Morning Note: Explosion of #4s

Asian equities traded mostly in the green overnight; 12 of the 16 markets we track closed higher. Same for Europe this morning; 16 of 19 indices presently in the green. U.S. equities are mixed as I type, with the Dow up 244 points (.91%), the S&P 500 up .18%, the Nasdaq down -0.53% and the Russell 2000 up 1.5%. 

The VIX (SP500 volatility) is up 1.13%, to 22.48. VXN (Nasdaq vol) is up 4.60% to 31.13. I.e., don’t let the Dow’s 254-point rise fool you, the market remains on edge this morning…

Oil futures are up 2%, gold’s are up $31, silver’s up a huge 6.8%, copper’s up 3% and the ag complex is mostly green.

The 10-year treasury is up (yield down) a titch, and the dollar is off .05%.

Our core portfolio is starting the day off nicely, up .56%, with 14 of our 17 positions trading higher as I type.

Keeping this one brief, I’ll leave you with this timely message from Annie Duke’s enlightening book Thinking in Bets:

“…as I found out from my own experiences in poker, resulting is a routine thinking pattern that bedevils all of us. Drawing an overly tight relationship between results and decision quality affects our decisions every day, potentially with far-reaching, catastrophic consequences.”

Which is essentially the message in my own basketball analogy: 

We can sum up basketball shooting as follows. There are:

1. Good shots that go in.
2. Good shots that miss.
3. Bad shots that miss.
4. Bad shots that go in.

#1s are great. #2s are fine, unavoidable, and possess a livable probability rate. #3s, while costly, are the most predictable and, therefore — being costly — should be readily avoided. #4s — as explained above — are an utter curse!

Here’s my point:

We can sum up investing as follows. There are:

1. Good investments that make money.
2. Good investments that lose money.
3. Bad investments that lose money.
4. Bad investments that make money.

#1s are great. #2s are fine, unavoidable, and possess a livable probability rate. #3s, while costly, are the most predictable and, therefore — being costly — should be readily avoided. #4s: I can’t think of a worst case scenario than a new investor hitting a #4 right out of the gate. The perverse feedback from that experience could absolutely send him or her to the poorhouse — as he or she might think that he or she’s discovered a high probability investing method and chalk up the subsequent string of losses to rotten luck. I.e., believing what are in reality #3s to be #2s. The emotional imprint from that early “success” may indeed last longer than his or her capital.

Considering the recent explosion in the number of new retail trading accounts, and the explosion in valuations among a great number of “hot” stocks, I fear that there are a lot of #4 experiences — and, thus, their attendant ultimate consequences — presently taking shape. 

Have a great day!


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