Magic bullets, secret weapons and prayer

 " Stop Reading Lists of Things Successful People Do.”  

Stephen Covey and other purveyors of panaceas...  is a good point.

‘silent evidence.’

Magic bullets, secret weapons and prayer – the truth is, there are no investing shortcuts

• The Globe and Mail (Ottawa/Quebec Edition)
• 22 Mar 2017
• SCOTT BARLOW sbarlow@globeandmail.com

In investing and life, it’s tempting to believe in magic bullets – a set of rules and habits that, if followed, guarantee success.

The 7 Habits of Highly Effective People by Stephen Covey sold more than 20 million copies by appealing to this common sentiment.

The Harvard Business Review, however, almost begs readers to avoid temptation in the March 13 column “Stop Reading Lists of Things Successful People Do.”

The authors argue that just because certain habits worked for a few people, it doesn’t mean they work for everyone, or even most people. 

More importantly, they cite Nassim Taleb’s point that “failure is silent.”

HBR points to an anecdote in Prof. Taleb’s The Black Swan that Cicero told about Diagoras of Melos, the ancient Greek poet and atheist.

“When Diagoras was told that praying saves sailors from drowning, he wondered about those who prayed but drowned anyway,” HBR said.

“Prayer receives credit for saving sailors because all those who survived prayed. Yet this strategy is utterly useless if those who died also prayed, which is a fair assumption. … Taleb refers to the people who didn’t survive as ‘silent evidence.’ These are the outcomes that we don’t get to see; their absence leads to a false sense of effectiveness of certain actions.”

The investing world has seen numerous secret weapons in the form of valuation techniques.

Jim O’Shaughnessy’s 'What Works on Wall Street' touted the use of price-to-sales ratios in combination with other metrics.

Legg Mason’s Bill Miller, the man who beats the S&P 500, focused on price-to-cash-flow ratios.

Enterprise value to EBITDA also had its day in the sun as a revolutionary valuation method.
(EBITDA represents earnings before interest, taxes, depreciation and amortization.)

But in the hands of less talented investors, these tools were often found ineffective.

The belief in investing magic bullets is a belief that markets are a problem tied to physics, with immutable laws that apply every time. In my opinion, more answers are to be found in biological ecosystems, which are what scientists term a complex adaptive system.

This means that not only are there more factors affecting asset markets than we can account for, and that the strength of these influences wax and wane over time, but also that markets adapt – investor buying and selling can change how it functions.

There may come a time when a combination of intelligence and computing power can design an equation that accurately predicts markets. 

Until then, there are no shortcuts.

 

 Source: http://www.theglobeandmail.com/globe-investor/investment-ideas/gi-newsletter/article34362628/