Category: fooled by randomness

Investment newsletter Darwinism

Just how rough has 2008 been for investors? Writes Peter Brimelow on MarketWatch today:

The year has been a grim grind, for investors and for investment letters alike.

As of the end of August, just 19 letters of some 180 followed by the Hulbert Financial Digest had made money in 2008.

Even the ultraconservative Growth Stock Outlook, which has finished in the black every year for more than two decades, is slightly (0.8%) under water (but don’t count it out).

Recall, in June of 2007 the top performing newsletters were bullish according to Mark Hulbert:

There are no guarantees. But to bet on a new bear market right now, you have to bet against the timers with the best long-term records and with those whose records have been awful.

At the time we reached the opposite conclusion (I personally exchanged e-mails with Mark Hulbert and blogged about it here.):

We’ll go with the so-called “dumb money” as the valuation, economic and sentiment stars or extremely well aligned for a killer bear market.

The newsletter community, by its nature, tends to be non-conformist, bearish, and uses technical analysis to time markets. The current environment should suit their style over that of traditional money mangement, which has morphed into “buy the dip,” “buy-and-hold,” and “don’t fight the Fed.” Clearly, a weeding out process took place during the 25-year credit expansion and financial asset inflation of 1982-2007, even among the market’s skeptics who are now unprepared for the Great Unwind. Call it “survival of the unfittest,” as Nassim Taleb writes in Fooled By Randomness.

Nassim Taleb and Charles Mackay on the boom and bust cycle

Learning from history does not come naturally for us humans, a fact that is so visible in the endless repititions of identically configured booms and busts in modern markets.

~ Nassim Taleb, Fooled By Randomness, 2nd Edition (2002)

Taleb’s quip brings to mind this classic…

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.

~ Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds (1852)

My comment: We are still largely in the delusional phase of the current bust.

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