8 Fascinating Reads

High skills
A group of researchers compared popular trading strategies to a completely random trading strategy and came to an amazing conclusion: 

Our main result, which is independent of the market considered, is that standard trading strategies and their algorithms, based on the past history of the time series, although have occasionally the chance to be successful inside small temporal windows, on a large temporal scale perform on average not better than the purely random strategy, which, on the other hand, is also much less volatile. 

Expertise 
The blog Monevator makes a great point about expertise in stock-pickers: 

I've noticed many extra clever people make extra terrible stockpickers.

The worst are probably engineers. If I was charged with recruiting for a hedge fund by degree alone, I'd pick maths and physics grads first, then high-flying arts students -- as in history, philosophy, and so on. 

Engineers would come last.

This is no disrespect to engineers, who play one of the least appreciated roles in modern society – heck, they pretty much gave us modern society.

But boy do they get themselves in a muddle with investing.

I suspect it's an innate distaste for uncertainty and fuzziness that's helpful for engineering but lethal to active investing.

If you're a structural engineer, you build a bridge that will take several times the maximum load you can imagine passing over it, just to make sure.

Apply that mind-set to active investing and you'll either cower in cash, or else you'll become wedded to certainties: "I just KNOW this stock is good enough!"

Full throttle
The auto industry is back, writes The Wall Street Journal

After years of layoffs, plant closures and corporate bankruptcies, U.S. auto makers and parts suppliers are pushing factories to the limits. At General Motors (NYSE: GM  ) , Ford (NYSE: F  ) , and Chrysler, more flexible union agreements now allow the companies to build cars for 120 hours a week or more while paying less in overtime pay.

Nearly 40% of car factories in North America now operate on work schedules that push production well past 80 hours a week, compared with 11% in 2008.

Breaking up
Stocks are finally being judged individually, rather than as a group, writes WSJ

Shares are moving less in tandem with the overall market than at any time since the financial crisis, by some measures. That suggests that investors are zeroing in on the prospects for individual companies rather than making wide bets on stocks as a whole ... One big sign of this change can be seen in correlation, a measure of how closely different stocks tend to move together. This measure has fallen to post-financial-crisis lows. As of the end of July, stocks in the Russell 1000 index of large-capitalization stocks had a weighted average correlation of 0.30 to the index itself, the lowest for and end-of-month since 2007 and down from 0.57 a year earlier, according to Deutsche Bank data.

Unknowns
Barry Ritholtz writes about unknowns in the market:

We do not know if equities are either over or under valued, because we have no idea what future earnings are going to be. The debate about valuations often turns on which group's forecast is going to be correct: Expansion or contraction. (We shall ignore the extremeists on both ends of the scale, as they are annoying little twerps who are almost never correct).

Consider how earnings might change in the near future: If the economy were to accelerate (Sequester ends? China improves? Europe recovers?) than earnings could increase significantly, thereby making stocks "suddenly" look cheap. The opposite of this is a US recession, where earnings fall 20-30%, making stocks appear pricey and due for a more significant correction than the 10-19% blips we have plowed through the past 5 years.

Checking in
Hotel occupancy is back to pre-recession levels, writes Calculated Risk: 

How to be happier with your money
Carl Richards quotes Paul Graham discussing money and happiness:

"Most people would say, I'd take that problem. Give me a million dollars and I'll figure out what to do. But it's harder than it looks. Constraints give your life shape. Remove them and most people have no idea what to do: look at what happens to those who win lotteries or inherit money. Much as everyone thinks they want financial security, the happiest people are not those who have it, but those who like what they do. So a plan that promises freedom at the expense of knowing what to do with it may not be as good as it seems."

