Monday, December 27, 2010

Finding Your Inner Investor (3)

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

Mr. Mamis has more to offer us in his book, The Nature of Risk, Stock Market Survival and the Meaning of Life.  In the last post  about his book, we ended with the observation that there is never a time in the stock market when the "right" decision is perfectly clear.  Let's continue with the book:

A useful simile for the stock market might be that of the tide, waves and a beach.  The tide comes in and goes out in cyclical fashion; the waves come in and go out like market fluctuations, but in differing fashions - crashing, gentle, white-capped, mild.  Each wave, each tide, affects the grains of sand on the beach, shifting them here and there; there may be a period of erosion, a period of rebuilding, but in a different place.  Those shifting grains of sand make up the (long term) beach, just as constantly shifting but minute changes in price, tick by tick, make up the stock market.  A sudden violent (short term) storm can rip the beach up and change its shape, and even though we were warned by the weatherman, he did forecast such a "storm in the late afternoon," so we thought we could enjoy a picnic lunch first.  And yet the weatherman was not wrong: he may have underestimated the severity, may have missed the precise timing, but there was the warning for us to believe or not.  Hindsight reminds us of how much we know, and yet still we got drenched in the parking lot.

Thus it is not just information that becomes the key to taking a market risk; it is also necessary to understand such information in terms of our relationship to that knowledge.  "What do we know?"   "How do we know it?" and "What is our reaction to that information?" - as well as "What do we need/wish/want to know?" - are all questions that affect the decisions we make every day.  Some of that is trivial, routine, habit.  We "decide" what clothes to wear to work and in what sequence to put the garments on, but never pause to wonder if that routine might be best for us.  And thus we might panic in preparing for a job interview because the getting-dressed risk of what had been easy to "decide" abruptly increases.  What is a suitable interview suit?  How do we want to present ourselves?  The anxiety of making a mistake overpowers the ability to make a "free" choice.  When a decision is required, the way we take information in, and how we use it, affects that decision.  Our self's style goes back deep into childhood.  The manner in which we let information in, our ability to understand it, to deal with it, and perhaps even distort it, all start with who we are, as developed from the moment of beginning, on our hands and knees, to explore the world.

Thus the risk we are about to take via our next decision is not a simple choice of "do it or not" or "yes or no."  Before deciding, we need to know why what we know is never enough, a question that, in turn, leads to what kind of information do we believe or trust? and is it us or the market?  But we must remember that there are times when the market, or life itself, is incoherent, unclear, and/or conflicting: times when it isn't us, it's it.  The risk can never be cured by knowing enough.

But when information is insufficient we need the trust and belief in ourselves, and the inner acceptance that we'll be okay anyhow.  We need the discipline to accept whatever is available.  We need the experience to understand all the ifs, ands, and buts, and yet still confront the risk and make the decision.  Setting ourselves free from the quest for information, oddly enough, is what reduces risk even as it appears from the freedom itself that risk is being scarily increased.  Oh my, freedom; that's dangerous. 

Both Dr. Le Bon and Mr. Mamis use the analogy of grains of sand.  Wind blows the sand around on the beach like Dr. Le Bon's individuals in a crowd.  Waves move the sand to remake the beach like the market for Mr. Mamis.  Given all of the subconscious forces Mr. Mamis says are at work in each of us as we approach risk and decisions, it would appear that we each, at times, may act like Dr. Le Bon's psychological crowd; although a crowd of only one.

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Excerpts from The Nature of Risk, Stock Market Survival and the Meaning of Life by Justin Mamis, copyright 1991, are used with the permission of Mr. Mamis and Fraser Publishing Company.



Monday, December 20, 2010

Season's Greetings

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

At this time of the year, it is worthwhile to step back and reflect.  To all of the visitors to this blog site from the USA, Canada, Mexico, Russia, United Arab Emirates, Germany, Netherlands and the country of Georgia, I would like to extend my wish to all of you for this holiday season with apologies to the poet / philosopher, Robert Browning.

