Insurance. If you have cheap insurance, then taking risk becomes worthwhile. Take Goldman Sachs for example. They can take all the risk they want, knowing they can never goi broke. Sure they can lose. but they cannot lose it all. That's nice insurance.
The rest of us have to do with less.
If you jump out of airplanes, have a backup chute (or two). If you have stock market investments (before or after proper asset allocation), own insurance. The best, least expensive insurance is a collar (buy puts, sell calls when you own equities). The latest study (http://tinyurl.com/ye78jvg) suggests this may even make money in a declining market, but I quibble with their methods. Collars significantly limit limit loses - there should be no profits durings bear markets.
But protect yourself. Disregard that overconfidence and own insurance anyway.
Carl Richards
· 3 months ago
Mark- Thanks for the comment, your link goes to a typepad log-in page. Can you add a correct link to the study.
Thanks,
Carl
MarkWolfinger
· 3 months ago
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My view is that the way to deal with overconfidence is to put forward a model for understanding stock investing that puts dealing with overconfidence at its core. I call this model "Rational Investing." The Rational model is the opposite of the now-dominant Passive Investing model. Passive teaches investors that they do not need to adjust their stock allocations in response to price chages. Rational teaches that they must do so to have any realistic hope of long-term success.
There are a good number who try to speak up about the dangers of overvaluation when we are in a bubble. It's too late then. By the time we are in a bubble, most investors (and most investing "experts" too) have already let their emotions take over their ability to reason. People are not going to listen to the message at that time. They will exhibit the overconfidence that is really bravado, not at all a true confidence.
But if people are taught from the first time that they learn about investing that the biggest danger of stock investing is failing to adjust one's stock allocation in response to price changes (that is, Passive Investing), they get it. I think that the best way to teach this message is through reference to the historical stock-return data, which shows that Passive has never worked and that following Rational strategies consistently over the course of an investment lifetime would permit the average person to retire five years sooner than would otherwise be possible.
The "confidence" that many evidence today is not a real confidence. It is the opposite of confidence, it is a bravado that masks a deep insecurity. The deep insecurity is rooted in the impossible belief that many hold that somehow, someway, this will be the first time in history that Passive works out in the long run. On some level of consciousness, we all know that that cannot be so.
All Comments
Insurance. If you have cheap insurance, then taking risk becomes worthwhile. Take Goldman Sachs for example. They can take all the risk they want, knowing they can never goi broke. Sure they can lose. but they cannot lose it all. That's nice insurance.
The rest of us have to do with less.
If you jump out of airplanes, have a backup chute (or two). If you have stock market investments (before or after proper asset allocation), own insurance. The best, least expensive insurance is a collar (buy puts, sell calls when you own equities). The latest study (http://tinyurl.com/ye78jvg) suggests this may even make money in a declining market, but I quibble with their methods. Collars significantly limit limit loses - there should be no profits durings bear markets.
But protect yourself. Disregard that overconfidence and own insurance anyway.
Thanks for the comment, your link goes to a typepad log-in page. Can you add
a correct link to the study.
Thanks,
Carl
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http://blog.mdwoptions.com/options_for_rookies/...
Direct link to the study:
http://www.optionseducation.org/institutional/r...
There are a good number who try to speak up about the dangers of overvaluation when we are in a bubble. It's too late then. By the time we are in a bubble, most investors (and most investing "experts" too) have already let their emotions take over their ability to reason. People are not going to listen to the message at that time. They will exhibit the overconfidence that is really bravado, not at all a true confidence.
But if people are taught from the first time that they learn about investing that the biggest danger of stock investing is failing to adjust one's stock allocation in response to price changes (that is, Passive Investing), they get it. I think that the best way to teach this message is through reference to the historical stock-return data, which shows that Passive has never worked and that following Rational strategies consistently over the course of an investment lifetime would permit the average person to retire five years sooner than would otherwise be possible.
The "confidence" that many evidence today is not a real confidence. It is the opposite of confidence, it is a bravado that masks a deep insecurity. The deep insecurity is rooted in the impossible belief that many hold that somehow, someway, this will be the first time in history that Passive works out in the long run. On some level of consciousness, we all know that that cannot be so.
Rob