Jason Zweig

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Jason Zweig

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You can copy and paste the following title to Google in order to access the full article.

Flash Tax: Why Levies on High-Speed Trading Won't Work
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Re: Jason Zweig

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The Wall Street Journal

NOVEMBER 5, 2011

The Extraordinary Popular Delusion of Bubble Spotting

BY JASON ZWEIG
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A good weekend read for all.
Jason Zweig wrote:Can you spot a bubble?

Ever since 1841, when a Scottish journalist named Charles Mackay published the book known today as "Extraordinary Popular Delusions and the Madness of Crowds," the answer has seemed clear. If you watch carefully for signs of euphoria, you can sidestep the damage when markets go mad.

But bubble spotting isn't as simple as Mackay made it sound—even, it turns out, for Mackay himself. Investors should always guard against the glib assertions of pundits who claim they can detect bubbles before they burst.

It's also a reminder that expecting policy makers to predict the future by popping "bubbles in the making" is probably a bad idea.
The article also includes an interesting story on Mackay,
But new research tells the untold tale of Mackay's own behavior in the face of a bubble—and it is a shocker.
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Re: Jason Zweig

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Tip of the hat to Boglehead's, did you know that Jason Zweig has a personal website? Check out http://www.jasonzweig.com/whylisten.html. The content isn't necessarily up-to-date, but many of the ideas and articles are timeless, for example Benjamin Graham speech from San Francisco, 1963, which IIRC has previously been linked on FWF, but is still worth a read.
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Re: Jason Zweig

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An interesting read for the individual investor, The Intelligent Investor: How Small Investors Can Get Stomped - WSJ.com. It isn't clear to me if the problems cited can occur on the Canadian exchanges, although I suspect they can and do.
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Re: Jason Zweig

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Peculiar_Investor wrote:It isn't clear to me if the problems cited can occur on the Canadian exchanges, although I suspect they can and do.
Yes, don't use market orders.
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Absolutely agree. I probably should have included the following quote from the article, but was assuming that readers would follow the link and read the article to understand the problem and the recommendations.
WSJ article wrote:First, avoid open-ended buy and sell orders. The UAL trade was a market order, or an instruction to sell at the best available price. "Rule No. 1 for the small investor is never, ever put in a market order," says Joe Saluzzi, a partner at Themis Trading in Chatham, N.J. Instead, use a limit order that stipulates either the price below which you won't sell or above which you won't buy.

A traditional stop-loss order, as Dr. Penn found, has become dangerous. A "stop-limit" order, combining a stop-loss with a limit below which you won't sell, is a safer approach.
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Re: Jason Zweig

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NormR wrote:
Peculiar_Investor wrote:It isn't clear to me if the problems cited can occur on the Canadian exchanges, although I suspect they can and do.
Yes, don't use market orders.
I don't think exchanges should accept market orders. Globex doesn't, they use something like a mkt protect order where if an order can't immediately fill at the best bid/ask it get's resubmitted as a limit order.

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Re: Jason Zweig

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Peculiar_Investor wrote:An interesting read for the individual investor, The Intelligent Investor: How Small Investors Can Get Stomped - WSJ.com.
This is one of the comments on the linked article:
Secondly, market orders do make sense in certain cases, which I will explain later.

Where problems arise with market orders, the reason is usually illiquidity. So if the security to be bought or sold has a wide spread between bid and ask, trades low volumes, or is extremely volatile, market orders may be filled at a disappointing price. For most big board stocks, illiquidity is not an issue, unless your order is in the millions of dollars.

The other problem with market orders happens when you don't know where the bid or ask is right now. But that is not a deficiency of the market.

Have you ever missed the investment of your dreams because it ran away from you? Even Warren Buffett confesses to this. Unwilling to pay an eighth more, he watched one of his hard-won picks do just what he expected it would do – from the sidelines.

You may have experienced the flipside, when you wanted to take profits or bail out of a stock only to ride it down in agony because your sell order didn't get filled.

This stuff happens millions of times a day. Investors lock onto a price and the market moves away from it, sticking the hopeful with the opportunity cost.