Although Peace on Earth yet remains beyond Mankind's reach this season, I hope for each of you that a modicum of peace in your lives is within your grasp.

We will return to our study of the market next week.

Monday, December 13, 2010

Finding Your Inner Investor (2)

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

We return to Justin Mamis' book, The Nature of Risk, Stock Market Survival and the Meaning of Life.  We ended the last post wondering what is it about risk that could be used to help the individual investor improve his or her return in the stock market.  Let's pick up where we left off with Mr. Mamis:

Let's examine one daily life situation - crossing the street - to see what the risks are:  When risk is examined in terms of the moment-to-moment decisions - stepping off the curb being an assumption of risk with all the dictionary negatives of hazard, peril, exposure to danger, but also with a positive: to get successfully to the other side - risk is at its core making a decision.  It is a form of binary Yes/No, for Maybe merely postpones choice.  Crossing the street involves an absolute danger: a car coming can hit you and knock you down, injuring or killing you.  Therefore, we have learned certain safety rules:  Cross at the intersection, with the light in your favor, and not in the middle of the street.  So we are taught to look both ways before crossing.  But then, getting a little bolder, we come to believe that if we follow the second rule - looking both ways - we can safely cross in the middle of the block.  And suppose we are in a hurry.  Can we simply rush across - looking as we leap?

Clearly, then, we can either take what we know about proceeding safely and turn it into an assumable "safe" risk, or, in a moment of thoughtlessness, actually take an unnecessary risk.  Although infinitely more complex, the stock market is more like crossing the street.  The stock market is as moment-to-moment within a long-term trend as life is.  People think:  I'm buying this house to live in while the babies grow up and go off to college; I'm marrying this person "till death do us part" - long term investments but moment-to-moment decisions.  We get caught up in emotions, and believe our feelings represent our judgment about the long-term values.  Thus there is a distinction between the religion of long-term beliefs, hopes and expectations, and the secular short-term practice of our moment-to-moment behavior.  Although we might be convinced that the decisions we make have that long-term basis, they stem from the moment.  Life's decisions have an auction fever:  you're buying as an investment, but standing up in the audience waving your hand for attention, desperate, at that moment, to buy at an even higher price.

Similarly, so-called long-term investors make buy or sell decisions for moment-to-moment reasons.  A portfolio manager may contemplate buying a stock  but has decided to wait until he or she gathers more information; along comes a short-term rise sparked by news - the Fed cuts the discount rate, for example - and the money manager can't stand being patient any longer, bangs on the phone to get the trader's attention, and buys right then and there into the excitement, up 2 points.  On the sell side, stocks get tossed out emotionally - even though they were originally bought to be held for a "three year time horizon" - just because the market looked awful this morning while it was selling off.  The portfolio manager can't endure seeing - literally seeing at that moment - the money disappear.  Watching the market every moment can turn any long term investor into a hypochondriac.

Americans are often described as basically optimistic, when in reality it is that they are perpetually hopeful.  The market seems to represent hope itself.  And yet, among professionals, even those who function on the stock exchange floor, a frequently heard stock market expression is, "No one ever said it was going to be easy."   It never can be easy because the rule of the market is that you have to act before you know enough.  Because it is a process there is no one moment or single point, at which one can make an obvious "sure" decision.

Mr. Mamis seems to describe how some people make an investment decision in a paraphrase of the old shooting lesson, "Almost ready, try to aim, fire anyway."  We will return to him once more in the next post and see what else he has to share with us.

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Excerpts form The Nature of Risk, Stock Market Survival and the Meaning of Life by Justin Mamis, copyright 1991, are used with permission of Mr. Mamis and Fraser Publishing Company.

