He holds a BA in Economics from Brooklyn College (1970) and an MA in Economics from Brown University (1971).

Economic and Finance Themes:

In this interview, Jack mentions and discusses: chartists, technical analysis, fundamentals, futures, normal distribution curve, options, Black-Scholes Options Pricing Model, option warrant trading, efficient market hypothesis, probability, negative externalities, fiscal responsibility, Keynesianism, deficits and demand.

I chose economics because I wasn’t any good to major in physics or math. I just felt I would be mediocre if I went into those fields. On the positive side, I had a super professor for Econ1. He was just so clear and logical – Jack Schwager.

Economists and Traders:

In this interview, Jack mentions: David Shaw, Ed Thorp, John Bender, Michael Marcus, Fischer Black, Robert Merton, Myron Scholes, John Maynard Keynes, Michael Lewis, Nassim Nicholas Taleb, and Yoram Bauman.

In this episode, you will learn:

  • why Jack chose economics at University.
  • about the similarities between Physics and Economics and why they are so different as a science.
  • if there is a certain personality that is required in trading financial markets.
  • if there is a holy grail to trading the markets.
  • about the importance of discipline.
  • how an $18 ‘Job Wanted’ ad in the New York Times landed Jack a position as a key analyst.
  • the one trader that particularly impressed Jack.
  • about the different strategies of some of Jack’s Market Wizards.
  • why normal distribution tail events can have a higher probability of occurrence than is lead to believe.
  • about the tragic ending of Market Wizard John Bender and the current case against his wife by the Costa Rican authorities for his ‘murder’.
  • about Fund Seeder – the world’s first search engine for undiscovered trading talent.
  • about Jack’s forthcoming book with the working title ‘Undiscovered Market Wizards’ and how you could possibly feature it.
  • about the Market Wizards Roadshow coming soon in 2015.
  • why Jack wrote his book ‘Market Sense and Nonsense’.
  • about the debunking of the efficient market hypothesis.

Physics, Economics and the Stock Market: A Connection

Economics is more complex from a quantitative standpoint because in physics at least the rules are well-defined and don’t change and in economics they’re not stable.

Many schools in economics get it wrong because they fail to appreciate the influence of human behavior which is not stable.

Because of the human element it becomes much more difficult to forecast in economics than it is using physical laws.

A lot of traders interviewed for the Market Wizards book come from the higher level mathematics and physics spectrum. That’s one type of person who is attracted to the markets. It’s solving analytical problems that intrigues them.

Other traders are very intuitive and have a completely different approach to trading markets.

Trading with  Discipline in the Markets

There are no secrets to trading the markets. There are an untold number of ways in which the markets can be successfully approached.

They are all very difficult and most people will fail. There is no common approach and it’s more of a matter of finding an approach that works for you.

On Trading: Regardless of how you do it, you better have discipline – Jack Schwager

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It doesn’t matter if you’re quant or not quant, chart or fundamental,  long-term or short-term. Whatever approach you do use, you better be disciplined or it’s not going to work.

Once I got involved in futures, I quickly discovered that at that time, at least on the analytical side, there wasn’t much talent out there. I think I succeeded because competition was very easy at that time – Jack Schwager.

Life for almost all of us is tremendously influenced by chance more so than people would admit or realise – Jack Schwager.

Probability and Options

On Ed Thorp: He is the walking refutation of the Efficient Market Hypothesis – Jack Schwager

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The options markets are pricing for the assumption of equal probabilities at all times on both sides.

Options are priced for neutrality all of the time and that’s not reality. There are certain circumstances in the markets where something happening is much more likely to occur on one side of the distribution curve than the other.

The markets may assume a log normal distribution. But when there is a critical stop level at some price then, when the market goes to that price, the probability that the market will go below that price, what is considered within the tail events, will be much greater. Just getting to that critical price can trigger an avalanche of orders.

Fundseeder: The World’s First Search Engine for Undiscovered Trading Talent

The concept of Fund Seeder is to create a central place on the web where all traders, particularly undiscovered traders can establish their track records, have them verified and then have investors who are looking to allocate new trading talent find them.

The trader links their brokerage accounts with their own account on Fund Seeder so the numbers come directly from the traders’ brokerage account. That critical verification step occurs on this central platform allowing the traders and potential investors to verify the numbers.

There are traders from over 60 countries on Fundseeder who now have the opportunity to get in front of potential investors and establish a track record.

There is also the ‘seeding’ side where investor groups will participate to find traders and offer seed funding. It acts like venture capital where traders will receive seed funding to allow them trade larger accounts, which otherwise would not have been available to them outside Fund Seeder.

Many brokerage firms can be connected to Fund Seeder, including Interactive Brokers, and many more will connect in the near future.

Fund Seeder is a place where traders go to be discovered and where investors go to look for traders. You trade, we connect, they invest – Jack Schwager

Problems Jack Sees with Economics and Finance

  • The Efficient Market Hypothesis.
  • The Sharpe Ratio.
  • Looking at past returns to pick investments.
  • Volatility as a satisfactory and complete measure of risk.
  • Risk management.
On writing Market Sense and Nonsense: ‘I really wanted to throw stones’ – Jack Schwager

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Jack Schwager on Economists, Externalities and Fiscal Responsibility

I believe that 90% of economists will agree 90% of the time. Economists do agree on a lot of things. You can go from a liberal to a conservative spectrum in economics and still have wide agreement on a lot of things Jack Schwager.

The solution to global warming is a revenue-neutral carbon tax. You have a cost attached to the polluter side and you have a benefit attached to growth and expansion.

