It’s a public holiday today in Victoria, so our office is closed. Not that we’ve used it for a while. Most of us have been happily working from home even though you are now allowed back in the office, by the grace of Dan.
I’m in NSW, and ostensibly working. So I thought I’d hijack Money Morning today and regale you with an excerpt from my new book.
It’s called You, Your Brain and the Stock Market, and is largely about how we are our own worst enemy when it comes to investing. It doesn’t just happen to us mere mortals though. It gets EVERYONE.
The book provides plenty of tips and offers a process to overcome the problem of investing with the handicap of having your brain running the show.
We’re giving the book away free, as well as a bunch of other stuff, as a part of a promotion for my new service called Greg Canavan’s Investment Advisory.
To provide some context around this new service, last week we hosted an event called Life at Zero. It looked at problems we face in a world of long-term zero interest rates and constant government stimulus.
These problems aren’t going away and as investors, we need to have a plan to deal with them. That’s what my new advisory is all about. It’s a service designed for investors who know they need to play the stock market game but want to do so in a way that manages risk as much as possible.
To find out more and get your hands on a copy of the book, click here. For now, here’s the introductory chapter…
‘Ray was coming up in the world.
‘He set up his own investment management business in the US in 1975. He worked out of a two-bedroom apartment with a friend, building it up from scratch.
‘Ray’s job was to trade his own account and advise clients how to manage risk.
‘His initial focus was on the livestock, meat, grain and oilseed markets. He believed these were easier to analyse than stocks. Stock prices were subject to human emotions, and so predicting their trajectory was difficult. These commodities, on the other hand, were subject to supply and demand, which was much easier to work out.
‘Ray modelled these supply and demand relationships using a variety of inputs. But he did so in a unique way. He didn’t view supply and demand in the same way that the economics textbooks did.
‘This unique approach worked and made the firm money. Soon, Ray used this unique modelling approach on other markets, currencies, bonds and even stocks.
‘Yet he knew this approach was far from perfect. He still had some significant losses using this method. No matter how good the model was, nothing was certain:
“…the most painful lesson that was repeatedly hammered home is that you can never be sure of anything: There are always risks out there that can hurt you badly, even in the seemingly safest bets, so it’s always best to assume you’re missing something.”
‘Still, despite the fact that Ray knew this, he didn’t really understand it. He was successful, arrogant and egotistic. He was going to have to screw up much worse to really “get it”.
‘Ray’s fledging company navigated the crazy volatility of the late 70s/early 80s and continued to grow. However, by 1981, Ray was concerned. Really concerned. He thought the global economy was heading into a depression.
‘He started making his views public. He went on TV and confidently told everyone what was going to happen. He said that owing to the amount of debt in the global economy, the coming depression (he was sure of it, hence the certainty of the language) would be as bad, or even worse, than the depression of the 1930s.
‘In August 1982, Mexico defaulted on its debt, just as Ray had forecast. Other countries would soon follow. US banks were heavily exposed. There would be a nasty credit contraction. Ray’s depression call was looking prescient.
‘So much so that now, everyone wanted to hear from him. Congress invited Ray to testify at a hearing it was holding on the crisis. He went on a national and widely watched business TV show called Wall $treet Week with Louis Rukeyser to confidently explain why a depression was coming.
‘Only the depression didn’t come.
‘Ray got it horribly, hopelessly wrong.
‘The Mexican debt default in August 1982 was the low for the Dow Jones Industrial Average. Over the next 18 months, the Dow soared 67%! The US economy enjoyed high, non-inflationary growth.
‘Ray was shattered. He was not only wrong. He was publicly wrong, an even bigger blow for the ego. As he said:
“So there I was after eight years in business, with nothing to show for it. Though I’d been right much more than I’d been wrong, I was all the way back to square one.”
‘He lost so much money that he couldn’t afford to pay staff. He had to let everyone go. He even had to borrow $4,000 from his dad to stay afloat. It was a devastating blow.
‘What happened? As Ray said:
“In retrospect, the mistakes that led to my crash seemed embarrassingly obvious. First, I had been wildly overconfident and had let my emotions get the better of me. I learned (again) that no matter how much I knew and how hard I worked, I could never be certain enough to proclaim things like what I’d said on Wall $treet Week: ‘There’ll be no soft landing. I can say that with absolute certainty, because I know how markets work.’ I am still shocked and embarrassed by how arrogant I was.”
‘Despite the setback, Ray didn’t give up. He used the experience to learn valuable life lessons and go on to bigger and better things.
‘Who is this Ray guy?
‘I’m talking about the early years of the career of Ray Dalio, the founder of Bridgewater Associates. His firm is now one of the largest hedge funds in the world, with $160 billion in funds under management.
‘Without that experience, Ray simply could not have built Bridgewater into the company it is today.
‘Ray’s story isn’t unique.
‘In fact, it’s pretty much every investor’s story. At some point in their investing life, every trader and investor is humbled by the market.
‘As Ray Dalio’s life shows, if you can learn from it, you can go on to great success. The aim of this book is to help you recognise the inherent investing blind spots we all have. You, me…and even Ray Dalio!
‘The thing is, when you recognise what the problem is, you can take action to fix it.
‘The good — if somewhat confronting — news is that the problem is always…you!
‘And it’s easy to fix. By the time you finish reading this book, you will have all the tools to be a smarter, better and humbler investor and/or trader.
‘In preview, just keep in mind that arrogance, hubris, overconfidence and letting emotions get the better of you are all common characteristics of portfolio blow-ups.
‘If you’ve been in the market for any more than six months, chances are you’ve had a similar experience to Ray. I know I have. Let me tell you about it…’
To find out more and get your hands on a copy of the book, click here.
Editorial Director, Port Phillip Publishing