Tuesday, September 20, 2005

To sleep: perchance to dream: ay, there's the rub

I've mentioned before John Mauldin's newsletters. (http://guambatstew.blogspot.com/2005/09/in-library.html) This week he takes a look at investment managers, and in the process teaches us a bit we should know about building dreams of financial success from trading and/or investing -- or per chance.

"I cannot recommend highly enough a marvelous book by Nassim Nicholas Taleb called "Fooled by Randomness." The sub-title is "The Hidden Role of Chance in the Markets and in Life." I consider it essential reading for all investors, and would go so far to say that you should not invest in anything without reading this book. He looks at the role of chance in the marketplace. Let's look at just a few of his thoughts. Assume you have 10,000 people who flip a coin once a year. After five years, you will have 313 people who have come up with heads five times in a row. If you put suits on them and sit them in glass offices, call them a mutual or a hedge fund, they will be managing a billion dollars. They will absolutely believe they have figured out the secret to investing that all the other losers haven't discerned. Their 7 figure salaries prove it. The next year, 157 of them will blow up."

He also makes the point that technical analysis may (may) be helpful for trading, but can't be relied on for investing, in driving home the point that the only statistically helpful technical indicator is the trend. Read/subscribe at http://www.frontlinethoughts.com/printarticle.asp?id=mwo091605

There is also a salutary thought here: http://bigpicture.typepad.com/comments/2005/09/why_we_love_jef.html

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