Monday, March 26, 2012

Dirty work

A reader sent me this video of James Fallon, science-famous for having killer ancestors and violent genes.  My favorite part is where he basically says that sociopaths exist to do the dirty work for everyone else.




Here are paraphrases of what I consider to be the most interesting parts:

6:48  There's a societal receptivity to psychopathology, in fact one may say that there's psychopathology in all of us because we ask the so-called successful sociopaths or psychopaths to do the dirty work for us. Ok.  And not just the dirty work but the good work.  You don't want your neurosurgeon to be empathetic and caring emotionally when they're working on you.  You want them to be cold machines that don't care.  Same thing with an investor. . . . A society almost demands that we have psychopaths.  It's a very stable feature throughout society in history that these people are there.  And they pop up in a very malignant way sometimes but these traits seem to be very useful to society so we almost ask for it, or our genes and our behavior ask for it.

8:10 Many of them . . . have excellent memories.  And there's a genetics to this.  The people who have very good memories usually have two forms of a gene that allow you to have very good memories but they also make you very anxious to depressed.

12:40  The fundamental way that a psychopath is put together is like a three legged stool.  One of the legs is a high vulnerability genetic alleles (aggression, violence, lack of bonding), brain loss, and abuse.

14:00 Two areas of the brain that are damages are orbital cortex and the ventromedial cortex

15:30 Cold cognition (logic) in balance with hot cognition (emotions, ethics, morality, etc.) in a normal brain.

Here's another video of James Fallon.

Sunday, March 25, 2012

Beating the market by trading like a sociopath (part 4)

My recent purchase of Scholastic stock illustrates these principles well.  Scholastic is a well-known children’s book publisher.  Because I have some exposure to the publishing industry through work, I understand how unlikely it is that any book will ever make it to the public domain.  I know that Scholastic has book fairs at schools, children begging their parents to buy them a whole stack of books and parents unable to deny children the simple pleasure of reading.   Parents are nostalgic and force their children to read the same books that they read as children.  Scholastic happens to publish the Harry Potter series in the U.S.—seven separate books all being sold to every young reader for the next century (my several siblings read Harry Potter to their grade school aged children every night together as a family).  Scholastic also publishes the crossover hit “The Hunger Games”, which was being made into a movie just at the time I decided to buy.  I looked on Yahoo Finance and learned that the last activity from an analyst was more than 5 years ago.  The stock was primed to go zeitgeisty with the movie being the trigger to give the stock the requisite buzz and “it” factor for the stupid money.

I bought the stock, two days later the company updated their earnings estimate to account for a huge run up of sales for the Hunger Games books (a trilogy, so three books sold to every interested customer).  In two days I saw the stock go up 14% to a nine-year high, drawing the attention of not just hundreds of investment bloggers but the Wall Street Journal and other financial heavyweights.  In my opinion this lured in some of the so-called “smart money” and we still haven’t even plumbed the depths of the stupid money, which will reach its peak as the movie profits soar and people start worrying that they’re missing out on another “Harry Potter” boom.

This is my best attempt to describe what I believe is a unique vision.  Most of the time I don't even consciously think of these thinks, I just intuit and act upon them.  When I look at the world, the flaws or vulnerabilities in people and the social institutions that they’ve made jump out to me, as if they were highlighted for me and only me to see. I have such an uncannily accurate ability to gauge probabilities and to discover patterns in human behavior that I sometimes appear psychic.When ever you buy or sell a stock, I may very well be on the opposite side of that transaction.  I understand that might be a little little scary.  You should know that I intend to exploit that fear.

Saturday, March 24, 2012

Beating the market by trading like a sociopath (part 3)

There's nothing special or sophisticated about my system.  It could be luck.  It's impossible to tell.  But if you're interested in what I've done to manage to beat the market so soundly, all of my stock picks have general brand name recognition among what traders call “stupid money.” Stupid money is a derogatory term for unsophisticated individual investors.  These investors frequently buy high and sell low, endlessly chasing stocks rather than profiting from them.  If you think of a stock trade as a zero sum game (someone wins and someone loses), playing against stupid money will be more profitable on average than playing against smart money.  I want to make sure my stocks are already on the radar of stupid money because the companies are household names—stocks like Google, Apple, Disney, and Amazon.  My thought is that for stocks like that, there is a much higher proportion of stupid money to smart money than for a more esoteric stock like United Technologies Corp.

I like to choose stocks that have been out of the news for a while.  Before I buy a stock, I look at Yahoo Finance to see if there have been recent upgrades or downgrades by analysts or any recent news about the stock or coverage from financial bloggers.  My ideal stock has not seen any movement from an analyst for at least 5 years and no real news for the past year.  I need that stock to seem new and fresh to stupid money (and even some smart money).  It’s the same technique as the marketers who peddle their wares as being “an ancient Japanese formula” or “what doctors don’t want you to know about . . . ginseng.”  There is a sensation of newness (it isn’t currently zeitgeisty) with all of the benefits of pedigree (it has an established history).