Keynes would never have argued for deficit spending in an expanding economy

Recommended Books:

Where To Find Jack Schwager:

010: Douglas Goldstein on How Chess Can Teach Us Lessons on Strategic Financial Planning

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010: Douglas Goldstein on How Chess Can Teach Us Lessons on Strategic Financial Planning

Doug GoldsteinDoug Goldstein has over 20 years in the financial planning and services industry, beginning his career on Wall Street in 1992 at Dean Witter. Doug is a Certified Financial Planner, registered Investment  Advisor, Trust and Estate Practitioner, and a licensed investment professional. Doug is the founder and director of Profile Investment Services, Ltd and hosts two podcasts on iTunes called Goldstein on Gelt and Rich As A King. Doug has authored numerous books on financial planning and building wealth and is co-author of Rich As A King: How the Wisdom of Chess Can Make You The Grandmaster of Investing. Doug is quoted in many publications such as The Wall Street Journal and Forbes, as well as guest lecturing on investment in colleges.

Economic Themes:

In this interview, Doug mentions and discusses: investment planning, stock markets, over-confidence, behavioral finance, loss aversion, prospect theory, personal finance, strategic finance, interest rates, bonds, risk, liquidity risk, hedge funds,

Economists and Economic Schools:

In this interview, Doug mentions: Terence Odean, Daniel Kahneman and Kenneth Rogoff.

Doug’s Defining Moment:

  • A chance meeting with Boris and Anna, a Russian couple, led to Doug enrolling his daughter and son into Boris’ chess classes. While sitting in during these classes, Doug realised that the strategic thinking and analysis of a chess player is similar to that of a financial planner and investor.
  • You can use the strategies of chess to illuminate so many concepts in investment

Doug’s Affirmations/Mantra:

Accept upon yourself a teacher, acquire for yourself a friend and judge everyone favorably

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Doug’s Influencers:

Doug’s mother and grandmother who were both in the finance industry.

In this episode, you will learn:

  • about two women in Doug’s life who smashed the glass ceiling in their respective careers.
  • about the financial planning lessons Doug learned from his mother and grandmother.
  • if women make better financial planners or investors than men.
  • if trading markets more frequently leads to better returns.
  • how the patience of chess playing is similar to the patience needed when planning your stock market trades.
  • why the fear of losing results in investors making bad decisions.
  • what you should do if you have a question about your business.
  • how the concepts of improving your game in chess is the same as that of investment and financial planning.
  • about the difference between short-term and long-term financial planning.
  • how a game of chess is bounded unlike the uncertainties of a stock market and what you can do to manage these uncertainties.
  • ‘how the News causes you to Lose’.
  • how goal-setting can get you out of the bottom of the socio-economic ladder.
  • who Doug would be if he was a chess piece.
  • whether stocks or bonds are more dangerous today.
  • which investor performs better – those listening to the news for advice or those that do not.
  • if Doug has a crystal ball to help make predictions!
  • why building a community is better than building a network if you want to succeed.
  • what Doug’s path to success is.
  • if we should try to pay off our mortgage early.
  • how being a philanthropist can make you a better person.
  • Doug’s simple method of identifying if you are risk averse in terms of your investment.
  • the parallels that Ireland and Israel have in terms of their economy, innovations and foreign direct investment.

Advice:

  • There’s nothing that you’re actually going to know about what’s going to happen tomorrow in the markets. But what you do know is to educate your clients about how to responsibly take care of their own money.
  • Amateur investors  and amateur chess players move around because they can’t figure out their strategy. They make a move that doesn’t really have a purpose and that’s a huge mistake.
  • Go into meetings and discussions with people as a friend. Assume that they’re there to work with you and not against you. You’ll be much happier.
  • Focus on developing a strategy.
  • Build your community – that’s how you will ultimately succeed. Build a group of people that you can constantly be in touch.

Career Advice

‘We are not the same as our parents and grandparents. You’re not going to work for some company for your whole life and then retire with a great pension at 60. it’s up to you to take care of yourself. The governments going broke, your parents are probably going broke, you’re going broke and you’re in debt. You’ve got to get your own act together. As soon as you understand how business works, you should try and set your own sails and find something that you really enjoy doing, that can add value and work really hard to do it.’

‘There’s nothing wrong with a little bit of hard work in order to succeed. Don’t assume someones going give it to you’

Personal Habits:

  • ‘I tend to be more conservative. I look for ways of trying to protect my business and my savings. I’m constantly looking for problems, coming up with solutions before the problems arise so that they don’t arise.’
  • Goal-setting. Check out Doug’s and Susan’s goal-setting paradigm STRATegic in Rich As A King.
  • Doug is an anti-debt person and is a philanthropist.
  • Doug organizes everything first thing in the morning – calender, email and builds a list of what needs to be done. He does the unpleasant but most important things first. Everything that’s crossed out are his accomplishments for the day.

Takeaway:

  • Don’t be afraid to pick up the phone and calling someone if you have a question about your business.
  • Having a pretty good strategy today is much better than having no strategy until maybe one day you’ll develop one.
  • It’s okay to develop as a strategist. It’s what all investors do and it’s what all chess players do.
  • The news you’re getting from most sources is probably useless.

    ‘Give me a stock clerk with a goal and I’ll give you a man who will make history. Give me a man with no goals and I’ll give you  a stock clerk.’ J.C. Penney

Recommended Books:

Favorite Internet Resources:

  • Financial Snapshot – a tool that builds up your financial profile and identifies your financial situation so that you can work on it or improve it.

Where To Find Doug Godstein:

Gift for You:

How To Achieve Exponential Growth in Your Business: The 3 Game-Changing Tactics I Used to Double, Double Again and Then Triple The Size of My Business.

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