Sunday, May 21, 2017

Four Types of Investments -- AND -- This Week's Video

I play a lot of basketball, and, as my son and the dudes I play with will attest, I like to attempt three-pointers. In that success enhances the enjoyment of virtually any endeavor, I knew from the start (my late start [not surpassing the 5'5" mark till after highschool and, thus, being a wrestler during my formative years]) that if I was to score enough to justify my itchy trigger finger, I had to learn good shooting fundamentals. While I'm fully aware that 100% from the field is infinitely beyond my reach, I know that if I can stay in rhythm, if my form is sound and if I practice good shot selection, my odds of maintaining a respectable enough percentage to keep me from being the lowly last pick come time to select the teams increase dramatically.

Different players bring different talents to the game. There's a young man we play with, we'll call him Bartholomew (just in case he happens to stumble upon this blog post) who possesses exceptional ball handling ability and plays the point beautifully. Surprisingly, however, his outside shooting leaves much to be desired. So much so that when he launches a three his teammates cringe; hoping the ball finds nothing but air. Now why would his own teammates want Bart to miss his shot, in embarrassing fashion no less? Because they know that if he drains it, their odds of winning will decrease exponentially.

You see Bart believes that a shot that goes in has to be a good shot. Therefore, when he makes one he believes that he possesses the fundamental makings of a good shooter -- and good shooters shoot. So he shoots and he shoots and he shoots and, in reality not having mastered good shooting fundamentals, he misses and he misses and he misses and, alas, his team loses.

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.

#1's are great. #2's are fine, unavoidable, and possess a liveable probability rate. #3's, while costly, are the most predictable and, therefore -- being costly -- should be readily avoided. #4's -- 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.

#1's are great. #2's are fine, unavoidable, and possess a liveable probability rate. #3's, while costly, are the most predictable and, therefore -- being costly -- should be readily avoided. #4's: I can't think of a worse 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 #3's to be #2's. The emotional imprint from that early "success" may indeed last longer than his or her capital.

In the early 1980s legendary traders Richard Dennis and William Eckhart -- having hotly debated the nature vs. nurture question for years -- made a wager. Dennis believed that great traders can become great traders through proper nurturing. Eckhart, on the other hand, believed that great traders possess the nature to be great traders. To Eckhart "either you're born with trading skills or you're not."

Not to spoil it for you if you're inclined to read the story for yourself, but based on the ultimate experience of the guinea pigs whom Dennis and Eckhart assembled and trained to settle their wager -- consisting of college grads with degrees in everything from accounting to piano music theory, as well as non-grads with vocational backgrounds such as security guard, tractor salesman, bartender, phone clerk and board game designer -- indeed, good trading can be taught.

One principal that both gentlemen agreed on, and pounded into their pupils, was:
"...when “good” trades, not necessarily profitable trades, are consistently made over the long run, the chances of profitable results increase dramatically."
Below, in what will likely be this week's only video, I essentially bring you into our office and share a little of what we do to ensure that we keep our #3's and #4's to a bare minimum. Of course we'd love to reduce our #2's as well, but, as in basketball, if we're to (for lack of a better term) be in the game, some really good looking, fundamentally and technically sound shots are simply not going to go in.

Have a great week!

P.s. Bart is truly a fine young man whom I enjoy playing bball with. And, you know, it's entirely possible, if not probable, that he would express the precise same sentiment toward my outside shooting ability.

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