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-- Posted Wednesday, 23 August 2006 | Digg This Article
Ouzilly, France Wednesday, August 23, 2006 --------------------- *** Today's topic: Irrationality...The finance behaviorists are drumming their fingers nervously... *** When to go into pornography, illegal drugs, and - gasp - even hedge funds...A gluttonous analogy applied to investing... *** Dear reader, you might have a thinking problem...Addison's recent conversation with Dr. Richebächer...and more! --------------------- "The bulk of the money in this world is managed in a cover-your-ass fashion." Thus speaks a modern day Zarathustra...a prophet of the school of "behavioral finance," Mr. Whitney Tilson, fund manager, founder of T2 Partners, and Financial Times columnist. As an investment theory, behavioral finance turns out to be a full-dress version of the familiar truism about the fool and his money. What worries the behaviorists is the way investors make mistakes by following their impulses...with nary a sign of rational profit maximizing. If only the poor suckers would stick with sober investment analysis, complain the behaviorists, drumming their fingers in a nervous, academic sort of way. Think about it. Here, an investor holds a stock too long. There, another buys a fund simply because everyone else is buying it. A third bumbler investigates so much he gets "married" to his picks, having put so much time and effort into them. We might feel sorry for the poor fools, for we realize that we make all those "mistakes" ourselves...only, we wonder if they really are mistakes. You see, the problem with the behavioral finance chaps is that they don't go far enough. They pretend to analyze what people do, and then compare it to what some fictional, non-existent investor "ought" to do. So, today we ask the question: Why should he? If we investors do not really invest the way a theory says we should, where is the fault? Where is the error? In ourselves...or in the theory? Why, after all, should investors behave in any other way than the one they are accustomed to? The behaviorist professors assume that man is essentially a rational, profit-maximizing creature who simply makes "mistakes." But these "mistakes" are not mistakes. If an investor does not invest the way the professors think he should, it is because he is not the animal they think he is. In other words, we investors do not invest merely to make money. If our only goal were to make money, we would go into pornography, illegal drugs...or even worse, hedge funds! Yes, if men were only money makers, we would go door to door in trailer parks, offering zero-down, no-interest, negative-amortization loans on new cond....er, doublewides. And we'd give a discount for buying two of them. Where we met resistance, we'd throw in a subscription to one of those nifty Internet porn sites - free, with every purchase, and maybe some crack cocaine, too...just to ease the settlement. But the lumpen investor does not have only moneymaking as his goal. Making money is merely a part of a whole complex of desires and prejudices that drives him to his much-deserved fate. The lump wants not only to make money, you see, but also to feel both wise and hip...both daring and cautious. He is certainly willing to try contrarian investments, only so long as everyone else is, too! And that is why in the hard world of investing, the lumps are losers. For, in investing, what tends to go up is just the thing that has gone down. But, buying down-and-out investments is not what the average investor wants to do. Why? Because it makes him feel marginalized, odd, in danger. It makes him feel like an outsider...when he wants to feel anything but. He would as soon forego his profits to pay for that privilege. In fact, the lump tosses and turns at night, unless he is firmly and squarely bedded down in the middle of the vast herd of other slumbering fools. The lumps may not maximize their investment returns, but they judge being able to sleep well worth the cost. Other investors don't care so much about making the right decision as they do about avoiding the wrong one. Such men fear losses less than laughter. They dread most of all being in a position where anyone - especially their wives - might point a finger and call them a jackass. To tell the truth, they would rather actually be jackasses, financially speaking, than be accused of being one by an ignoramus. And, what do you do to avoid your wife's criticism? Why, you do exactly what Citibank or Lehman Bros does. Or what the Federal Reserve Bank tells you to - even if it means taking out an adjustable rate mortgage. Yet another lot of investors exhibits a loyalty we can only admire. They stick with an investment sector - or even an individual company - through thick or thin, rich or poor, success or failure, until death do them part. And death often does. Others tend more to be bad boyfriends, dropping their