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Announcer: 00:00 You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion and help you overcome emotions by looking at the numbers. Your path to financial freedom starts now.
Andrew: 00:36 Welcome to the Investing for Beginners podcast. I am Andrew Sather; Dave is taking the day off. So today I have a special guest with us. Today’s guest is David Keller. He is the president and chief strategist at Sierra Alpha Research LLC. I am very excited to hear what he has to say about behavioral finance. So before we dig into all of that and hear everything that David’s got going on and the stock market investing and finance world, first off, thanks to David for joining the show. And if you can give us the listeners just a short synopsis of kind of where you’ve been, how your investing journey has been and how it’s taken you and what’s something cool that you’re working on today.
David: 01:26 Absolutely. Thanks, Andrew so much for the invitation. It’s great too, great to join you. And I, I’ve listened to some of the the the episodes of the podcast. I think it’s fantastic and I love your focus on educating, uh, beginning investors that’s there. There’s so much that, uh, investors have to learn as I get started. So, so thanks for what you guys are doing. I think it’s great. Um, so my, uh, I’ve been in the financial industry for about 19 years. I started in, uh, mid 2000, which if you know, your financial marketing history man means you, you know, that the first, uh, you know, six, 12, 18 months of my investing, uh, experience where relatively difficult, which was coming out of the tech bubble and, and watching people that had come before me sort of struggling with that. And I was at Bloomberg, got in New York for the first eight years of a, of my career, and that’s where I learned about behavioral finance investors, sentiment decision making, and then a technical analysis.
David: 02:20 And my university background was studying music and psychology, which is kind of a non traditional background but somehow really well suited me for thinking about investor sentiment and also, uh, you know, doing statistical analysis of stock prices cause there’s a lot of mathematical, uh, similarities to what I was doing with music actually. So it ended up being a pretty, a pretty good fit for me. And then in 2008, I moved up to Boston and was the managing director of research for fidelity investments for about eight and a half years. So I ran two of the research groups therein asset management. So I ran the technical research team where we advised all the portfolio managers on buy and sold decisions, individual stocks, and also broad asset allocation. Um, and then I ran the new associate program called the business associate program where we have a, you know, young analysts rotate between research departments and find a good fit for them.
David: 03:12 And then end of 2016, I left the Deli, relocated to Cleveland, Ohio, which is where I’m at now. And I started my independent research firm called Sierra Alpha research. And so I work with financial advisers, institutional investors, and also more and more asking some individual investors are helping them to improve their investment process, develop good routines and focus on good habits and decision making. And try to unpack all those behavioral biases that for some reason causes us to make poor decisions a lot of times with, uh, with our investments. Um, and, and what I’m working on now is a, and I appreciate you asking. So I work with a firm called stock charts.com based out in Seattle and a, and actually starting a show for them on stock charts TV, geared towards the individual investors, a self-directed investors called the mindful investor would relate sort of mindfulness and mental programming and, and uh, and, and how that relates to investment decisions. So that’s the quick rundown on where I’ve been.
Andrew: 04:10 That’s a, we didn’t intentionally do this. Kind of a nice segue from the episode we recorded the last week we were talking about minimalism and trying to improve the way that you study the market and approach investing by working on yourself. And so I like this idea that you’re talking about with your column called the mindful investor that’s focused on like you said, building, I don’t know if you call it like building skills. But like building the tools to make somebody better at investing by focusing big picture and raining yourself in versus being so focused on the results — may be looking more at the process. I think that’s a cool idea.
David: 04:54 It’s a really good point and a, and it sounds like a good segue to what we, what we can talk about because I think a lot of times we measure investing success based on performance based on an outcome. And again one of the worst things you can do is have a good run of investment performance and then attribute it all to your routine. Do your process because then when you had a bad performance, you attribute it to the market and something out of your control. Um, and in reality, a lot of times, you know, you will have good or bad returns are a good or bad performance for several reasons that you’re, your processes is a really important part of it, but it’s part of it. And so having people understand that it’s not just about the performance, not just about the outcome, but it’s the inputs. It’s how you decide because that’s what tends to be more robust. I mean, that’s what, that’s what’s going to attend to be more consistent. That’s what’s going to lie to do well in different market environments and over a longer period because you will be able to, uh, you know, withstand different movements in different market conditions much better if you have a better process in place.