To hedge my risk, I choose stocks in a particular sector that I believe is stable while retaining enormous growth potential and then choose the best stock out of the bunch.  I choose these stocks because I know that when people get spooked, they will pull their money out of oil futures or other high-risk securities and dump them into my blue chips—stocks like Coca Cola, McDonalds, and Johnson & Johnson.

I also have to be intimately familiar and impressed with the business model, but in a way that most people are, or can quickly be made aware.  I have little relatives and frequently watch their movies.  Disney movies are always popular, but I tend to prefer Pixar.  Luckily I know that Disney owns Pixar and Disney has a nearly a century full of intellectual property in their stable.  I’ve seen my little relatives flip upon receiving a Minnie Mouse doll and know how powerful that brand is for youngsters, but so have millions of other parents, uncles, aunts, and grandparents.  While they may not think immediately about exploiting their children’s joy, I do.  But I also know that when those parents are sitting down to pick some stocks and are thinking about Disney, they’ll remember that moment and buy.

Friday, March 23, 2012

Beating the market by trading like a sociopath (part 2)


Predators tend to see in black and white.  Scientists have suggested that contrast against background may be more helpful for predators in detecting potential prey than color, helping them to focus on crucial spatial relationships rather than extraneous details.  I’m color-blind to mass hysteria.  My lack of empathy means I don’t get caught up in other people’s panic, particularly mass panic.  It gives me an incredibly unique perspective.  And in the financial world, being able to think opposite the pack is all you need.

Traders laud the “contrarian” mentality.  Warren Buffett famously said “Be greedy when others are fearful and fearful when others are greedy.”  Easier said than done for the vast majority of stock traders.  And when I’m trading stocks, those are the people I am up against.  On every stock trade there is someone who wants to sell and someone who wants to buy, at least at a particular price.  Both tend to think the other is an idiot.  In simple terms, the person who is selling thinks that she is getting out just in time while the person buying thinks that they are about to make good money.

Because the actual transaction is faceless, I can’t practice my usual people-reading skills or manipulation, but I don’t need to.  I understand mass psychology.  And the truth is that the market doesn’t really reflect some magical perfect valuation of a stock under the efficient market hypothesis.  It reflects the mass consensus of how actual individual investors value the stock.  It is the sum total of everyone’s hopes and fears about what a company is capable of doing.  Preying on people’s hopes and fears is my métier, even en masse.  To my colorblind eyes, I see these features more starkly than anything else.

Given a choice of hopes and fears, preying on people’s fears is the better bet by far.  Hope is too ethereal.  People are too unpredictable when acting on hope.  I’d rather rely on their fear, but even that is tricky.  When the market spooks, it can be as senselessly destructive and difficult to exploit as a stampede.  When I trade stocks the main thing I am focused on is not people’s fear of losing what they have, but fear of losing out—of having missed an opportunity to make millions.  I look for stocks that have the visceral pull of get-rich-quick schemes.

Thursday, March 22, 2012

Beating the market by trading like a sociopath (part 1)


I love money.  It’s so impersonal.  In a world where winning is the best thing, money is frequently how I keep score.  I don’t like spending it, necessarily.  Money doesn’t matter to me in itself.  I only like it because other people care about it a lot (more than almost anything else in the world).  Because they care about it so much, they will fight hard for it—against me or anybody else.  It makes the game very fun.  And although it is never high stakes on my part, it almost always is with whomever I am playing against.  I play because it’s a game.  Others play because it’s their life.  People are frequently ruined.

I have an incredibly green thumb for money.  I fully funded my retirement by the time I was 30 years old.  Since I started investing seriously in 2004, I have averaged a 9.5% return in the stock market—257% better than the average returns of the S&P 500 over the same period of 3.7%.  It’s sick how well I do trading stocks.  Beating the market this soundly and consistently is unheard of and many argue it is impossible (or due solely to luck).  In 2011, only 4 out of 5 mutual fund managers beat the market, and only a handful of individuals have managed to do so with any regularity. One Forbes article (“Why Smart People Fail to Beat the Market") put it this way “There are only two ways to beat the stock market in the long-term, net of expenses: one, trade on superior information; two, be lucky.” (Unfortunately, the efficient market hypothesis holds that all available information about a company’s future prospects are already widely known and reflected in the price of a stock,  so that just leaves one way to beat the market.  The one exception is so-called insider information, which is largely illegal to trade upon.).

But I am not trading on better knowledge.  I am a relatively unsophisticated investor.  Instead, I am trading on a special vision.

Join Amazon Prime - Watch Over 40,000 Movies

.

Comments are unmoderated. Blog owner is not responsible for third party content. By leaving comments on the blog, commenters give license to the blog owner to reprint attributed comments in any form.