poor girls as soon as another bit of skirt wiggles in front of them. But, of course, if you believe the behaviorist geeks, the cads are only being rational, profit maximizers. Not a whisper of spring fever in the blood at all. But if investment decisions really were such cold-blooded, binary choices - one clearly right, the other clearly wrong - computer programs might make them for us just as well. Only, computers don't get to read tomorrow's headlines any sooner than we do...and even a silicon chip can't tell which investments intend to go up or down. Which means that the whole idea of a rational profit maximizer, a perfect investor who doesn't make mistakes, is so lacking in any connection to reality, we can safely classify it as a bloodless intellectual fraud. That is why our ingenuous and irrational investor is right, after all. Knowing that the success or failure of his investments - money wise - is mostly beyond him; he goes for the non-monetary rewards: bragging rights, sound sleep, social cache, derriere covering, wife pleasing...skirt chasing. He may be a fool to finance professors. But in the real world, he is a man. More news from our currency counselor... -------------- Chuck Butler, reporting from St. Louis: "The markets seem to want to pick and choose data that they want to focus on. But, I think they will rue the day they failed to do the math on the 'ghost jobs.'" What's a ghost job? Find out in today's Pfennig: The Birth/Death Adjustment Revisited http://www.dailyreckoning.com/Writers/Butler/Articles/082306.html
-------------- Back to France for more from Bill and Addison... *** First, Mr. Bonner in Ouzilly: We are not writing much today, because we have to drive up to Paris for a meeting. And at home, we now have a fresh new face: a young friend of Maria's, an aspiring actress, or we should say, actrice, for while she is from Australia, the airport where we picked her up yesterday is French, after all. Forced to entertain young starlets. Ah! How thanklessly we toil for you, dear reader. No doubt, our reward awaits us in heaven. *** Two articles nestled in our mailbox merit reproducing, as they speak to the theme of irrationality we are fleshing out today. The first is from an article by Sol Palha: "Have you ever noticed how people act when they are at a buffet? Their behavior changes all of a sudden. They can eat all they want for one price tag. They will fill their plates, as many times as possible with little or no regard for the quality of the food. "To add insult to injury, most of these people will feel physically worse after they have gorged themselves indiscriminately...in their quest to make sure they get more then they paid for. The funny part is that they all did. High cholesterol, obesity, digestive disorders, diabetes, degenerative disorders of the organs, hypertension, autoimmune diseases, and so on. "Now let's apply this analogy to the investment arena. "Instead of eating hamburgers, we stuff ourselves with worthless pieces of paper that represent these companies. We have no idea what they make or even anything about the internal structure and function of these companies. We do not know if they are cooking the books, or lying to people, to what ends they are going to beat the street by a penny We simply buy because it looks good, feels good, and we want to get as much of it as possible before the price goes up. End result...the experience is painful. Unlike the buffet, which just cost us about 10 bucks, this experience costs in the thousands or more. And then what do we do? Yes we look for another buffet. "It is very interesting how we chose to use the term 'cooking the books' to describe fraud. Why not manipulating the books? It is perhaps that subconsciously we revolve our whole life around the pleasure-pain principle...How many times we have promised ourselves that we will not stuff ourselves again? But as soon as we heal and the pain is gone, we are ready to repeat the whole process again. The same can be said for our stock investing style. We get burned to a crisp, yet as soon as we heal, we are willing and ready to get fried to death again. "Insanity is often described as doing the same thing over and over and expecting different results. If you keep doing what you are doing, you will keep getting what you are getting. In the markets, bears make money, bulls make money and pigs get slaughtered. In life, pigs get fat and lazy and sick, yet they keep swallowing slop. "Our investment style is usually representative of our lifestyle. Live and think like an idiot and you will invest and reap the rewards of a moron..." So much for addiction to irrational behavior. But our second piece, whose author is anonymous, looks at irrationality from another angle: "Do You Have a Thinking Problem? "It started out innocently enough. I began to think at parties now and then to loosen up. Inevitably though, one thought led to another, and soon I was more than just