David: 05:58 I like, so the thing that popped into my head when you said that, and I’m not going to claim to be an expert or even say I know anything about psychology. Um, but I have heard, you mentioned you’re from Cleveland, Ohio. We were talking a little bit before this conversation about Cleveland, Ohio Sports. And I’ve heard, I don’t know if you call it psychology or what, but there’s this idea where um, sports fans, if they have their team 13 wins, they feel like, yeah, we did it. But when their team loses it’s like, oh, they lost. And so it reminds me of like what you just said about when we do good in the stock market. Yes, it was because of our process if we did poorly odds because the market’s crazy. Yeah. So a wise person once said, never confuse brains with a bull market.
David: 06:45 Well, we love to attribute it to our genius and our skill, and when things go poorly, it’s more because of luck and conditions outside are controlling you. You mentioned identifying, right? As our cohort of, you know, we’re, we’re a good investor along with other good investors. When things go poorly, so it’s, you know, the market is, and we, and we have ways to personify the mark, and we call it mister market or doctor copper. And you know, the market takes on this persona of this thing that’s there out, you know, out there to get you when in reality, again, it’s all about, it’s all about your routine and how you come to your decision. And the good news is I think for investors is there’s a lot of work that you could do to improve your decision-making process. And, uh, and that’s where I think with a lot of investors, not just be getting investors, but even more seasoned investors, there’s an opportunity to, to grow into and as an investor to mature — thinking about your decision process.
Andrew: 07:35 So can you give one example? Our shows structured for beginners. So maybe for the beginner who, let’s say as a hypothetical, jumped into the market, got into a very overpriced doc and, and was way overexposed to it and then got burned. And so maybe this, this temporary setback is a good humbling experience too, to want to learn and develop a skill or an idea or behavioral mindset to help deal with this specific thing that we’re talking about. Keeping your emotions, uh, based on, you know, keeping them constant based on how the market’s changing. So can you give like one example of maybe how somebody could do that?
David: 08:21 Definitely. And I would say you hit on a great point, which is as an investor at some point and usually pretty early on, you will have a huge mess or a hey, a, a, an investing experience that will go against you, that will stick with you your whole career. And if you ask any seasoned investor for a, you know, one of their, uh, you know, worst calls or worst trades, they will be able to pull something probably early on in a career where they lost a good amount of money. And hopefully, if you, if you’re starting early enough, there aren’t a lot of Zeros attached to that, that decision or that madness. But you know, everyone, I think that’s part of the learning experience as an investor is, uh, is going through and putting money to work and seeing when something didn’t work well. And uh, you know, I would say for me, as I mentioned, I, you know, I started in 2000, and I was a technical analyst, but I remember in particular one of the worst decisions that I made, or maybe worse calls were in 2013.
David: 09:14 So was maybe in the middle of my career here when, if you know, your market history, the market sold off in 2000 through line 11 and into 2002 low rallied back up into 2007, 2008, we pulled back and then 2013, we once again, yes, a repeated and return to those high levels. And so for me, one of them, one of the calls that I made was being bearish on the market because I had been hurt two times in a row and I knew when the sot got around to that level, that’s where there was exhaustion of buyers. That’s where valuations were extended. That’s where sellers came in, whatever it was, it caused the market to go back down. And again, if you know your market history, 2013 would have been a fantastic buying opportunity because the market just plowed right through those highs and continued to multiyear rallies.
David: 09:59 And again with all sorts of moving afterward. But overall, it was a; it was a good time to buy. So for me, I realized that, and one of the learning experiences that I find a lot of people have is not to be too tied to a specific market outcome. And there’s, there are behavioral reasons why w what you could call that. And I would call it probably confirmation bias, which is, and what that is, is you develop a investment thesis and then as you look what’s happening around you, any evidence that supports that thesis you attribute greater weight to and anything that does not confirm or disagrees with your thesis, she pushed it away mentally. So as a result, you, you know, I’m bearish. And then you start gathering more and more bearish evidence to make yourself feel better about the fact that your parish and anything that’s more bullish, you kind of push it aside mentally.