I've made a few thousand trades. For me, if the liquidity is there, and my rationale is sound, and the time is right, I see the spread as an insurance premium. If I place a market order, I take stock off the offer or hit the bid and it costs me something. But in return, I'm covered. I get filled.

And if the liquidity isn't there, I will place a limit order in the context of the market and monitor it until the trade takes place.
Market orders have their place. But, like other aspects of investing, you have to think about what you're doing.

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Re: Jason Zweig

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If I'm making a minor adjustment (say, 100 shares) to a position in RY I will use a market order immediately after checking that the price is suitable. But if I want to buy or sell CU, which is much more thinly traded, I will use a limit order.
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Re: Jason Zweig

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ghariton wrote: Market orders have their place. But, like other aspects of investing, you have to think about what you're doing.

George
One of the advantages of a direct access one click trading platform is you rarely have any movement between the time you place your order and when it executes.

If you are trying to get out of a stock, especially if it's falling you want a market order. A limit order may not get filled costing you more than a few ticks of slippage.
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Re: Jason Zweig

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The Intelligent Investor: Now That's Performance Art - WSJ.com
Do you hear something jingling?

It might not be sleigh bells. It might be billions of pennies cascading into the pockets of money managers, an unwitting gift from clients caught up in the perennial December ritual of "window dressing."

This time every year, most of the market tends to drift into hibernation, but stocks at the top and the bottom of the performance charts often go into overdrive. Many stocks that won big for the first 50 weeks of the year levitate even higher the final week or two. Conversely, bad losers for the year-to-date can take a final pounding as the calendar comes to a close.
Is there any time of year left that is safe for individual investors to trade?
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Re: Jason Zweig

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Peculiar_Investor wrote:Is there any time of year left that is safe for individual investors to trade?
"October: This is one of the particularly dangerous months to invest in stocks. Other dangerous months are July, January, September, April, November, May, March, June, December, August and February." ...Mark Twain

I recall reading about "window dressing" in the 1980s and 1990s. It's nothing new, even if the regulators are watching more closely. It's just one more reason why I continue to practice buy-and-hold.
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Re: Jason Zweig

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Bylo Selhi wrote:It's just one more reason why I continue to practice buy-and-hold.
Moi aussi.
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Re: Jason Zweig

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An thought provoking read this weekend, The Intelligent Investor: A Low-Risk Way to Beat Low-Return Markets - WSJ.com that discusses the role that rebalancing play in returns.
Jason Zweig wrote:Perhaps you can beat the market after all—by trying not to.

In typical markets and a basic portfolio, rebalancing—or trimming your winners and adding to your losers—can add 0.25 to 0.5 percentage points to your annual return, estimates William Bernstein, an investment manager at Efficient Frontier Advisors in Eastford, Conn.

That might not sound like much, but with stock and bond markets looking as if they will deliver lackluster returns over the coming years, investors need to snatch every smidgen of extra return.

Are you what the great financial analyst Benjamin Graham called a "defensive investor"—someone who doesn't want to work too hard at managing a portfolio? Rebalancing can get you a little more return and a little less risk with a minimum of effort.
The article takes the discussion further into behavioural finance
It is important to note that rebalancing is likely, but not certain, to work. If one asset does far better than all the others in your portfolio, then any money you move to the other investments will lower your returns.

Furthermore, there's no guarantee that what goes down will go back up; a Japanese investor rebalancing into stocks has thrown good money after bad for decades.

"I don't think there have been enough major cycles to say definitively that [rebalancing] will be a good thing in the future," says William Sharpe, a retired finance professor at Stanford University who shared the Nobel Prize in economics in 1990.

Above all, rebalancing is psychologically painful. Investors want to bask in the pride of picking winners and to avoid the pain of recognizing losers. Rebalancing forces you to sell pleasure and buy pain—a bad emotional trade.
The behavioural side is the one that I struggle with the most. Generally I know what I should be doing, whether I can always pull the trigger and actually do it is another story. I think back to the 2008/09 period, as well as Oct 1987 and recall that in both times what I thought I should do and what I actually did. I think that reading articles like Zweig's are helpful as a reminder.
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Re: Jason Zweig

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Sedulously eschew obfuscatory hyperverbosity and prolixity.
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Re: Jason Zweig

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From the article:
Don't fuss over frequency. Mr. Bernstein says there is no reason to believe that rebalancing monthly or on another frequent schedule is much better than doing it annually.