Monday, December 6, 2010

Finding Your Inner Investor (1)

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

Having now spent some time in crowds with Mr. Mackay and Dr. Le Bon, it's time to move on to that crowd of one-you, the individual investor.  If the stock market is anything, it is certainly risky.  As an individual investor, you should understand how you approach risk.  It pays to know yourself and your risk tolerance.  Although you have lost the memories of when you first faced risk as a child, your parents' warning words are still buried in your subconscious.  And like your parents back then, those cautions are guiding your actions today.  Justin Mamis, an executive at the New York Stock Exchange and a specialist in technical analysis for many years, wrote several enlightening books about the market.  The one we will focus on in this and subsequent posts is The Nature of Risk, Stock Market Survival and the Meaning of Life, written in 1991.  Mr. Mamis goes back to the beginning to explain risk and how it is addressed by all of us, each in our own individual way.  Here are excerpts from this classic:

The first word parents want a baby to understand and respond to is not Mama or Daddy--it's No.  How is anyone going to learn to venture, to take a risk, when "No" resounds?  Parents and baby may exchange smiles, but as soon as the baby wants to take a risk--that is, do something venturesome--the infant hears: "Don't touch that," Watch out," "Be careful."  From infancy's earliest days, taking a risk becomes a negative concept.  "Don't" becomes a family motto.

An infant knows no risk; all is ahead.  Parents know all is risk, and try to protect.  The child learns what the parents teach, and a world that starts out full of possibilities becomes full of limits and danger.  We come into adolescence with fear of failure as a new risk: the opposite sex won't like you; the teachers don't believe in you; how are you ever going to be an adult unless you do what your parents say and take no risks?  Stage fright, or its equivalent, is everywhere, and everywhere understood: the less you expose yourself, the less danger of failing.

You can see this in sports very clearly.  The difference between the top tennis players in the world, and the next rung down, Billie Jean King once said, is not the strokes--at that level, strokes are approximately the same--but in the mental attitude.  The top players play to win; the others play the game so as not to lose.  When it gets to be match point, some players become tentative and hit the ball carefully.  Often this kind of player is so fearful of losing that he actually double-faults at match point.  The sense of ego risk does him in.  In contrast, the top players continue to drive the ball from the first point to the last; when behind, they try to serve an ace.  And by playing past the anxiety of the risk, they win.  Ego risk, whether in sports, business, or the stock market, causes hesitation, faltering, and therefore, failure.

We grow up in such a pervasive atmosphere of caution that it becomes astounding when we read about, or see, someone who actually does take risks willingly, skillfully, successfully.  And even more astonishing: there actually are a few people who never consider risk at all; they just do.  How does one become able to venture forward without anxiety?  How does one use risk positively?  When all is risk, as war is, or the street, or cancer, there is no future.  "What the hell" derives from that sense, in contrast to a more standard "The future is at risk" so "Be careful."  Thus it is the fear of the future that risk magnifies.

Foolhardiness, defiance, sheer gambling, and other extremes aside, if there are ways to learn to evaluate what a risk is, and whether it is worth taking, and, indeed, whether it is actually less risky than not taking it - turning the notion of risk into a positive - it may be that we can translate such answers into our own too-often scared, too anxious behavior.  Here we have a "security" - already there is a built-in semantic implication of anti-risk-taking that needs to be challenged.  What is there about risk that can be used to produce better stock market performance?

The classic example of the effect of parental warnings is the child with his or her most precious possession, maybe a teddy bear or a doll, and a peanut butter sandwich (smart kid) standing at the corner of the block.  When asked, the child explains, " I'm running away from home, but I'm not allowed to cross the street."  We will learn more about risk from Mr. Mamis next time.  To gain some insight into your own tolerance for risk, click on the link to take the Risk Tolerance Questionnaire at the Investment Strategies, Inc. web site.

If you would like to leave a comment, you can do so without going through all the steps of signing in.  Just click the comments link, type your comment and pick the "Anonymous" profile.  Feel free to add your name at the end of your comment.  Comments are posted within 24 hours after received.

Excerpts from The Nature of Risk, Stock Market Survival and the Meaning of Life by Justin Mamis, copyright 1991 are used by permission of Mr. Mamis and Fraser Publishing Company.