David: 10:46 As a result, you’re tying yourself to a specific market outcome as opposed to just without any emotion, without any preconceived biases, just looking at what the evidence is telling you and then determining how you want to be positioned as a result of that. So for me, it was, I, you know, I went into that, you know, that returning to the market high in 2013 as being pretty bearish. And I thought all sorts of reasons why I should stick with it. And then the market just continued going higher, and I stuck with that bearish thesis because I kept trying to find things to, uh, to convince myself. So my recommendation, especially earlier in your career is, is don’t be too tied to a specific point of view or a specific, uh, you know, position. Look at the evidence with, uh, you know, with a, with a clean slate every day, every week, whenever you do it, gather the evidence and then use the evidence to make a decision and then see how you need to be positioned relative to that thesis.
Andrew: 11:40 I love that. Yeah. Confirmation bias that can be very tricky I think you can find whatever political side you’re on, whatever bull or bear side you’re on, any stock you can pull up or the clothes on Google to confirm you. So I guess challenging your opinions. I think you know, having, um, two conflicting opinions, just challenging Europeans, I think it’s a great way. Oh, can you maybe give another example of a kind of behavioral bias that might, that an investor might run into and, and one way they can maybe get resolve that or fight it? Maybe. Maybe there’s no in these types of things, but maybe doing better to combat it.
David: 12:26 Absolutely. And I would say you bring up a really good point. Before I, before I give you another example, I think you have to remember that, uh, you know, I am a professional behavioral finance expert. I’ve studied it and learned all about it and worked with a lot of investors on improving it. I’m still not immune to the impact of these behavioral biases. So it’s, it’s not like you have to learn enough about these things, and then they no longer affect you there. They’re hardwired into your brain there. There are reasons why we make decisions a certain way, and it’s not just related to investing or with our money. You know, we make a lot of decisions every day what we’re going to eat, where we’re going to shop, how much we’re going to pay for something. And these behavioral biases are all related to all of those decisions as well.
David: 13:07 So, you know, I think the number one thing you need to do is have an awareness of what these biases are, what you know, how you think, and then start to develop systems and behaviors that are going to help minimize negative impact of some of those, some of those biases. So, I, the second one that comes to mind immediately is right called the endowment effect or endowment bias. And what that is, is that something that you own or something that you possess, you attribute greater value than you would otherwise. Um, and as an example, let’s say you gave me a water bottle and it’s my favorite water bottle. I love this water bottle. So for me, that water bottle has greater value because it had a sentimental connection to it. I would not sell my water bottle because I love it that much.
David: 13:50 It’s that important to me. But you can’t think of stocks or your portfolio as owning a bunch of very special sentimental things that you can’t get rid of. Um, we’ll down foods, a portfolio manager at fidelity and who I worked with them among others, he would always say, remember you don’t own stocks, you just rent them. Now while technically you do own stocks in your shareholder and you have responsibilities there. Of course, you can’t think of it as owning a position that you are unable to get out of them, that you are renting a position, and you own that stock for the time when you feel like it’s going to help your positioning, help your returns, help your, um, your overall portfolio. So, um, you have to be ready to let go of them. Um, what, what happens is once we own stock, once you own home depot, you immediately have an emotional connection to it.
David: 14:35 And when you go to sell home depot, you’re going to think of all the times when you own it, and it’s it very well. You’re going to think of how would a good name it’s been for you, how it’s been such a great performer in your portfolio. And as a result, all of a sudden you won’t sell it early enough because you will be holding onto it away too, just because of that sentimental connection. So there are several ways to try to disconnect from that. What I’ve often found is, um, if you have a stock in your portfolio or a position, uh, any, any acid media for anything, don’t think of it as I own this stock. Do I want to own it still or do I want to sell it? Think of it, if I had new money to put in the market today, would I put it into this name?
