"Daily, my mail box is full of emails, many of which come from well-meaning friends. 'Have you seen this article?' or 'Do you know this guru?'"I follow the links as I frantically go from thenewyorktimes.com to financialarmageddon.com and everywhere in between. 'The Dollar will rebound...Gold is another bubble...Buy bonds...Sell bonds...Pork bellies are undervalued," and so on. I pretend to read some of these writings just so that I can make up something to say should they follow up the email with a telephone call. In an enduring quest for understanding and picking kernels of knowledge, I find myself surrounded in an epochal – and mad – battle of the optimists versus the pessimists."Honestly, there are intractable and momentous problems which should be the cause of considerable pessimism. But when it comes to action with other people's money – particularly the irreplaceable kind – merely on account of the free advice of a wellknown guru who writes for the-world-is-coming-to-an-end.com is complete madness."To follow the advice of an analyst working for a bank that can't even manage its own balance sheet and who is intentionally or accidentally divorced from reality, is madness squared."
"The correlation between high stakes and people's willingness to believe quackery is high. And it's pretty rational."A low-probability, high-stakes prediction should always be taken seriously. And if your world is so confusing that you can't determine probabilities, defaulting to assume that prediction will come true may increase your chances of survival.""When things are calm people believe what they tell themselves. When things are crazy they believe what other people tell them."Brent Beshore has a great philosophy: 'In the moment, people act rationally, always,' he says. 'The question is what information, preferences, time horizon, and biases came into play?' High stakes and uncertainty is a huge information asymmetry that causes rational people to pay attention to crazy forecasts."
- If the stakes appear high, reduce them.
- Reduce your exposure to fanciful narratives by restricting your news network to the smallest number of genuinely trustworthy and ideally independent sources.
- Reduce your exposure to risk through the simple mechanism of basic mathematics.
- Reduce your exposure to expensive assets – not least, almost all bonds – in favour of cheaper ones.
- The prices of highly valued stocks (for example) have far greater potential to fall than those of more lowly valued stocks.
- The prices of popular stocks have far greater potential to fall than those of stocks that nobody ever owned to begin with.
- Move the odds further in your favour by consciously aligning yourself with managers (either of funds, or of meaningfully diversified companies – the difference is largely moot) displaying a healthy commitment to maximising shareholder returns and an unusually high ability to allocate capital efficiently.