a social thinker. "I began to think alone - 'to relax,' I told myself - but I knew it wasn't true. Thinking became more and more important to me, and finally I was thinking all the time. "I began to think on the job. I knew that thinking and employment don't mix, but I couldn't stop myself. "I began to avoid friends at lunchtime so I could read Thoreau and Kafka. "I would return to the office dizzied and confused, asking, 'What is it exactly we are doing here?' "Things weren't going so great at home either. One evening I had turned off the TV and asked my wife about the meaning of life. She spent that night at her mother's. I soon had a reputation as a heavy thinker. One day the boss called me in. He said, 'Skippy, I like you, and it hurts me to say this, but your thinking has become a real problem. If you don't stop thinking on the job, you'll have to find another job.' This gave me a lot to think about. "I came home early after my conversation with the boss. 'Honey,' I confessed, 'I've been thinking...' "'I know you've been thinking,' she said, 'and I want a divorce!' "'But Honey, surely it's not that serious.' "'It is serious,' she said, lower lip aquiver. 'You think as much as college professors, and college professors don't make any money, so if you keep on thinking we won't have any money!' "'That's a faulty syllogism,' I said impatiently, and she began to cry. I'd had enough. 'I'm going to the library,' I snarled as I stomped out the door. "I headed for the library, in the mood for some Nietzsche, with NPR on the radio. I roared into the parking lot and ran up to the big glass doors... they didn't open. The library was closed. "To this day, I believe that a Higher Power was looking out for me that night. "As I sank to the ground clawing at the unfeeling glass, whimpering for Zarathustra, a poster caught my eye. 'Friend, is heavy thinking ruining your life?' it asked. You probably recognize that line. It comes from the standard Thinker's Anonymous poster.' "Which is why I am what I am today: a recovering thinker. I never miss a TA meeting. At each meeting we watch a non-educational video; last week it was 'Porky's.' Then we share experiences about how we avoided thinking since the last meeting. "I still have my job, and things are a lot better at home. Life just seemed...easier, somehow, as soon as I stopped thinking." *** Now, Addison with the latest from his days with the good doctor: Dr. Richebächer's femme de ménage has just served us a bowl of tagliatelle with bolognese sauce. A bottle of Cotes de Rhone sits between us. It's another sun-drenched day over the baie de Cannes outside, but a bit humid for our taste. Kurt says he plans to visit the chateau where the wine was produced over the weekend. It's over by Avignon. He has friends there. "You know," he leans forward conspiratorially, "she's half Jewish, half Arab." He is speaking of the femme de ménage. "Un peu bizarre, in our times," he notes. He sits back. She was apparently married to a rich man, with whom she has two daughters. The girls are now in their twenties. "He doesn't give her a dime." *** "Ja, what we find unbelievable in America today," he says switching gears automatically. "When the government says something everybody nods." "We regard government as a necessary evil," he continues. "Nothing more. All you can hope is that the government, its pernicious bureaucracies, and its propaganda do no lasting harm. But in America, when the government [and in that we include the Federal Reserve and Wall Street] says something...everybody nods. It's disgusting. Again, this is the mentality of the Nazis. When Hitler said something everyone nodded, no matter how ridiculous the statements that came out of his mouth. "Let's take the so-called 'Productivity Miracle,' as an example. For the classical economists in Europe, productivity was simply a number. A measurement. In order to reap any benefit from productivity gains - such as higher profits or wages - certain conditions must also be present. A high savings, high investment society can reap enormous gains from increased productivity: rapid increases in production, higher profits, higher wages and likewise increased savings. None of those conditions exist in America today. "Yet, you have American economists [like Paul Krugman or Alan Greenspan] treating productivity as if it were the Holy Grail of economics itself. Despite almost no business investment and a dismal, negative savings rate, you have leading American economists touting GDP growth as the result of 'increased productivity.' It is ridiculous. "The problem is 'hedonic price indexing' and increases in 'asset prices' - including houses - account for almost all GDP growth in America. Rather than looking at productivity as a measurement of existing economic activity, it is touted as the root cause of prosperity! Yet real features of the economy like wages, savings, employment are all stagnant or down. "Mention