David: 15:12 So Home Depot to get, not, not saying anything in particular about that company, but let’s say you had a home depot in your portfolio. Don’t think of, do I still want to hold this or not? Think of it as if I had new money today. If I had an influx, I, I just, uh, you know, had an influx of capital where I put new money in that today. And if the answer’s no, then you may want to reconsider. Is it something you should be holding at all right? I mean, if you’re, if you’re going to go somewhere with your new money, should your old money be moving to a better opportunity as well. Um, so that’s the kind of the the the way that you can avoid endowment effect or endowment bias, which is good, just attributing greater value to something you own just because it has that sentimental connection for you.
Andrew: 15:51 I like that idea of looking at, okay, am I going to buy it now? If so, then why am I holding it? Um, you know, you have CRL for research. Um, I’m staring at the logo right now. It’s pretty cool. At first glance I didn’t know this as um, you know like I just saw this doctor, I didn’t see the plane on there. Um, uh, I would like to talk about that. But first, you know, on, on the topic of the finding a good sell point and trying to combat the endowment effect. Do you have, you know, I don’t want you to have to share any proprietary information to do with your firm, but is there like a, a good enough, like how do you determine when you want to sell something? I guess we could; we could talk for hours and days probably, but like if you could boil it down to like a, a general process of like what kinds of things you consider when you’re considering selling the stock?
David: 16:52 Yeah, really good question. And I would say the answer again, then, there are simple ways to answer, but I would say the first thing you would need to, to consider before you can answer that question for yourself is what your time frame is. Right. So a lot of times investors, I feel like don’t have a clear sense of what their timeframe is. Are they, you know, we’re a short term investor, a couple of days, couple of weeks, or are you more long-term investor a couple of months, couple of years. Um, because how you’d answer that question, that should affect yours by discipline and your sell discipline for sure. And I think the reason why that’s the cases, because you’d look at the data if you look at the equity markets globally, but especially in u s over multiple cycles, multiple decades, if your timeframe is short, if you’re looking at a couple of days to a couple of weeks and natural investment horizon in general. You should be betting on Neymar version because in general, that’s what stocks tend to do on that time frame.
David: 17:42 So if things had been weak for the last couple of days to weeks, they tend to rebound and go higher. If they’d been unreasonably strong, they tend to come back. So you’re better off son sort of, you know, looking for the peaks and valleys within that short term horizon. But I would imagine a lot of your investors are longer. A lot of your listeners are longer-term investors looking at a couple of months to a couple of years. And if that’s the case, then you really should be leaning more towards trend following if you could. Um, and looking for, um, you know, stocks that are starting to improve because in general, the data support stronger performing names, um, have continued to perform well. Things that outperform tend to continue to outperform more of those time horizons. So the trick is figuring out when something is, when that performance is going to change, when something has had a really good run and starts to roll over or when something has had, has been underperforming and is starting to improve.
David: 18:33 That’s the game on that, on that horizon. So for me as you, as you alluded to earlier, my background is in technical research technical analysis, which is trying to understand investors psychologies find demand through price charts and trying to quantify that sentiment that you, that you see around you. So there are several tools you can use as a trend follower to try to identify when trends are reversing. And in our, in the technical toolkit, there’s a lot of things people use, things like moving averages and other ways of smoothing out price movements. Try to get rid of the noise a little bit and look overall for were, uh, you know; we’re inflicting points are so the one you know it, you know, I guess that’s the long answer. The short answer, you know, when I have a series of position I’m in, I’m trying to understand when to start considering exiting that I do a lot of screening for stocks in a portfolio, also stocks in a broader university or hitting a new 13 week low.
David: 19:26 And I find if I do that consistently, anything that pops up on that list, you know, it hasn’t gone to zero yet. It might just be beginning to roll over, but it pops up, and it’s a red flag pops up on my radar. And then I see this is something that had been going up and is now starting to go down a little bit and the new 13 week low flags, the fact that something has changed, something new comes in, and instead of buying, investors are starting to take profits or sell. And again, it doesn’t tell me to exit the position automatically robotically. It just tells me that it should be on my list of things to review and determine whether or not uncomfortable still owning the name. Cause as a value investor, a lot of times you know, a lower price means you know that that can be a good thing because it’s a, it’s a better valuation might be an opportunity to add to the position. But again, all large losses begin a small loss. So if you can catch things earlier on in the move, a lot of times you’re going to do better. And, and, and again, the goal is to avoid the climactic losses when something goes down for an extended period.
