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Even the billionaires have this problem

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From Richard Smith, Founder, TradeStops:

Eric Arthur Blair — better known by his pen name, George Orwell — is the British author who wrote the timeless classics Animal Farm and 1984. Phrases still in use today — like Orwellian, Big Brother, and Thought Police — are a result of those novels.

Orwell was also known for his essays. In 1946, the year after World War II ended, he wrote the following in a piece titled “In Front of Your Nose:”

“We are all capable of believing things which we know to be untrue, and then, when we are finally proved wrong, impudently twisting the facts so as to show that we were right. Intellectually, it is possible to carry on this process for an indefinite time: the only check on it is that sooner or later a false belief bumps up against solid reality, usually on a battlefield.”

Orwell also has a famous quote: “To see what is in front of one’s nose needs a constant struggle.”

Long before the phrase “cognitive bias” gained attention in the 1970s, Orwell and many others (all the way back to the ancient Greeks) knew something basic about human nature.

It can be very hard to see what is “in front of your nose” — in other words, the glaring evidence right in front of you. There are countless ways to be distracted or misled … or focused on the wrong thing … or thrown off balance by emotion … or a dozen other things.

At the same time, every so often and seemingly like clockwork, there’s an example in the news where human judgment fails spectacularly.

Such-and-such person makes a decision (or a string of decisions) so terrible that the age-old question arises: “How could anyone make such an obvious mistake? How in the world did that happen?”

They probably failed to see “in front of their nose.” And it was probably due to cognitive bias.

Cognitive biases help explain the “why” behind certain bizarre quirks of human nature

They can be described as “systemic patterns of deviation” from rational thought.

These biases are “systemic” in the sense they are built into the brain, which means everyone has them as part of the brain’s default setting. They are not glitches or flaws in day-to-day functioning, but a result of the brain’s architecture.

Cognitive biases are literally everywhere. Anyone with a brain is susceptible to them.

But how do cognitive biases make it hard to see something obvious?

Take confirmation bias — one of the better-known biases (there are hundreds of them) — as an example. Confirmation bias is the tendency to filter information in a way that supports a desired belief.

If you deeply want to believe “X,” for example, your brain will seek out and register information that confirms the validity of X. At the same time, your brain downplays or ignores inputs that go against X.

The stronger your desire to believe something, the more powerful this effect becomes.

Confirmation bias can sometimes be so strong that it creates a reality distortion field — where the person in the grip of the bias is no longer able to process reality accurately.

In markets, this can get expensive. The problem is that different cognitive biases can combine and reinforce each other, leading to irrational behaviors that cost a lot of money.

You may have heard a version of this joke:

Q: What do you call a short-term trade that doesn’t work out?

A: long-term investment.

Here’s how that works:

Bob believes a certain stock will have strong earnings and a string of profitable quarters ahead. He buys the stock, assuming the earnings report will be a catalyst for a nice move higher.

Alas — the earnings report is bad. The company failed to meet expectations. The outlook is “meh” and was supposed to be great. The stock goes in the wrong direction. It gaps down and starts drifting lower.

At this point, Bob experiences the cognitive bias known as “loss aversion.” His desire to avoid a loss is stronger than his desire to seek gains. So, he holds onto the losing position.

If he waits a little while, Bob reasons, then maybe the stock will come back. Never mind that his whole thesis for buying the stock in the first place (strong earnings and rising profits) has been trashed.

Now that Bob’s short-term trade is a “long-term investment,” he has a vested interest in seeing the stock go up. This translates to an emotional desire — Bob deeply wants the stock to make a comeback.

Confirmation bias then takes hold: Bob’s brain starts paying attention to articles that are friendly to the idea the stock might come back … while discounting or ignoring evidence that the stock could go lower.

There is so much written about publicly traded stocks, it’s almost always possible to find a bullish article or someone making a weak bullish case somewhere — even if the stock is a total dog. Caught in the grip of confirmation bias, Bob seeks out these bullish articles. The stock keeps falling.

Bob ignores the strongly negative evidence — the warning signs in front of his nose — and stays with the position. A year later, the stock has fallen dramatically … and badly damaged Bob’s portfolio.

This can happen to anyone. It even happens to hedge-fund billionaires.

The tricky thing about cognitive bias is that, much of the time, you don’t even know it’s there. The bias factors play out in the realm of the subconscious.

At no point did Bob (our hypothetical investor) realize that he was acting irrationally as the stock kept going down. In the real world, Bill Ackman (a billionaire) did the same with Valeant Pharmaceuticals.

But cognitive biases can be trickier still — because they still distort things even when you spot them.

