Weekend Reads for Finance Pros: Bogle, Baseball, and Investment Bubbles

A few weeks ago, my Twitter account was hacked. If this has ever happened to you, then you know the drill: in a matter of seconds your followers are hit with hundreds of spam tweets. It’s annoying, and time-consuming — it took several hours to delete the offending tweets and the hundreds of accounts that I was suddenly following, and I had to change my passwords on other sites. (Yes, I had broken the cardinal rule of cybersecurity by using the same password on multiple accounts.) But all things considered, I got off lightly.

When it comes to cyber risk and financial services firms, however, the consequences of being hacked are a lot more serious. Just last month, The Wall Street Journal ran an article noting that more advisers are insuring against cyber threats. Ross Gerber, who runs an independent advisory firm with more than $121 million in assets, was quoted as saying that cyber-risk was his “secret biggest fear.” And it’s not just the theft of client money through electronic fraud that is the only risk, the article noted. Clients’ personal data can be vulnerable to hacking, too.

If it has been a while since you reviewed your protocols, you may want to read Financial Planning’s tips for best practices when it comes to cybersecurity. And for a more thorough list, check out the tips from the United States Computer Emergency Readiness team, also known as US CERT, part of the US Department of Homeland Security. (The latest headlines suggest that a fellow agency, the US Office of Personnel Management, may also need a refresher.)

Kicking off this week’s round-up of interesting papers, articles, tweets, and blog posts is a cartoon with a serious message:

When "safe" is "risky" http://t.co/1yyNHTOGU7 h/t @davidbrear pic.twitter.com/1eoWpNMkyy

— Lauren Foster (@laurenfosternyc) July 8, 2014

The article, safe is risky, is worth reading. Here are some other links you may enjoy:

Economics and The Financial Crisis

• Quantifying the Lasting Harm to the US Economy from the Financial Crisis (Stanford University)

• A Cheat Sheet for Understanding the Different Schools of Economics (Pragmatic Capitalism)

Investing / Investor Behavior

• Legendary investor Warren Buffett has cautioned investors to “be fearful when others are greedy and be greedy only when others are fearful.” Based on the results of a new study by researchers at Caltech and Virginia Tech that looked at the brain activity and behavior of people trading in experimental markets where price bubbles had formed, it turns out this is sage advice. (Caltech)

• Are markets efficient? Even the US Supreme Court Is Weighing In (NYT)

• Here’s something that surprised me: According to Elroy Dimson, emeritus professor of finance at London Business School and a speaker at the upcoming 2014 European Investment Conference, wine investments have yielded some of the best returns of the 20th century. In “The Price of Wine,” Dimson and his co-authors analyzed a dataset of 36,000 prices from 1900 to 2012 and found that annualized real returns for wine investments exceeded returns on art, stamps, and even government bond investments over the same time period. Although equities delivered the highest return over the period in Dimson’s study, his findings raise interesting questions about what it means to have a diversified portfolio. See: Varietals for the Long Run? Wine Investments May Outperform Artwork and Bonds. (European Investment Conference Blog)

• Charles Rotblut, CFA, has published two top-notch interviews with Jack Bogle: Common Investor Mistakes and Other Investing Insights and Achieving Greater Long-Term Wealth Through Index Funds. (AAII, registration required)

• “If your goal is to create a perfect portfolio you have basically already lost because you are only setting yourself up for disappointment. It’s a pipe dream. There are only investment styles that fit your personality and allow you to meet your needs with a high probability for success,” says Ben Carlson in his blog post In Search of the Perfect Portfolio. “The real ‘perfect’ portfolio is whatever approach allows you to stick with your investment plan without completely abandoning your strategy at the worst possible times.” (A Wealth of Common Sense)

• Chasing returns has a high cost for investors. How high? Doing so “caused the average US mutual fund investor to miss around 2% return per year.” (St. Louis Fed On the Economy)

• Ben Carlson on Charley Ellis, CFA, and “values discovery” (A Wealth of Common Sense)

• Morgan Housel hits a home run in his post, How to Win By Doing Less, which opens with a photo of a baseball player catching a ball that was “coming off the bat at about 90 miles per hour. In less than five seconds the outfielder ran to the exact location the ball landed, down to the centimeter, catching it without a blink to spare.” His point is that players don’t do a complicated mental calculation to know where the ball will land, they use a rule of thumb to know where a ball will land:

• Align a flying ball in the center of your gaze.
• Run.
• Adjust the speed and direction of your run so the angle of the ball stays at the same spot in your gaze.

How does this apply to investing? “Markets are endlessly complicated, investors are endlessly emotional, and there are no points awarded for difficulty. Overthinking things like valuation and modern portfolio theory can be the equivalent of a baseball player pulling out a calculator after each ball is hit, desperately trying to track its landing point with precision. Any time you can tame a complicated system into a simple rule of thumb, you will be better off.” (The Motley Fool)

• The problem with positive thinking: An excerpt on the “introspection illusion” from the new book Investing Psychology: The Effects of Behavioral Finance on Investment Choice and Bias.  (Abnormal Returns)

• Unfortunate Realities You Should Get Used To (The Motley Fool)

• Meb Faber, author and co-founder and CIO of Cambria Investment Management, talks to a group at Google about global value (video is about one hour long, The Big Picture)

• An engaging profile of Jim Simons: Doer, Giver, Ponderer: A Billionaire Mathematician’s Life of Ferocious Curiosity (NYT)

• 125 Years On, Mr. Market Is Older. But He May Not Be Wiser. (WSJ, tiered subscription)

• Percentages Are Common but Don’t Seem Like Real Money to Many People (WSJ):

https://twitter.com/CFAwealth/status/486137750274732032

Economic Soothsayers

• Salil Mehta, CFA, a lecturer at Georgetown who also blogs at Statistical Ideas, has a new post looking at the poor forecasting abilities of those trying to predict the changes in the economy.

Retirement

• Adapt or Perish: The Retirement Financial Decision (Advisor Perspectives)

• Offering a nudge to save more for retirement: Online Tools Can Encourage Greater Saving (NYT)

• New Research on How to Choose Portfolio Return Assumptions (Advisor Perspectives)

• Nobel Laureate Robert C. Merton weighs in on the crisis in retirement planning. (Harvard Business Review, preview only, subscription required)

Luck vs Skill vs Practice

• The “hot-hand fallacy” is the false belief that a person who has experienced success with a random event has a greater chance of further success in additional attempts. The concept has been applied to gambling and sports such as basketball. It is also the subject of the article, That’s So Random: Why We Persist in Seeing Streaks, which notes that “Time and again, we don’t want to believe that streaks can be the result of pure chance — probably because the bias appears to be deeply ingrained in our minds.” (NYT)

https://twitter.com/ezraklein/status/486223230739709953

And Now For Something Completely Different

• If you’ve ever had occasion to pen something more than a quick email or tweet, this should make you chuckle:

https://twitter.com/matthaig1/status/486421331572187136

• What Writing and Running Have in Common (The Chronicle of Higher Education)

• An interesting fact, and a health crisis that can be mitigated with inexpensive mosquito nets:

https://twitter.com/conradhackett/status/485850673536180224

• Here’s another staggering fact, courtesy of @conradhackett of the Pew Research Center:

https://twitter.com/conradhackett/status/486082198118731776

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Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Photo credit: ©iStockphoto.com/JLGutierrez