Speaker 1: 20:22 Hey you, what’s the best way to get started in the market? Download Andrew’s free Ebook at stockmarketpdf.com you won’t regret it.
David: 20:33 Is it fair to say it and having a system and then really staying disciplined to that system rather than letting your emotions run free? Absolutely. And I would say, you know, there’s a, there’s been a big movement in the financial from a more qualitative, more subjective forms of analysis, tour, quantitative or objective forms of analysis. You know, the rising of quant models, quants, investing has certainly had certainly happened. Um, but I think what you want to remember is it’s very difficult for individual investors I think to completely disconnect and have all of their investments run by a machine run by a computer. Because you miss out on the ability to review things, uh, you know, subjectively make a good decision based on your own experiences. So I think the best, you know, I don’t think it’s man versus machine. I think that that’s an answer. Broadly speaking as man plus machine, right, you met people are, are good investors, are good at certain things and make sure you’re focusing your time on that. Computers are good at a lot of things too. Like, you know, uh, identifying qualities of good investments. So you know, of, of screening for good ideas of monitoring things you don’t have to. And I think a thoughtful investor’s ability to combine those two things, the more subjective in, the more objective, in a really meaningful way.
Andrew: 21:51 Plus, I mean with Ai, you never know what weird kind of number thing will lead to some stock being there that shouldn’t be there or some signal flagging mission flagging from an outside perspective it’s obvious a, an algorithm that’s just so strict. I mean, if the technology were perfect, we wouldn’t have bugs, and we wouldn’t have internet issues, and we’re going to have to stop phone reception going out. Right. I was, I was off, we were off the air earlier too. I was talking about how my cell phone reception just completely went out, um, earlier today. So, uh, yeah, I like that a lot. I think that’s, that’s um, those are great points, and I’m glad you clarified with kind of how you approach both the buy and sell process from the technical standpoint. So back to your research firm and the logo. Um, I’m assuming there’s a story behind that because it’s pretty creative and you have some imagery there. So would you care to share about that?
David: 22:50, Yeah. So the logo, you’re free to. It’s an airplane. You know, it’s funny, I was a student pilot, um, we six, seven years ago, I want to say I started flying airplanes. It was, it’s funny looking back, I can’t believe I was trying to distress after, you know, a difficult day investing. I decided to fly an airplane where, you know, imminent demise is always around the corner. I feel like as there’s a lot of risks and fault, so I probably could’ve done better coming up with a better way to, to relieve stress. But you know, there, there are moments when you’re, when you’re flying an airplane, which is just completely, um, you know, a theory. I’ll take just these beautiful moments where you feel like you’re free and you’re flying and, and uh, and all your worries are on the ground below. You don’t have to worry about it.
David: 23:31 But what was, I was learning to fly an airplane, uh, flying assistant one 72, uh, my flight instructor, uh, would trade stocks when he wasn’t up in the area. He would do it as a hobby. So when you learned that, that’s what I did. We ended up spending a lot of time. You, a lot of times you’re just flying straight and level and navigating and you’ve got time to chat. So we would often talk about the markets and talk about the relationship between trading and uh, and flying because there’s, I mean, if you think about it, if you think of any financial media or writing about the markets, there are often aviation terms that get thrown in. Something’s taking off or something, stalling. There’s a glide path and um, you know, crashes and, and all these things had imagery that come from the aviation.
David: 24:13 When I thought of a, you know, creating my firm and decided what to do with it, I want with an aviation theme and the name of the firms Sierra Alpha research. Which if you know, that is a, you know, as the, as the code s a witch, as a, as a pilot in stands for situational awareness. And this is as a pilot, what are the things that I learned that that made so much sense for investing was when you’re flying an airplane, you have to have an awareness of what’s going on outside of the cockpit. That what’s happening around you because otherwise, you will do something like flying into a mountain or another airplane or the ground or something and your flights over prematurely. Uh, and so, you know, you have to have a good awareness of situational awareness of what’s happening around you.
