Strange Coincidence?
I Won a Book!
Okay, one of the only Substacks that I pay to get is LibertyRPF. He decided to have a giveaway (10 copies) of The Founders: The Story of PayPal and the Entrepreneurs Who Shaped Silicon Valley. Well, guess what? I won a copy (there were 51 entries, so I had about a 1 in 5 shot)! Thanks to LibertyRPF and Jimmy Soni for putting this together. So, it’ll be awhile, hopefully I’ll share a review of it sometime in the not too distant (but not near) future.
What…Another Cancer Update? Sure, why not!
Two more days of radiation!!!
Then a month off and chemo starts for 6 months to 12 months (hoping for the former as 12 months seems like a LONG time). Heck, 6 months seems like a long time, but in the grand scheme of things, I suppose both are pretty damn short. The chemo ups the dose from 140 mg to 320 mg and then to 400 mg, so they’ll be upping the dose a fair amount. Hopefully no side effects at the higher dose, but we’ll see. Heck, maybe my vertical leap will grow to 2 inches!! It’ll be 5 days on followed by three weeks off. Rinse and repeat.
Got the blood work done again on Thursday and got a great report, so that is going great. Overall, I’ll be happy to be done with radiation and on to just chemo. Heck, maybe my hair will even grow back!
Superstition or Strange Coincidence?
Was listening to one of my older podcasts — Freakonomics. The episode is titled “What Do Broken-Hearted Knitters, Urinating Goalkeepers, and the C.I.A. Have in Common?” and the topic of the day was superstition. Didn’t realize this, but apparently one superstition is that knitting a sweater for someone you love was likely to create a broken romance. What a minute…what? First, who knits anymore? Okay, there are a few, but probably not many (feel free to correct me if you do knit — he’ll do anything for comments). Second, and this is the interesting part, but apparently knitting a sweater for someone who is not a professional knitter takes a LOT of time. One person being interviewed basically said the following:
MIERZEJEK: I’ve done the math before for curious family asking me why I don’t sell my sweaters. One sweater I would personally sell for about $1,500. I would increase the price if the yarn was black, and I was going blind knitting it. I would increase the price if it was a very complex pattern.
Yep, I don’t think I want any home-knitted sweaters regardless of how well they are done. I’m pretty sure my entire wardrobe isn’t worth $1500+ bucks. They take awhile to make. As Stephen Dubner says:
Unless you’re knitting full-time, it could easily take a year. According to research by the sociologist Michael Rosenfeld, 60 percent of new couples don’t last a year. So if you decide to knit a sweater for your new boyfriend or girlfriend, there’s a pretty good chance your relationship will be done before the sweater is. So, yeah, maybe sweaters aren’t so curse-y after all.
So, maybe knitting a sweater is bad luck or maybe it’s just a matter of math. An interesting topic which we can probably connect a bit to finance in a bit.
Superstitious Reality?
Again, let’s go back to Stephen Dubner’s presentation on superstition. You’d think that people in the US would be pretty well grounded. We aren’t.
According to the market-research firm Ipsos, 21 percent of Americans believe in spells or witchcraft; 36 percent believe in ghosts; roughly 40 percent believe in U.F.O.’s — although I’d argue that “believing in U.F.O.’s” is categorically different from ghosts and witches. Meanwhile, nearly 30 percent of Americans do believe in astrology, unlike me, and that belief has been rising. An astrology app called Co-Star has over 20 million downloads and last year it raised $15 million in venture capital. The “psychic services” industry is worth about $2 billion. So: what are we to make of this intense belief in the supernatural?
Now granted, we generally can take research on interviews with a grain of salt. People will answer based on what they think you want to hear, they’ll make things up, there are people who don’t believe in “witchcraft” that will argue it is real just for something to do. That said, I think can guess that people aren’t really spending $2 billion for psychic services just for grins.
There’s a lot of superstition out there from curses, to rally caps, to strange practices designed to make machines operate that really aren’t based in reality. As Stuart Vyse (a retired psychology professor and author of the upcoming book “The Uses of Delusion: Why It’s Not Always Rational to Be Rational”) puts it:
Stuart VYSE: It is irrational. And yet it’s very popular.
VYSE: Many people are superstitious, probably more than admit to it. I’ve seen a number of surveys over the years that suggest that roughly 50 percent of people will admit to being at least a little superstitious.