productivity and everybody nods in unison. It is one of the pillars of American superiority. It is scandalous." [Ed. Note: The good doctor has some more thoughts on the subject of America and the only five investments you'll need in 2006 - one of them is a mighty hedge against the forces of dollar weakness and inevitable inflation. At the very least, it will help protect your money from the boneheaded inflationary policies and programs of the Federal Reserve - especially under new Fed Chief Ben "Printing Press" Bernanke. To learn about the other investments, see his new special report: Wealth Insurance http://www1.youreletters.com/t/400729/4459110/786948/545/--- Advertisement --- Eleven Super Stock Picks From the World's Top Experts 25% Gains in Six Months - Guaranteed! They've done it again! Some of the market's top analysts just released a brand-new list of must-buy stocks for you. Their last list soared 5 times higher than the S&P 500 - but these recommendations could go even higher. In fact, we guarantee it or your money back. Best of all, getting this valuable information couldn't be easier or more affordable. But these markets are already on the move, so you'll need to act fast. Discover the details here... http://www1.youreletters.com/t/400729/4459110/793638/307/--------------------- The Daily Reckoning PRESENTS: Although Justice Litle doesn't believe we will be spared from the harrowing effects of Peak Oil, he does offer us an update on a few of the alternative energy programs currently underway in various parts of the world. Read on for the latest about wind, water and sun... SURF'S UP FOR ALTERNATIVE ENERGY by Justice Litle Wouldn't it be nice if we could surf our way to energy independence? Complete freedom from fossil fuels is a pipe dream - for the next few decades, anyway. But maybe we can get to a place of significantly less dependence on them. As demand relentlessly outstrips supply in the coming years, we'll have to cut back no matter what. It will merely be a question of how rough the ride turns out to be. Going back to the surfing analogy, the basic ingredients of a good wave aren't hard to guess: wind, water and sun. There are interesting developments taking place in all three areas. We'll start with wind. On June 28, at the 2006 Wind Power Asia exhibition in Beijing, China unveiled a major technological breakthrough: the first ever "Maglev generator," or permanent magnetic levitation wind power generator. The Maglev generator is expected to produce 20% more output than previous wind turbine designs, while cutting operating expenses in half - generating power in the range of five cents per kilowatt hour. The Maglev generator can also make use of significantly lower wind speeds than previous designs, likely due to the same frictionless operating principle that Maglev trains use to travel at more than 300 miles per hour. Lower wind speed requirements mean the new turbine can be deployed effectively in far-flung rural areas, and the vastly improved economics make it a competitive alternative to fossil fuels. As a side benefit, the breakthrough gives China new incentive for respecting intellectual property rights, as it now has some highly valuable IP of its own to export. Back in the United States, General Electric has partnered with the U.S. Department of Energy to develop a crop of giant new wind turbines over the next three years. At up to seven megawatts, the new turbines will be almost twice as powerful as existing ones, each one capable of powering a thousand homes. At 95 meters, these monsters are as tall as a football field, and destined to get larger over time. As the turbines grow in size, however, the problem of "visual pollution" becomes more acute. East Coasters don't like having their ocean views ruined by ugly structures too close to shore. The solution? Tow the suckers out to sea, where the wind is better anyway. The MIT Technology Review reports: MIT researchers recently demonstrated the feasibility of "tension-leg" platforms, a technology that oil companies have recently adopted for deep-water rigs. The wind turbines and towers would be assembled at a shipyard and placed on top of large floating cylinders. The canisters would be ballasted on the bottom with high-density concrete to keep the structure from tipping over, and the whole turbine assembly would be tugged out to sea. There, four steel cables would be attached to the platform, anchoring it to the sea floor. First, though, some water would be allowed into the cylinder, causing the structure to sink more into the water. Once the cables are attached, the water is pumped back out again, allowing the turbine to rise, tightening the cables and preventing the turbine from bobbing up and down, yet allowing some lateral movement that would help cushion the impact of storm waves on the tower. (The blades themselves would be high enough to avoid even waves from hurricanes.) Two of the biggest challenges