How to be even happier with your money
This video from Harvard Business School discusses the relationship between money and happiness: 

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Read/Post Comments (9) | Recommend This Article (18)

Comments from our Foolish Readers

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  • Report this Comment On August 23, 2013, at 10:44 AM, cavrad wrote:

    I disagree about the engineers and cash bit. Engineering design is constrained on the upside by considerations such as weight and cost, so saying a bridge is designed to bear several times its load is just not true. At the same time, engineers realize that there is variability in the quality of raw materials, workmanship, and magnitude of future loads on the structure, hence they need to add some extra capacity to the optimal design obtained under assumed perfect conditions.

    In fact, I always thought that it took a genius like Graham to bring into securities analysis this centuries old basic concept of engineering: the margin of safety!

  • Report this Comment On August 23, 2013, at 1:21 PM, hbofbyu wrote:

    Engineers don't lose money in the stock market at the same rate as Doctors. Doctors are the worst.

  • Report this Comment On August 24, 2013, at 1:31 AM, sliderw wrote:

    Engineers are bad at X. Doctors are bad at Y. Writers are bad at Z. All said by bigots.

  • Report this Comment On August 24, 2013, at 12:11 PM, AnsgarJohn wrote:

    It seems the research mentioned above only considered technical strategies not fundamental stock screens that many high scoring Fools playing CAPS seem to use. Engineers using the right heuristics might do quite well. Consider the margin of safety bridge in Superinvestors of Graham and Doddsville.

  • Report this Comment On August 24, 2013, at 12:14 PM, chrisjrogers wrote:

    So the auto workers are working 80 hours a week and not getting overtime pay? Such seems to be the way of the world now.

  • Report this Comment On August 24, 2013, at 1:53 PM, Schneidku40 wrote:

    chrisjrogers, I'm guessing that 80-120 hours a week is not by one person. It's factory-wide, meaning 2-3 shifts of 40 hour workers per week. Overtime is not necessarily needed then.

    As for #7, I believe work is valuable for a person's state of mind. I think many people don't realize how work gives them a sense of accomplishment and focus. If a person receives a financial windfall and wants to quit their job, that's fine, but they should definitely think about picking something else up to be constructive. Simply spending the money on entertainment and toys won't do. I would guess leaving a waiter/waitress a $100 tip every day would do more for a wealthy person's psyche than buying a jet ski, for instance. I think a good idea would be to use the financial independence to go into a job that pays less than you could have lived on before but that you've always wanted to try. Or go back to school for additional degrees, just to learn more. Just because a person is financially wealthy doesn't mean lifelong learning and accomplishment is over.

  • Report this Comment On August 24, 2013, at 2:36 PM, Sotograndeman wrote:

    I very much agree with the comments above about engineers. In fact Buffett himself uses the analogy of a well built bridge to exemplify the concept of margin of safety. And Munger has often remarked that a scientific or engineering background is a good base for investors, since it instills rigor of thought, analysis, and conclusions. All too often, professional money managers are superficial in their thinking. Many Fool articles are superficial to the point of absurdity.

    We should ignore market prognosticators like Ritholtz. Again to quote Buffett, they exist only to make astrologers look good.

  • Report this Comment On August 24, 2013, at 4:55 PM, Mega wrote:

    http://www.wu.ac.at/executiveeducation/other/vgsf/activities...

    There is evidence that high-IQ investors’ portfolios earn upwards of 200 basis points per year more than those of below-average IQ investors, when controlling for wealth. The gap is considerably larger, over 400 basis points per year, when we account for relative differences in the timing of stock market participation by high- and low-IQ investors. These differences are unlikely to be accounted for by differences in risk: high- and low-IQ investors’ portfolios exhibit similar sensitivities to risk factors.

  • Report this Comment On August 24, 2013, at 6:24 PM, Tomohawk52 wrote:

    Question: aren't the synopses for "High Skills" and "Breaking Up" somewhat ironic? I mean if a random strategy is pretty much as good as a standard (not sure what that means) strategy but that stocks within a sector are diverging, doesn't that mean that people are using some sort of strategy to differentiate stocks within a sector which presumably is some sort of strategy, but isn't likely to be very successful? Sorry for the run-on sentence, and possibly my total confusion.

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