When a bias is strong enough, it creates a form of “cognitive illusion.” This causes you to see something that isn’t there, or to wrongly perceive an irrational course of action as rational. And even if you recognize what’s happening, the illusion persists.

We can use a visual cognitive illusion to demonstrate the point.

The “Müller-Lyer Illusion” was developed in 1889 by Franz Carl Müller-Lyer, a German sociologist. A version of it from Daniel Kahneman’s book, Thinking Fast and Slow, appears below.

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As you look at the illusion, ask yourself: Which of the two horizontal lines is longer?

The correct answer is: It’s a trick question. Both of the horizontal lines are exactly the same length. (You could prove this by taking a measurement.)

The illusion persists even after you know the correct answer. The bottom line still looks longer, even when you know the truth. This is due to a quirk of how the brain works and how certain shapes are interpreted relative to depth perception.

Certain types of cognitive bias can create a similar type of illusion. But these illusions are patterns of thought or beliefs rather than visual brain teasers. That makes them far more dangerous.

In the world of investing, persistent cognitive illusions (created by built-in cognitive biases) can lead to irrational decision making, which winds up costing investors money. Sometimes a LOT of money.

And the real challenge is, you can study up on the various biases … and be fully aware that you have them (just like everyone else) … and still fall victim to them anyway.

This is another benefit of using a set of rules that exists outside your brain … while interpreting market data with the help of software that informs and guides decision making.

A well-designed software algorithm doesn’t see with human eyes. Technically speaking, it doesn’t “see” at all. It just crunches a vast stream of ones and zeroes. That helps make the algorithm a reliable interpreter — an impartial judge, if you will — when programmed correctly.

And this, again, is why software can be such a help to investors.

You won’t always know when your cognitive biases (which all investors share) are negatively impacting your investing decisions. And sometimes those biases will distort your perception … even if you are well aware of them and know they exist.

But well-designed investment software can help you see “in front of your nose” in terms of making rational decisions with the help of data — thus increasing the likelihood of investment success.

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Richard

Crux note: As if the the challenge of savvy investing wasn’t hard enough, you have to fight against your own subconscious… But that’s why Richard created TradeStops.

His philosophy is to cut your losses and let your winners ride… And the results speak for themselves.

You can discover why one satisfied investor called TradeStops his “safety net” right here.


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Investors have spoken… It’s time for more risk

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From Dr. David Eifrig’s Health & Wealth Bulletin:

All eyes have been on the 10-year U.S. Treasury yield over the past couple of days.

It recently broke out above 3.2% to a new seven-year high, causing a lot of reaction from the financial media… both positive and negative. The 10-year yield is significant for a couple different reasons…

First, as we talked about back in July, the spread between the 10-year Treasury yield and the two-year Treasury yield are recession predictors.

Second, the 10-year Treasury yield is the benchmark that guides other interest rates. It affects rates on everything from auto loans to home mortgages to consumer and business loans.

Finally, the 10-year yield is a signal of investor confidence. When investors are scared of owning stocks and corporate bonds, they tend to put their money in risk-free assets like government bonds. And as demand increases for government bonds, prices rise – which drives yields lower (bond prices and yields move in opposite directions).

When investors are optimistic about stocks, they don’t want to have their money in boring government bonds. Demand for Treasuries falls, and prices fall – which means yields shoot up.

That’s what we’re seeing today with the 10-year Treasury breaking out to multiyear highs. It shows investors want more risk. They don’t want to settle for 2%-3% returns in Treasuries. They want to chase the higher returns they can get in the stock and corporate bond markets.

The chart below shows how much money flows in to and out of U.S. Treasuries on a weekly basis…

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Last week, investors pulled $1.6 billion from U.S. Treasuries and $1.1 billion the week before. That’s nearly $3 billion, by far the largest two-week outflow since the start of 2018. And according to EPFR Global, investors put $1.2 billion into U.S. stocks last week.

The message is clear… Investors don’t care about risk-free assets. They want higher returns. And they think the stock market will deliver it to them.

As yields on Treasuries creep higher to 3.5%, 4%, or even 5%, we may start to see some more folks shift their money back in to these assets. Earning 5% risk-free is hard to turn down. But we may be awhile away from that.

For now, folks want to own stocks. That’s bad and good…

It’s bad because this is what happens at the end of every bull market. Investors see their friends making tons of money in the stock market and can’t stand to sit on the sidelines anymore. They pull money from safe assets and from their savings accounts to plow into equities. This of course, creates a bubble… and we all know how it turns out from there. (Not well.)

We start to see headlines from financial-media sites such as CNBC like this…

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And this from Bloomberg…

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If you’ve been following Stansberry Research for long, you know that my colleague Steve Sjuggerud has been pounding the table for folks to buy stocks now because of the “Melt Up” that you see above.

