Weekend Wisdom: You be the judge

"It's important to choose not who you think is the prettiest girl, but who the judges will think is the prettiest girl." John Maynard Keynes (1883 - 1946)

Do computers "know" that wisdom?  Do you?

During the week, I cautioned to "Know Thy Risk" with investing and uncovered "A Chilling Rhyme" that revealed a quant fund computer model failure in 1998 that is astonishingly similar to this week's Goldman Sachs mess.  During my research, I also discovered another article titled, "Could a computer be the next Buffett?"  (Note to prudent investor:  With a title like that, problems can not be far ahead).  Here are a few telling excerpts from the article:

"...in the 1970s, quant funds failed to understand that the ramp-up in inflation would drive the market.  Similarly, even before the Internet bubble, quant funds lagged because they didn't foresee that technology was the next big thing..."

"What you get from a computer is discipline... What you don't get is judgment."

"The best human investors have a much better chance of significantly outperforming the market than computers do.  On the other hand, human managers are also much more likely to lose you a lot of money."

Evidently, the quant fund mess has repeated at least three times in the last thirty years.  The prudent investor will learn now and remember in the long term.  The vast majority of others will learn now but forget in the long term -- just in time for the peak of the next market cycle...

My main point is not to rail against quant funds -- it's more about the primary objective of The Financial Philosopher blog:  Wisdom exists for us to follow.  We simply need to take notice and apply it to our own experience... 

As for the remainder of my usual weekly observations, I'll close with a few more links...

• U.S. stocks fall on financial concerns, hit 10% "correction" mark then make stunning recovery.
• The VIX has been called the "premier barometer of investor sentiment" and an "investor fear gauge."  Do high VIX readings tell us anything more than we would already know from casually reading the news headlines?
• Is the worst over for the credit contagion?  Here's a 10-point guide for your understanding.
• Is the Bull Market over?  Here's five ways to know...

To close, I believe the lessons from this week should be to remember the lessons that were learned years, centuries, or even millenniums before us that continue to prey on us today.  Our human emotions bring out the best and worst in us all.  And what lies between is moderation.  Why should we continue to seek "something better?"  Why do we believe a computer can aid us in achieving something better? 

There is no way to "program" judgment.  You be the judge -- not only of your own actions but for those of others...

Have a nice weekend...

TFPAuthor, Kent Thune, is the President and Owner of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Adviser firm located in Mt. Pleasant, SC.

Comments

[Ana]

I just found this site VIA Mortgage Broker Coaching and I love it!!! There is so much to learn here and so much I all ready knew inside myself but ignore out of fear and lack of self confidence. Thanks for this site. I've been here for days, going to sleep at to AM just reading and reading. I'm in the mortgage/real estate business and It will help me help my clients. I've learned to keep a beginner's and not rely so much on experts, chats, and computers. Thank you, thank you, thank you!!!
Blessings

Ana

[The Financial Philosopher]

Your positive comments are appreciated. I am passionate about finding existing wisdom to use for my own benefit. Why would I not choose to share it with others? I look forward to sharing more knowledge with you as we continue forward in our mutual pursuit of wisdom...

[Ana]

Thank you for the reply. And sorry for the spelling...always in a hurry, you know. Planning to take it easy today though.

Ana