Even once every two or three years would be fine, he says—except that the hardest part of rebalancing is remembering to do it and following through on that intention. Wait too long and you might forget about it. There is no better time than the turn of the year to make a rebalancing resolution you can keep.
I personally rebalance every five years or so :wink:

(I rebalance, not because the markets have moved, but because my risk tolerance seems to be decreasing over time.)


I guess I just don't understand the usual notion of rebalancing. It involves selling your winners to buy more of your losers. But that assumes that your losers will do better than your winners in future. That is the "reversion to the mean`theory of investing, writ large. That may hold true in general, but I think that it is risky to make large bets on an assumption such as this one.

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Re: Jason Zweig

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I do not believe so much in selling one winning asset class to re-balance into an underperforming asset class, as I am about using investment contributions, or withdrawals to pseudo-accomplish the same thing. For example, when in accumulation mode, preferentially invest each year into the underbalanced class to help even it out. In withdrawal mode, preferentially sell some of your outperforming asset class to help accomplish the same thing. This may not result in rigorous re-balancing but it helps get over the behavioural tendency to do nothing at all.
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Re: Jason Zweig

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For sure during the swoon in 2008, it forced you to buy more equities as they were losing value. That turned out to be fortuitous if you did not rebalance too often.
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Re: Jason Zweig

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kcowan wrote:For sure during the swoon in 2008, it forced you to buy more equities as they were losing value. That turned out to be fortuitous if you did not rebalance too often.
It also depends on how finely you define your categories. At the most aggregate level, i.e. fixed income versus equities, I don't suppose that there is much harm in periodic rebalancing. But suppose that your categories are geographic. W#hat if you have been adding Japanese equities since 1989, attempting to maintain a target allocation? Similarly, what if your categories are sectoral? Imagine adding technology equities since the 2000 bubble.

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Re: Jason Zweig

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A reminder, The Intelligent Investor: You're Not as Good an Investor as You Think You Are - WSJ.com ($$)
Jason Zweig in WSJ wrote:Many investors have been behaving as if the bloodbath between October 2007 and March 2009, when the U.S. and global stock markets lost at least 50%, had never happened. More worrisome, investors are forgetting the agonizingly real fear they felt during the financial crisis.

That could lead some to take more risk than they should and incur losses they can't withstand. So it is vital to evaluate whether you suffer from investing amnesia and, if you are, to counteract it before it is too late.
Behavioral finance is an interesting subject and IMHO this article is a reminder to oneself to make sure you at least make some attempt to understand your biases.
Jason Zweig in WSJ wrote:You shouldn't trust your recollections of how you felt in 2008 and 2009. Instead, ask your spouse or a close friend how afraid you were, and look at your old account statements to see whether you sold at the bottom. The best guide to how you will act in the next market downturn is how you did act in the last one.
Good thing that many of us posted our experiences here as it was happening.
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Re: Jason Zweig

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Peculiar_Investor wrote:Good thing that many of us posted our experiences here as it was happening.
Most of us here also keep monthly statements, or at least summaries. Mine go back to 1990. I find it helpful to pull these up from time to time and look at where I've been.

FWIW it's appalling how ignorant and stupid I was twenty years ago. Did I really invest that way? Teaches me patience with those just starting out.

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Re: Jason Zweig

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ghariton wrote:FWIW it's appalling how ignorant and stupid I was twenty years ago.
Ignorant, perhaps. Stupid - I doubt it. It is often useful - not to mention diplomatic - to remember the difference!
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Re: Jason Zweig

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jiHymas wrote:Ignorant, perhaps. Stupid - I doubt it. It is often useful - not to mention diplomatic - to remember the difference!
As the magnet on our fridge door reads, "Ignorance is curable. Stupidity is forever."
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Re: Jason Zweig

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Bylo Selhi wrote:
jiHymas wrote:Ignorant, perhaps. Stupid - I doubt it. It is often useful - not to mention diplomatic - to remember the difference!
As the magnet on our fridge door reads, "Ignorance is curable. Stupidity is forever."
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