So why are we so superstitious? The answer lies in math. A lot of superstitions are very broad (intentionally) or based on strange occurrences (which is also math) which makes them very hard to prove false. Let’s take a look at the Madden Football curse.
Apparently when someone appears on the Madden cover, their season is doomed. Heck, it’s happened in 14.5 of the last 20 years and the recent year featured the dual cover of Tom Brady and Patrick Mahomes (who threw 13 interceptions this year vs. just 11 over the last TWO years…coincidence?). Well, the reality is that often you appear on the cover of Madden not BEFORE you have a breakout season, but after you’ve HAD a breakout (or two) seasons. If we think of luck being random (obviously random around the mean for that player, not random in general), then after you’ve put together a historic season or two, you’ve probably played really well AND had some good fortune. Defenses start to adapt, age catches up, and luck balances out a bit (in other words, you regress towards your mean — the mean of that player, not a general player or someone who doesn’t play). The Madden “curse” is probably just a bit of reversion to the mean for that player.
Financial “Superstitions”?
What are some financial superstitions? First, let’s throw this into reality a bit and acknowledge that we don’t know anything with certainty. Something I may refer to as a superstition may be something someone else refers to as a fact. So think of this as an exercise in thinking about math.
Technical Analysis
Maybe it works, maybe it doesn’t. However, let’s look a bit at technical analysis (and always watch out for the bearish harami!). Fundamental analysis refers to analyzing the firm itself and making predictions about the direction of the company based on your analysis of valuation vs. the market’s analysis of valuation. You want to buy when the company is undervalued and sell when the company is overvalued…obviously easier said than done. Technical analysis doesn’t care what the company does, what products/services it sells, or even whether or not it is a company or commodity. Instead, it is trying to make decisions based on the supply/demand conditions in the company/commodity. So, the argument is that it is too hard to gain an edge based on the company (in other words, are you going to have an edge in analyzing Microsoft relative to the professional analysts following the company?). Instead you are going to follow the price patterns and look for lines of support/resistance, moving averages, Bollinger bands, relative strength indicators, and an assortment of other tools. Does it work? On one hand, there are a number of very smart people who use technical analysis. On the other hand, there are also a number of research papers that question how effective technical analysis (Cheol-Ho Park and Scott H. Irwin or Ben R. Marshall, Rochester H. Cahan and Jared M. Cahan).
Timing Indicators
Whether it is day-of-the-week, time-of-the-year, pre/post-holiday, or “Sell in May and Go Away”, there are a number of time-related indicators. Does it make sense that stock markets follow specific time patterns? Or are there enough ways to slice-and-dice the stock market (watch out for the Friday the 13th effect!) that we are bound to find some statistically significant “patterns” in the data?
Limited Portfolios
Let’s consider ARKK (Ark Innovation ETF) which is heavily concentrated in momentum stocks.
If we look at it over the past year, it has fallen by by just over 58%. It’s also not a stock, but a portfolio of stocks. How does this happen? Well, one quick answer is that it is poorly diversified. Instead of owning a well-diversified portfolio, they own a concentrated portfolio based on innovation-oriented stocks. These stocks have done terrible over the past year. Here’s a list of their top holdings as of Sunday, February 20th.
None of these stocks are up over the past 3 months. Heck, the “top” performing stock (Exact Sciences) is down 11.8% over the past 3 months. That said, these stocks are up quite a bit over the past few years. If we start back in February 2017 and go to February 2022, we see a total return of 180%. This compares to a 132% for the Nasdaq and an 85% return for the S&P 500. In other words, their 5-year return is pretty damned impressive. Alternatively, you could also argue that the average return per investor dollar is even worse as far more money came into the fund as their returns skyrocketed in 2020 to early 2021. In other words, their returns stink, are really great, and stink all depending upon your time horizon. Confused yet?
So Are They Lucky or Good?
Again, my goal here isn’t to tell you what is a superstition vs what the underlying reality is. That’s a bit above my paygrade (and ability). Instead, I want you to think about each instance and say “Does this make sense?”. Is there an underlying reason why capital isn’t flowing to the places it should, can we have an edge, and what exactly is that edge? It’s a damn tough game! Again, follow the Efficient Markets Hypothesis and have some fun with your spare time instead of reading 10Ks, market analysis, and other activities. However, if not, you need to make sure you have a plan that makes sense to you.
And for the record, if you avoided bad luck just remember to knock on wood! Not really, but maybe just to be safe. 😕😕