richwillis

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Homepage: http://www.cognitiveinvesting.com

How much time does it take to be a Cognitive Investor? (part one)

I have heard many investors lament, “I don’t have time to invest my money intelligently.”  Inherent in this statement is an assumption: successful investing requires a large amount of time.  They think it requires time to keep current with the latest market action, time to analyze companies, time to investigate various investment techniques, and time to learn about investing.

The truth is that is doesn’t take nearly as much time as one might assume, as long as the time is spent effectively.  Vast amounts of time are wasted by multitudes of investors who attempt to do the impossible.  They try to discern the future direction for various markets and securities or seek out someone who has a clear crystal ball.  They carefully listen to bullish and bearish arguments about the short-term future market moves and assess which viewpoint has more validity.  They continually seek out more data and opinions to clarify the situation.  This is a fruitless task.  No matter what the situation, there will always be a roughly equal number of plausible arguments about markets going in one direction or its opposite.  Read the rest of this entry »

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What are the chances that a limit order will be filled?

How far from the previous day’s market closing price? Buy order   (below the previous day’s closing price) Sell order (above the previous day’s closing price)
0% (at the closing price) 97% 98%
0.25% 94% 97%
0.50% 90% 95%
1.0% 81% 92%
2.0% 68% 81%
3.0% 58% 69%
4.0% 50% 57%
5.0% 42% 45%
6.0% 35% 35%
10.0% 18% 11%
15.0% 9% 3%
20.0% 5% 1%

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How much fluctuation should I expect of the stock market?

Median

Average

Cumulative

Probability of Price Increase

Daily

0.5%

0.8%

0.04%

53%

Monthly

2.6%

3.4%

0.8%

62%

Quarterly

4.2%

5.6%

1.9%

66%

Yearly

15.3%

17.8%

11%

79%

This data set applies to the Vanguard Index Trust 500 mutual fund for the 24-year time period between January 1, 1988 and December 31, 2011.  This data set takes into account dividends and is “investable,” unlike market indexes.  The performance mirrors the S&P 500 index, with a small drag due to expenses. Read the rest of this entry »

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Is investing a game? (part 4)

This is the last essay in this series. In part one of this series, we examined whether investing is a game.  In part two of this series we examined the question of whether investing is a negative-, zero-, or positive-sum game.  In part three we focused on how much of the investing game is luck or skill.  In this segment, we will examine the question of whether it makes sense to have someone more skilled play the game on our behalf.  If you have not read the prior essays, please read them first, in order.

There are numerous ways to have someone else “play the investment game” on our behalf.  We can pay a full-service broker to choose stocks and other securities for us to buy and sell.  We can purchase an actively-managed mutual fund and have a professional money manager choose a group of stocks or bonds for us.  We can pay an investment advisor or portfolio manager to do the choosing.  We can subscribe to a newsletter produced by the guru of the day and buy and sell the stocks he recommends.  In all of these cases, we incur expenses.  From a very broad perspective, these expenses are a zero-sum game.  Whatever we pay, someone else collects.  But for the investor, this is clearly a drag on performance.  The key question is, can the “wisdom” imparted by the finance professional compensate for its cost? Read the rest of this entry »

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Is investing a game? (part 3)

In part one of this series, we examined whether investing is a game.  If you have not read that essay (https://cognitiveinvesting.com/2011/11/17/is-investing-a-game/#more-216), I suggest reading that first.  In part two of this series we examined the question of whether investing is a negative-, zero-, or positive-sum game?  I encourage you to read that essay (https://cognitiveinvesting.com/2011/12/14/is-investing-a-game-part-2/#more-231) also.  The question we now turn to is whether investing is a game of luck or skill.  How much is luck and how much is skill?

If I buy a stock and after a year it is higher, is that due to skill or luck?  If it is lower, is it due to bad luck or lack of skill?  One of the most common answers is to attribute all good outcomes to skill and poor outcomes to luck.  That way our egos stay intact.  It also saves us from having to make a true assessment of whether we are truly skilled at choosing investments.

But to get to the truth of the matter we need to risk deflating our ego and determine whether our decisions really are better or worse than average.  Read the rest of this entry »

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Is investing a game? (part 2)

In part one of this series, we examined whether investing is a game.  If you have not read that essay (https://cognitiveinvesting.com/2011/11/17/is-investing-a-game/#more-216), I suggest you read that first.  Once we established that investing is a game, it is instructive to determine whether the game has more winners or more losers.  Said another way, is investing a negative, zero, or positive-sum game?  Read the rest of this entry »

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New math: One plus one equals four

[Note: This is an article I wrote for Forbes ASAP magazine near the beginning of the dot-com boom, and I thought it would be interesting to post it here on its 15th anniversary.  Most of the ideas in this article have stood the test of time, with the exception of the reference to software. (It formerly required a physical package, unlike the Internet-based software that we have today.)]

In the information age, conventional mathematics is obsolete.  Economics and accounting, which are based on an outdated version of mathematics, are likewise obsolete.  The key is to recognize that information arithmetic is fundamentally different from object arithmetic.  In the information age, one plus one equals four. Read the rest of this entry »

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Is investing a game? (part one)

I just finished reading an excellent book, Reality is Broken: Why Games Make Us Better and How They Can Change the World by Jane McGonigal.  The book draws on positive psychology, cognitive science, and society to describe how game designers have hit upon core truths about what makes us happy and have utilized these discoveries to astonishing effect.  She analyzes many different types of games and demonstrates how using some of the key ideas of their design may help to address some of the world’s most difficult and intractable problems.

However, none of the profiled games in Reality is Broken specifically address the problems faced by the self-directed investor, so I thought it might be interesting and potentially enlightening if I probed the question: is investing a game? Read the rest of this entry »

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How to determine the suitability of an investment portfolio?

Many investors’ existing portfolios are not well suited to accomplish their goals.  But how does one determine whether a portfolio is well constructed or poorly constructed?

I have categorized the important elements into five categories.  These broad categories are asset allocation appropriateness, diversification, security selection, investment decision-making process, and tax efficiency.  These categories are not mutually exclusive, due to the subjective nature of the task and the fact that most investment decisions have a wide range of effects and consequences. Read the rest of this entry »

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Is the sky falling?

One of the first stories I recall from my early childhood is the story of Chicken Little. Chicken Little is hit on the head by an acorn, decides the sky is falling, and she needs to tell the king. On the way to meet the king, she encounters Turkey Lurkey, Ducky Lucky, and a slew of other animals with rhyming names. Each animal is quickly convinced that the sky is indeed falling, and the crowd of animals grows as they journey to the king’s palace. At the end of the story it is revealed that the sky is not falling, and the animals had jumped to an erroneous conclusion. Read the rest of this entry »

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