David: 24:52 And you have all sorts of techniques about mount new your instruments and looking outside and tracking the horizon and looking for other airplanes and you learn all these tricks. And as I was thinking about investing, I immediately started to see some parallels because I think a lot of times as, as traders are as investors, you can have blinders on and you kind of focus on your specific portfolio over one specific position or one industry or one group of names you’re looking at. And you miss the opportunity to look at all the opportunities that present themselves. There are so many levers that you can pull, especially as an individual investor with ETFs. I mean there’s so much, so many different opportunities that you could potentially go into. And so you have to have a way of identifying, you know, what the conditions are, identifying where the opportunities are because a lot of times there are things that are happening that you might not be aware of if you don’t have a good process for reviewing that. So we took to get that. I with a lot of my writing with a lot of the videos that I produce it, it tends to apply the lessons that I learned firsthand flying an airplane and then trying to tie that back into investing in it. And I think the parallels tend to work pretty well.
Andrew: 25:57, Yeah. That’s cool. I don’t know hardly anything about flying, but I know it is. It looks a lot of fun. Uh, I don’t want to like derail our conversation, but I have to ask just because of it like pops in my mind. What are your thoughts on, um, maybe a sensitive topic with, with all the Boeing crashes that happened, but people claiming that maybe the way I see it as like they’re saying that some of the other pilots stuff is taking so much of the responsibility away from the pilots that they’re kind of like sleepwalking through it. Maybe it’s affecting their situational awareness, quote unquote. Do you, do you have a feeling one way or the other towards that?
David: 26:40 So I have a lot of thoughts on it and not to go too deep into it, but I, I, you know, you have to remember with the plane I was flying, there’s no autopilot. I mean, you are pretty much on your own, and you have instruments, and you have, you know, uh, um, a lot of redundancy of systems as we have things that are working for you. But in the end, it’s your, you know, you have to fly the plane. And, and the reason why I did it, you can learn in more sophisticated aircraft with better avionics, but you know, I wanted to learn what they call stick and rudder flying, which is, you know, very simplistic old school, you know, from the beginning of flight, you know, just basic understanding of how the plane is operating. Now, what happens as you get further and further and you and you learn, and this is well beyond where I’m at, but once you learn complex aircraft and multi-engine aircraft and uh, and Jetson, you know, and, and the, um, the things that, uh, airliners at that people would be able to fly down the road.
David: 27:33 A lot of that is automated. So when you fly on an airliner, there’s very little that the pilot is, is directly inputting the plane is flying itself. And a lot of ways if they’re planning things ahead of time and getting a gathering, a lot of data and the plane can adapt to that. Um, so, you know, it’s an interesting debate right now. I think going back to that man versus machine thing. And in terms of, you know, people feel, I think as you alluded to that, you know, uncle little uncomfortable potentially with the plane doing a lot of it, you have to remember, um, you know, those couple of things that we’ve heard about with the seven 37. So those are incredibly rare. Um, and also that what, uh, you know, one of the things you learn as a, as a student pilot is you spend a lot of time studying, uh, plane crashes actually, which is a little dark, a little dismal, but it’s a great learning experience because you learn what happened when things went wrong.
David: 28:21 And a lot of times it’s trying to recreate those conditions and making sure that you can get through them, uh, and, and be able to, you know, make sure that they, that you, uh, that you perform well under the same similar conditions. Um, so as a result, there’s a lot that you learn from when things went poorly. And what you learned, unfortunately, is that most, if not, I mean, I mean 97% probably of, of flight. Uh, incidents are due to human error. It’s rarely done to the plane, uh, having a malfunction. It’s usually the the the pilot doing something that pilots do, which is funny that because it ties it back to decision making. It’s, you know, maybe resting on your laurels, becoming too comfortable with a certain configuration. It’s not having a good awareness of what’s going on around you. So I think there are good lessons for the good news. I think there’s a lot of good lessons to be learned from some of these recent incidents for, you know, for a lot of pilots to be better at having a good awareness of what’s going on. And again, hopefully, it, it has some good where people can learn from, uh, from what’s happened.