The Melt Up is where we’ll see one final surge in the market before it collapses. According to Steve, folks who are invested before the market takes off could make 100% to 500%, if not 1,000% gains.

And that’s the good news from folks preferring riskier assets like stocks – massive returns in a short period of time.

Since everyone is demanding higher returns, their money goes into the stock market, which pushes stock prices higher and higher.

The even better news… We’re getting close to Steve’s Melt Up, but we’re not there yet.

Folks are getting more bullish, but we’re not at an extreme level of bullishness yet. We hear warnings all the time because of high stock valuations… or warnings about rising interest rates.

This isn’t typical top-of-the-market or Melt Up behavior.

Steve firmly believes that the real Melt Up has not started yet and there are still incredible gains to come.

That’s why, on October 24, Steve will show you how to cash in on the Melt Up, discuss when the bull market will end, and give away his No. 1 recommendation right now.

Don’t miss out on this opportunity… Click here to claim your spot.

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team


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An important ‘test’ for the market

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From Justin Brill, Editor, Stansberry Digest:

The broad-market sell-off continued today…

All three major U.S. indexes closed sharply lower again.

The benchmark S&P 500 Index fell 2.1%… the Dow fell 2.1%… and the tech-heavy Nasdaq fell “just” 1.3%.

More important, as you can see in the following chart, today’s decline pushed the S&P 500 below its 200-day moving average (“DMA”) for the first time since April…

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As longtime readers may recall, the 200-DMA is considered a rough gauge of the market’s long-term trend. During bull markets, stocks tend to spend most of their time trading above the 200-DMA. During bear markets, they spend most of their time trading below it.

The S&P tested this level three different times following February’s “volatility panic,” but it never broke solidly below it. In fact, outside of a few days early this year and two days during the “Brexit” panic in June 2016, the S&P 500 has not broken below this level in a meaningful way since the broad market correction in early 2016.

Seeing this support level fail again today is concerning…

But it could simply be another “false” breakdown like those we’ve seen several times over the past couple years.

Why do we say that? Take another look at the chart above…

At the bottom, you’ll see the S&P’s relative strength index (“RSI”). This is a simple momentum indicator with values ranging from 0 to 100. Values below 30 indicate an asset is “oversold” and may be due for rally. Values above 70 indicate an asset is “overbought” and may be due for a correction, or at least a pause.

As you can see in the earlier chart, stocks are now extremely oversold. In fact, they’re now stretched to the downside to nearly the same degree that they were stretched to the upside back in late January.

This is a bullish sign.

Of course, this doesn’t necessarily mean stocks will head higher tomorrow. It’s common to see a “divergence” form – where stocks go on to make a new extreme that isn’t confirmed by a new extreme in the RSI – before a significant reversal begins. But this reliable indicator says at least a short-term bottom is near.

As always, no single indicator is foolproof. So make sure you continue to follow your trailing stops, just in case. But history is clear: Anyone who panics and sells stocks now is likely going to regret it.

Of course, this isn’t the only reason we remain cautiously bullish today…

As regular Digest readers have no doubt become sick of hearing, all of the reliable long-term indicators of stock market, credit market, and economic health we follow remain positive today.

While a broad market correction of 10% or more is always a possibility, these measures tell us the chances of a true bear market or a recession are still extremely low.

So-called “seasonality” could now provide a tailwind as well. As Morgan Stanley analysts explained in a research note today, we’re now entering an historically bullish time for stocks…

Seasonality is about to get ‘helpful’: October is technically a positive month for risk assets, but with some fascinating bifurcation: it often starts badly, but ends strong.

From 1998-2017, the average return over the first 10 days of October was -0.4%. The rest of the month? +2.0%.

Finally, we’ll also note that third-quarter earnings season is about to kick off in earnest tomorrow. And analysts are expecting strong sales and profit growth for the third straight quarter.

In other words, if you want to profit from the ‘Melt Up,’ you must be prepared for more volatility…

Of course, for most investors, this is easier said than done. You’re likely to panic and sell too early… or worse, hang on too long.

That’s why we’re preparing a special event this month…

On Wednesday, October 24, Steve Sjuggerud will sit down with some of the biggest names in finance – in front of a live studio audience – to discuss exactly what you should do with your money during the final stage of this long bull market.

We guarantee this event will be unlike anything you’ve seen from us before. Whether you’re currently leaning bullish or bearish, you don’t want to miss it. You’ll even get the name and ticker symbol of one of Steve’s favorite Melt Up recommendations – a stock that he believes could soar as much as 1,000% in the coming months – just for tuning in. Reserve your spot for free by clicking here.

