As we're moving on in 2020, we're continuing to blaze forward with an appreciation for studying history and how markets and economies have been affected by human decision making.
This version of Three Things covers my firm's Decade in Review, an interesting study about the downfall of too much information, and an odd bubble in the 1950s.
Adam Harding, CFP / Smartvestor Pro
Decade In Review
Close your eyes and pretend that it's early January 2010 and you are reading a review of the financial markets. Investors have been on a roller coaster over the past three years, living through the stress of the global financial crisis and market downturn of 2008–2009, then experiencing the recovery that began in March 2009 and is still going strong.
Investors who rode out the market’s slide are beginning to be rewarded. But the rebound is 10 months old, and markets have a long way to go to reach their previous highs. Opinions are mixed about what might unfold in the coming year. A December 2009 headline in the Wall Street Journal underscored the uncertainty: “Bull Market Shows Signs of Aging.”1 The publication pointed out that, although stocks have rallied and indices are on the rise, worries are mounting in some quarters that the market is running out of steam.
No one would have accurately predicted the last decade and no one will accurately predict the next one....and that's okay, we just have to stick to a robust strategy.
This Decade in Review report is robust, here is the full blog post:
Study: Human Decision and Machine Prediction
Source: National Bureau of Economic Research https://www.nber.org/papers/w23180
Authors: Jon Kleinberg, Himabindu Lakkaraju, Jure Leskovec, Jens Ludwig, Sendhil Mullainathan
A couple months ago I read Talking to Strangers by Malcolm Gladwell.... He brought to light this study about human decision making vs. machine prediction that I think is really telling.
Here's a quick overview of the study:
Every day judges are tasked with setting bail amounts on individuals charged with crimes. Depending on the bail amount, the judge can essentially make bail so high that the perpetrator can't be released back into the public while they await their hearing --but they don't want this to unnecessarily infringe on civil liberties, so judges try not make bail amounts unreasonably high. Judges' goals are to assess the likelihood of that charged individual to commit another crime before trial and keep those who may commit further crimes from doing so.
I'm not an expert here, but I believe the process for setting bail goes something like this:
... So here's where things get a little crazy.
The economists looked at 554,689 bail hearings conducted by judges in New York City between 2008 and 2013. Of the more than 400,000 people released, over 40% either failed to appear at their subsequent trials, or were arrested for another crime. The economists applied a machine-learning program to the same raw data available to the judges; indifferent to the appearance of the accused, the computer made decisions on whom to detain or release that would have resulted in 25% fewer crimes.
Let me paraphrase that...
With the same data, but aided by the ability to look at the subject, judges were 25% worse than an objective computer.
Key Takeaway: Similar to investing, more information doesn't always produce better outcomes. It may make us feel like we're doing better, but it probably isn't helping.
The Great Bowling Bubble of the Mid 1900s
Dot-Coms. Dutch Tulips. Real Estate. BOWLING?
As pundits speculate about asset pricing bubbles, let's remember back on a simpler time in American history.... The 1950s and 1960s.
With the invention and introduction of the automatic pin setter it was widely considered that bowling was going to take America by storm. From 1955 to 1963, the number of American bowling alleys grew from 6,600 to 11,000 and the number of people in bowling leagues increased from about 3 million to 7 million...it was BIG.
The bowling alley was the place to be and bowling stocks soared (Brunswick Corp increased 1,590% from 1957 through 1961).
While interest in the sport held on for a few decades, "Bowling Stocks" hasn't proven to be a great investment strategy. Actually, the number of bowling centers in the US is now down to about half of the 1960s peak figures.
Key Takeaway: Don't get caught up in whatever the current theme-of-the-day is. Whether it be "5G Stocks" or "Cannabis Stocks" or whatever, guessing which macro themes will be the best long term investments is a difficult game to play (after all, in 2019 when virtually every asset class did well, cannabis stocks mostly declined).
Speaking of bowling, let's all take a second to remember this legend:
Adam Harding, CFP®
Three Things: Decade in Review, Bail, and Bowling
January 21, 2020