Andrew: 29:20 That’s fascinating. So you mentioned your, you’ve been investing since, um, 2000 is when you, when you started sharing and talking about like that AI versus human, it’s how, like how much has your approach evolved and, and do you see that as maybe one, one additional kind of, you know, not that we’re putting them together like human versus Ai and, and you said, uh, it’s good for, for both to kind of work together and kind of get the best of both. But you know, how much of that is, because I’m imagining it’s a very popular topic right now. If you go on a lot of different investing podcasts, email, we’ll be talking about Ai, you know, with AI it’s like how long do you let the AI do its thing before if you’re not making any adjustments or any sort of evils on like, well, you know, maybe that algorithm worked five years ago. It doesn’t work from which today is that. Have you noticed that? Cause you have, you’ve had much longer career than I have. So how, how has your process evolved? And you see that as another, you know, score one point for the humans.
David: 30:31 And I would say that, you know, number one, first off, remember that when you’re, anytime you’re remodeling of the markets are modeling anything, it’s not reality. It’s a model of reality. So any AI machine learning, any, any, even just as simple quantitative model at trend following model on valuation model, it’s all based on an assumption of what has happened previously and that conditions are going to be similar in some way going forward. Um, and so again, what has killed a lot of quantitative models and a lot of things is when, you know that three, four, or five standard deviation thing, that event that is completely unlikely a happens. And as many have seen, if you’ve read like the Nicholas Taleb books, about the black swan and, and other things, um, you know, investing performance has fat tails. Meaning, if you think of a normal distribution of, you know, the bell curve of how often certain things would tend to happen in a normalized environment.
David: 31:31 You know, there’s a, you know, as, as things get further and further from average, there are less and less likely. But in investing, those tails are a little wider. It’s a higher probability of some random, completely off the wall thing happening. So that five standard deviation move that should never happen based on normal assumptions happens a lot as investors. And that’s what, you know, long term capital management in 1998, that’s what kind of killed them was this completely unmodeled double event happening in it. And the model no longer, uh, started to work. So I would say, you know, as investors, we always have to be wary of anything that’s modeled and any system that’s designed to automate what’s going to happen going forward because it’s only as good as the assumptions of the model can make. The second point I would tell him about you is that, um, you know, in terms of score one for the humans, I mean, any model, I think the best opportunities for investors using AI and using computer power has the creativity to identify where the opportunities are going to be.
David: 32:29 So the model and the capabilities of the artificial intelligence are only as good as the input state you’re able to create. And, and the ways you can imagine the opportunities evolving going new industries, new market dynamics, new ways that things are going to move in and develop. And so that takes human creativity that takes thinking outside the box. And so I think there will always be a place for, um, for humans where unit related to developing, you know, the next thing, developing the next model. Um, and then my final comment, not to go too off the rails with it, but I think the final thing is, you know, the way that I think of, you know, people have said, you know, if we’re able to model everything and be able to have its to run by. You know, Robo advisor, for example, our humans, you’ve been going to have a purpose anymore in the financial industry.
David: 33:13 And I would say there certainly the answer’s yes, in my opinion. I think it relates a lot to a bank teller. So if you think years ago when, um, ATM started coming out, the thought was bank tellers are going to be obsolete because all you need is an ATM. It’s going to be able to do everything you need. Now, if you go to your local bank branch and they still keep building them, so you know that they need them. If you go there, there’s still a bunch of bank tellers there, and they still have jobs. But I think the job description has changed a lot in the last 10, 20, 30 years. Um, and so I think the same thing with, uh, with investing if you think of money management, mutual fund companies, ETF providers, all these people that are in even pension funds and insurance companies, others that are managing assets.
David: 33:55 The way that you invest will certainly be different. Just like it’s different than it was 30 years ago. It will be different 30 years down the road. And the role of the advisor, the role of the investor will certainly evolve. Um, but I think there will still be a place for it. I think the job description might be; it might be a little different because the computing power, the artificial intelligence would develop in ways that it’s going to allow you to do different things, focused on different things than you might have, uh, might have before. So I think the good news is they’re all be always a place for human interaction. It’s just the nature of that will probably evolve.
