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Unconventional Wisdom
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Charts, Cliffs and Cavemen...

1/4/2013

8 Comments

 
People in the financial services industry LOVE charts, especially ones with upward sloping lines. Charts, replete with disclaimers basically saying that you should not pay any attention to charts, have been the go-to-sales-tool for financial professionals since I can remember. For all I know, our great great great ancestors drew charts on their cave walls in an effort to persuade (er, advise) their cave mates.

However, this is not a history lesson about charts, per se. Rather, it is a non-academic (caveman's) look at what we can learn from going over a cliff. The series of charts below tell a rather interesting, albeit anecdotal, story. The moral of that story is that our perceptions (and resulting decisions) are often influenced by our current reality. 
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Illustration by Andertoons
Those who study behavioral finance sometimes refer to this as extrapolation bias. It's damn hard to see a 6,000-point rally coming when you have just witnessed (suffered) a 7,000-point blood letting. The paradox is that, the closer you are to action, the more difficult it is to see around the bend.

Speaking of seeing around the bend, I had the good fortune of meeting and interviewing a man by the name of Verne Wheelwright several years ago. Verne wrote a terrific book called, It's Your Future: Make It A Good One. According to the World Future Society, an organization to which Verne and I both belong, FORESIGHT, is the most important skill one can develop for the 21st Century. I could not agree more, which is why I included this as a category in my new Wealth Management Bookstore.

In any event, the purpose of this slog post (as always) is to get you thinking. Hope you find this helpful.

Click on images to enlarge...

Looking back from the far side of the chasm...

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It's twue, it's twue, hindsight IS 20/20

View from the top...

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I feel good! Think I'll go to a seminar and learn how to flip real estate...

Click on images to enlarge...

View from the bottom...

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Damn, that hurt. I think the world is coming to end...

Déjà vu all over again...

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The World Future Society says that the most important skill one can in the 21st Century is "foresight." Maybe I should look into this...

Explore Some More

  • Behavioral Finance, Bloomberg
  • Behavioral Finance: The High Cost of Emotional Investing, CFA Institute
  • Psychology and the Financial Crisis of 2007-2008, Nicholas Barberis, Yale School of Management
  • U.S. household wealth falls $11.2 trillion in 2008, Reuters
  • It's Your Future: Make It A Good One, Verne Wheelwright
  • Personal Futures Website, Verne Wheelwright
  • Interview with Verne Wheelwright, Author / Futurist
  • Interview with Tim Mack, World Future Society
  • Dictionary of Foresight, World Future Society
  • Books on Foresight & Related Topics, WealthManagementBooks.com
  • World Future Society

Advisor Survey Conducted at Market Bottom
8 Comments
Todd Lyon link
1/4/2013 01:23:56 am

Amen, brother! Foresight is the most important thing that our clients hire us for. That, and our knowledge of current tax, estate and liability issues. No one can predit the future, but in this profession one has to try. The key is adjusting to what is really happening as we go forward. There will be drawdowns, they are inevitable. The key is to win by not losing, so it takes less to get back to even and to making the client's money again. Thank you for this!

Reply
Edwards Holliday link
1/4/2013 07:49:08 am

Great points, Steve! And market graphs tell only one story, when in our lives we have dozens of other factors that affect the financial bottom line and peace of mind-- job income, job status, company state, budgeting and spending, mortgage and loan rates, real estate, health care, education costs, etc. Overwhelming.

Reply
Steve Saenz
1/5/2013 02:17:37 am

Thank you Edwards, in addition to foresight, one of the most valuable skills a consultant / coach / financial advisor (anyone really) can have today is the ability to help other people make sense of things. You do that by helping then cut through the complexities of life and by helping them stay focused on the things that matter. Another crucial skill is the ability to help others (and yourself) discern the difference between relevant and irrelevant information. That last one may be the most valuable of all.

Steve Saenz link
1/5/2013 02:12:38 am

Todd, foresight is a skill that can be developed. Please listen to my interview with Verne Wheelwright at http://www.stevesaenz.com/verne-wheelwright.html

Verne literally wrote the book on the subject...

Reply
Bob Cohn
3/6/2013 04:11:49 am

Great post. Stimulated a couple of thoughts:
First, around the time when we hit bottom, as soon as we realize where we are, the blame game starts. Not that there weren't some people who did some things they are rightly punished for, that's true, but the blame game shifts our focus to 'bad guys' instead of helping us to examine the general and prevalent irresponsibility that made the fall possible, or maybe inevitable in the first place.
Second: A look at any one of those charts reveals that they are made up of peaks and valleys, market cycles, economic cycles, whatever you want to call them. We never seem to learn that the more 'up' we are, the more likely that 'down' is near.

Reply
Michelle
5/3/2013 11:14:04 pm

Very interesting. I am not sure whether out of optimism, unshakable belief in the future, or foresight, but I started buying stocks in 2009, during the worst of the slump. My little portfolio has done nicely since then.
A question - what influences foresight? Can it be a sense of optimism, the ability to see a glass as half-full, thus being able to envision long-term success despite short-term crisis?

Reply
Steve Saenz link
5/4/2013 12:04:25 am

Hi Michelle, thank you for your comments. After 30+ years of working in the industry and 5 of trading stocks before that, I would say that "foresight" (as it relates to the stock market) is a function of four things -- 1) past experience and observations about the market; 2) understanding of human behavior (now called "behavioral finance" but it basically boils down to fear, greed and "herd mentality'); 3) understanding of the "mechanics" of the markets (which breaks down into fundamental and technical analysis) and 4) a "gut feeling" that comes with #1.

To me, attitudes or emotions like optimism and pessimism hinder more than assist. One of my mentors, who was an institutional money manager from the SF Bay Area, once told me that to survive in this business one has to be "tough minded." He went on to say that the day you become emotionally attached, is the time to get out of the business.

The older I get the more deeply understand the wisdom of his words.

Reply
Peter Burgess link
5/4/2013 02:14:00 am

I love charts and graphs. They stimulate me to think about causality ... not correlation ... and what it is that is really going on in the economy and society that is NOT captured in the charts and graphs I am looking at. For example: the DJIA is about price, but what about volume. The loss in value of the market is not really price times number of shares issued, but something else. For example: the chart presented is from a perspective, but what about looking at the issue from another perspective ... organizations may be making profit, but communities where organizations are located are doing badly. Where are the charts for the performance of communities?
I won't go on ... but I do love charts because they get me thinking about what is possible if only we would use the resources available for things that are really worth a damn!

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