for this out-to-sea approach will be maintenance and durability. The turbines will have to be incredibly durable to endure the regular battering they will take from wind and waves. Sending out a repairman will be no small task. But Jim Lyons, the leader of Advanced Technology for GE's Wind Energy Division, believes wind could handle 20% of U.S. energy needs - as much as nuclear power handles today. Other alternative energy companies are less focused on the wind and more interested in the waves. Ocean Power Technologies (OPT), the first ever wave-power company to list on the London Stock Exchange, has focused on perfecting a remarkably straightforward concept. OPT's "PowerBuoy" system utilizes a piston that moves up and down with the waves, as if the sea itself were turning a hand crank. The piston is connected to a generator, which, turned by the movement of piston, generates electricity and stores it in a battery. The buoy concept carries great advantage in its simplicity. More complex wave-energy devices have typically proven to be not durable enough, or vulnerable to storms; making them "sea-proof" was cost prohibitive. OPT claims its low-impact PowerBuoy setups can last in the open sea for decades, thanks to simplicity of design and special sensors that constantly monitor the ocean environment for changing conditions. In the event of rough waters, the PowerBuoy can suspend operations and disconnect itself, resuming operations when wave conditions return to normal. OPT has wave-power stations off the coasts of Spain, France and Hawaii, and will soon be embarking on its first project for the United Kingdom, a 5MW (five megawatt) installation off the north coast of Cornwall. For this project, 30 separate PowerBuoys ranging in capacity from 150-250 kilowatts each will be deployed in 2007 and 2008. Last but not least, alternative energy life is stirring in the sun-baked deserts of Southern California, with the help of an ingenious 19th-century concept. Two major utility companies, Southern California Edison and San Diego Gas and Electric, are working with a Phoenix company, Stirling Energy Systems, to harness the power of the California sunshine. It is said to be the biggest solar effort in the world so far - bigger than all other solar projects in the U.S. combined. After a period of testing and scaling, production is slated to begin on the larger of the two planned sites in 2008. Upon completion, the new Mojave Desert facility should produce a whopping 500 megawatts of electricity per day by 2012, enough juice for 250,000 homes. And it will be done without solar panels. The nearly 190-year-old technology being employed for the project is the Stirling engine (for which Stirling Energy Systems is named). Invented in 1816 as an alternative to the dangerous steam engines of the day, which had the annoying tendency of exploding every now and then - the Stirling engine contains a sealed gas - in this case, hydrogen. Piston movement is generated by heating the hydrogen and forcing it to expand through hot and cold heat exchangers. For the 500MW site, the sun will be precision-tracked by 20,000 swiveling mirrored dishes spread over 4,500 acres, each of them 38 feet in diameter and reflecting their intensely concentrated rays into a powerful heat source for thousands upon thousands of Stirling engines. The setup is expected to convert 30% of the sun's available energy into electricity, which is an efficiency rate double or triple that of present-day solar panels. These examples only scratch the surface; there are too many initiatives and innovations under way to mention even a fraction of them all. Common themes are cost of manufacturing, ease of maintenance, durability and efficiency. All these elements are improving as our knowledge increases and technology marches forward. Of course, we will not be spared the harrowing effects of Peak Oil in the meantime. The transition from traditional fossil fuels threatens to be drawn out, messy and painful, as we have already seen. But there is still some great alternative surf out there, and a better world waiting when we make it through the bottleneck. Regards, Justice Litle for The Daily Reckoning Editor's Note: Justice Litle is an editor of Outstanding Investments, ranked number one by Hulbert's Financial Digest for total return performance over the past five years. He has worked with soybean farmers, cattle ranchers, energy consultants, currency hedgers, scrap metal dealers and everything in between, including multiple hedge funds. Mr. Litle also acted as head trader for a private equity partnership, and made contributions to Trend Following: How Great Traders Make Millions in Up or Down Markets, a popular trading book by Mike Covel (FT/Prentice Hall). Outstanding Investments http://www1.youreletters.com/t/400729/4459110/793639/280/
-- Posted Wednesday, 23 August 2006 | Digg This Article
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