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What makes investing difficult to learn? (part 4)

4.  The process sometimes requires substantive amounts of unlearning.

Learning does not happen in a vacuum.  Whenever we learn something, we fit that new piece of knowledge into our existing base of prior knowledge.  But what happens if our prior knowledge is flawed?  How difficult is it to learn new and better ideas when such ideas contradict existing knowledge? Read the rest of this entry »

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How should a portfolio be measured?

In the previous essay, I discussed why it is imperative to measure your portfolio periodically.  In this essay, I will describe how to measure its most important characteristics.

The first principle is to measure the whole portfolio as an entire unit, and not just focus on a particular subset.  What matters is the forest, not the trees.  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In the information age, conventional mathematics is obsolete.  Economics and accounting, which are based on an outdated version of mathematics, are likewise obsolete.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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The importance of a fixed asset allocation

Most investors do not prioritize asset allocation as the most important aspect of their portfolio decision-making process.  For them, asset allocation is what results after a series of security selection decisions.  Other investors may prioritize asset allocation a bit higher, but are constantly changing it in an attempt to take advantage of the next trend in security popularity.  The cognitive investor’s process starts with a fixed asset allocation that drives security selection and market timing decisions.  This is a fundamentally different mental model, and it forces the investor to focus on answering a completely different set of questions from those addressed by the conventional media or the purveyors of most financial products and services. Read the rest of this entry »

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