The Unknown Nature of Investing

The Unknown Nature of Investing

David B. Armstrong, CFA Weekly Market Commentary

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Making Smarter DecisionsAnnie Duke’s Thinking in Bets – Making Smarter Decisions When You Don’t Have All the Facts may as well be titled “Dave, Read Me Now!”

Not even 20 pages in, she starts comparing Chess and Poker.

Duke states that “The quality of our lives is the sum of decision quality PLUS luck.”  Emphasis mine.

Chess is not a game of luck, she explains.  It’s a game of decision quality where every loss can be reconstructed to show exactly where the player made a mistake that allowed the other player to win.  There are no pieces appearing or disappearing and there is no incomplete information. Chess provides total transparency, because you can see all the opponent’s pieces and moves.

Duke writes, “If life were like chess, nearly every time you ran a red light you would get in an accident…”

Life is more like poker, she explains, where “you could run a red light and get through the intersection safely OR follow all the traffic rules and wind up in an accident.”

Investing and the Unknown

The point she gets around to making can be applied to investing–uncertainty can allow for investors to deceive themselves or misconstrue data.

Bought a FAANG stock and made a profit?  Are you an investing genius or are you just lucky?  You can make a ton of decisions that work out, but is that skill or luck?

It’s not until there is a lot of data that you can determine probabilities.  Annie Duke goes on to write that it’s hard to prove that coin flipping is 50/50 odds after just 4 flips but do it 1,000 times and it becomes more obvious.

The analogy to investing is the difference between short-term and long-term.  Is now the right time to invest?  Tomorrow?  January 1st?  If 21 out of 27 S&P 500 trading sessions prior to the low on October 29th were negative (77.8% negative days), does that mean the odds of tomorrow being down are good?

Well, here’s my answer…

I.

Don’t.

Know.

Because it’s the same short-term observation as the 4-coin flips.

But what I do know is that about 94% of the rolling monthly returns over a 10-year period since 1926 are positive.

Use the data from the long-term to drive your decisions because, “The quality of our lives is the sum of decision quality PLUS luck.”  Increase your luck by planning and using the probabilities to your favor.

Keep looking forward,

Dave

The MONCON Level remains a MONCON 5, the lowest level of recession risk in our 5 level gauge.  Details here.

 

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About the Author
David B. Armstrong, CFA

David B. Armstrong, CFA

David B. Armstrong, CFA, is a President and Co-Founder of Monument Wealth Management. Along with his role as the firm’s chief investment strategist and portfolio manager, Armstrong is viewed as an industry leader in several areas including innovative practice management, discretionary asset management, digital marketing and social media. Dave is the writer of Monument Wealth Management's weekly "Off the Wall" Financial Blog and Market Commentary, and is frequently sought after by journalists and event coordinators. Visit his full biography here.

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