Andrew: 34:29 Those are, those are all three fantastic points. Great answers. I think you know, in, in the situation you talk about where even in the, in the teller world I think a lot more people go to, I used to work as a teller, so I know like great. Okay.
Andrew: 34:44 Like when I was in high school, I worked as a teller ten what was it 10 12 years ago to now. A lot more people use the ATM. I’ve noticed just from going into a branch then do tellers. But you know, to your point, like if ever evolved into that where it was a bunch of ETFs and Robo Advisors, I think of anything that creates more opportunity for the individual investors managing himself rather than less because there’s more opportunity to kind of go against the crowd. Uh, that’s the way I see it. So it’s less dooming gloom and more, you know, how are you as the investor going to react to how the market could potentially change?
David: 35:26 It might. I guess my, maybe a little off the wall thesis is I think there, you know, again, just thinking of back to my background with investor’s psychology, I think there’s this, um, this pendulum that swings between left brain, uh, ways of thinking as investors in more right-brained, that way of thinking. And um, uh, there’s a book called the Towel Jones averages, which is written by this guy called on good independent speed. It’s a really interesting read and a quick read, but it talks a lot about the whole brain investing, and you know, when do you use your left brain more detailed oriented mind and when do you use more of your right brain creativity, creative thinking, uh, side of the brain and a good analysts, they good. You know, stock analysts need to be very left brain geared, right? They need to be looking at details and modeling a company’s cash flows and earnings, how it comes and, and thinking of all the details.
David: 36:14 But a good money manager, a good investor, needs to be the more right brain. You need to think about how all of those companies are related and think about relationships and things about thinking about opportunities and how they might evolve. And I would say there’s been a swing two more left brain thinking over the last 10 20, 30 years in the financial industry. And if you take a lot of the newest hires in big institutions are not, you know, stock jockeys, traders that are thinking of, you know, like trading places type of thinking. They’re thinking of a, you know, it’s more math PhDs in physics, PhDs and, and people with stem backgrounds that are thinking of things more from a left brain detail oriented model-based reality. I think that’s going to open the door. I think the future is, is because that computing power will be more commoditized as it becomes more widespread. I think the opportunity for investors just going to be me more right brain oriented and think more creatively and the the investors that are able to think of relationships and themes that might evolve and you know, new industries that would come out, uh, cryptocurrencies and, and such and how to play for that down the road five, 10, 20 years. I think that’s where the opportunities are going to evolve for, especially for individual investors.
Andrew: 37:23 Yeah, it speaks perfectly to your background. David, you talked about studying music and psychology, and I think having sort of a right brains personality living in the left brain and the story. I think it’s cool, it’s a cool message you’ve got, and I encourage you to continue sharing it if people are more interested in what you’re doing, whether you’ve got going on online. I know you mentioned, um, a podcast I think you said, and you also do videos and your blog to spin out the details where it works. Can we find you?
David: 37:56, Yeah. Thanks again, Andrew. This has been great. I appreciate your questions is a fun conversation. I look forward to engaging any, any of your listeners and to good places to find me. One is my blogs called market misbehavior. So if you go to marketmisbehavior.com, I try to look at that intersection between behavioral psychology and Decision Making and investing, relate things like flying and music and so forth. Back to the investment process. And then I also on stock charts.com I write a column there and also, uh, do a show for stock charts TV called the mindful of the investor. So if you go to stock charts.com, you’ll see the links at the top too, to check that out. So yeah, we’ll look to engaging an any of your listeners in those places.
Andrew: 38:38 Well, that’s awesome. Well, thanks so much for your time, David. I enjoyed our conversation. I thought everything you talked about with them, some of the behavioral finance stuff that’s super practical and people can use that today. And then, um, some of your thoughts on how you see kind of the AI thing. I thought that was fun too. So thanks again.
David: 38:57 Absolutely. They’re put pleasure to join you. Thanks again.
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