Regards,

Justin


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Another black market is opening up… And it’s bigger than cannabis

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From Justin Spittler, Editor, Casey Daily Dispatch:

History was made in 2012.

Colorado, along with Washington, became the first states to legalize recreational marijuana.

For many people in Colorado, this was the best thing that ever happened. For others, it was a mistake. And those people will probably never see eye to eye.

Still, there’s one thing almost everyone can agree on… and that’s the economic benefits of marijuana legalization.

Marijuana legalization has generated billions of dollars for Colorado’s economy. It has created thousands of jobs. And it’s brought the state much needed tax revenue.

In fact, the state took in almost $70 million in taxes, licenses, and fees from the marijuana industry in 2014. And that figure has only gone up.

Last year, Colorado’s government collected $247 million off $1.5 billion in marijuana sales.

In short, Colorado has shown what can happen when a state legalizes marijuana. So, it wasn’t surprising that other states followed suit.

Today, 30 states have legalized medical marijuana…

And nine states, plus Washington D.C., have legalized recreational marijuana.

Of course, regular readers know this already. I, along with Crisis Investing chief analyst Nick Giambruno, have been covering the legal marijuana industry for over a year.

But this isn’t another marijuana essay. No… I wrote this essay because Colorado’s on the verge of legalizing another black market. And just like with marijuana, this presents a huge opportunity for investors.

I’m talking about sports betting…

Until recently, sports betting was illegal in every state except Nevada.

That changed in May, when the Supreme Court struck down a 26-year-old federal law that barred single-game gambling in every U.S. state, except Nevada.

Now, this doesn’t mean that the Supreme Court legalized sports betting nationwide. Instead, it gave each state the power to license, regulate, and tax sports betting within its borders.

Seven states—Rhode Island, New York, New Jersey, Delaware, Pennsylvania, West Virginia, and Mississippi—have since legalized sports betting. Another dozen or so states are considering doing the same.

In short, legal sports betting is sweeping the nation just like legal marijuana swept the nation.

And I have good reason to think Colorado will be the next domino to follow.

Walker Stapleton wants to legalize sports betting…

Stapleton is a Republican gubernatorial candidate. And he’s pushing to legalize sports betting for a simple reason: He wants to tax the industry. Last month, Stapleton told a group of real estate investors…

Sports gambling is coming to Colorado… I think we should assess a tax on people placing a bet and use that to build up our roads and bridges.

Now, I have no idea if Stapleton will win the election. But it may not matter.

Colorado’s state legislature is expected to look at a sports betting bill in early 2019. And that bill is reportedly being “seriously considered.”

That’s why I think Colorado could legalize sports betting within the next year. But it certainly won’t be the last state to do so.

I say this because practically every U.S. state is in dire financial conditions. Just look at the public pension system. It’s a ticking bomb.

Everyone knows this. So, don’t be surprised if politicians try to buy themselves time by legalizing and taxing sports betting.

But this isn’t just an opportunity for desperate governments… It’s also a huge opportunity for savvy investors.

A lot of money will flow into legitimate businesses if states legalize sports betting…

And I mean a lot…

The American Gaming Association estimates that the illegal market for sports betting brings in $150 billion every year. That puts it on par with the global marijuana industry.

But even that might be lowballing the market’s potential. In fact, Bank of America Merrill Lynch says the illegal market for sports betting is worth $200 billion.

Meanwhile, the research firm Eilers & Krejcik Gaming estimates that the legal sports betting market in the U.S. was worth around $270 million last year.

That means the legal market for sports betting would become 37 times bigger if legitimate businesses captured just 5% of the underground market.

And many of the companies poised to benefit from this are publicly traded.

That means you can enjoy a share in their profits…

In other words, you can profit from the legalization of sports betting by speculating on casino and gambling stocks.

The easiest way to do this is with a fund like the VanEck Vectors Gaming ETF (BJK). This fund invests in 43 casino and gaming stocks. That makes it a relatively safe way to bet on this megatrend.

For even more upside, consider investing in small casino operators. Specifically, focus on operators located in states that recently legalized sports betting… or are likely to.

These are exactly the kinds of companies that E.B. Tucker encourages his readers to buy in his Strategic Investor newsletter…

E.B. has been researching this opportunity for the past six months… And he’s found four specific companies primed to soar from this tidal wave of legal revenue.

And each of those stocks are “buys” at current prices. These picks are still flying under the radar today. If you’re not a Strategic Investor subscriber, you’ll want to sign up before these stocks take off.

And that’s not the only massive moneymaking idea E.B. has recently uncovered. He also told his readers about “America’s Third Powershift” that’s underway. You can learn more – and see how to access all of E.B.’s picks – by clicking here.

Regards,

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Justin


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