Dodgy Blodget

Some of you may have read Yale professor and economist Robert Shiller’s “Irrational Exuberance” books, (the first in 2000 predicted the end of the dot-com boom, the second in 2005, the housing bubble), or at least heard of them since he is a well known expert on behavioural finance and prospect theory, topics which serious traders should be familiar with.

Anyway, I was reading an interview he gave recently in Davos to fellow Yale graduate, the disgraced Henry Blodget (he publicly said one thing about stocks, while privately saying another). When it was mentioned that all bursting bubbles tend to overshoot, Shiller replied:

Well, the problem is we've never had, in the United States, a bubble like this, of this magnitude before. That's the problem. That's the fundamental problem of economics. We'd like to be statisticians but in fact the world is always changing on us. So we end up having to use judgment. We're not very good at that.

It’s 'the world is always changing on us’ comment that caught my eye, because it is the same in sports trading. Just when we think we have a market figured out, it changes on us, so it really becomes important to first notice that the change is occurring, and second, to adapt to the change and either find a way to continue to profit from it or move on. While it may be true that, as a group, “we’re not very good at that”, those who can adapt quickest obviously hold an advantage, at least until the rest catch up.

Incidentally, Blodget has recently changed his tune on stock picking as I read that

“Blodget now recommends low fee index investing to capture the broad return, while focusing on reduced portfolio turnover to minimize taxes.”

Finally! Some of us came to the conclusion more than 15 years ago that this was the best strategy for an outsider when it comes to financial investing, but of course Blodget was anything BUT an outsider, and had his interests at heart rather than his followers.

This line in this Motley Fool piece made me laugh too (I'm easily amused):

Americans tend to laugh at people in less developed countries who believe in voodoo, curses, and other superstitions, and yet in 1999 there should be no doubt that many of the participants in the largest stock market bubble in history believed in something that was completely unsupported by reality. For a short period of time, investors believed in the magic that was emanating from Henry Blodget's keyboard.

Perhaps, but believe me, plenty of Americans who laugh at the superstitious beliefs of others are unable to look at themselves and see that their own beliefs are just as laughable to the more rational minded of us. When you point that fact out to them, they get all 'offended' - as if that's MY problem.

Not sure why the It Only Matters When There's Money On It blog didn't appear on my blog roll, but check it out. The author, SJ, has been whining about the fact that the Sultan has been the source of more hits than the King of Betting Blogs (that's this one) so please visit and put the Sultan in his place before he gets any big ideas about trying to usurp me.