Other People’s Money 2 – “Permanent Upside Bias”

Recent oil prices and forecast

Recent oil prices and forecast

It seems to me that more contrarian-minded investors have been successful over the long term than common wisdom would suggest. Take a long hard look at where the crowd is headed, and run as quickly as possible in the opposite direction. Bet against MBS’s? You betcha! Sell into a rally? Gotcha covered!

Which begs the question: why is every position in your (and my) portfolio long?

Last year, with the Dow treading water and oil at $145 a barrel and seemingly heading north forever, I was occasionally asked if there was anything I would invest in. I repeatedly said I only had one suggestion: if I had the nerve, I would short oil. Putting aside the relative complexity and expense of futures trading, did I do it? Did anyone I spoke with? Of course not.

I was reminded of my prep school days in Rhode Island. A fortune was to be made any time the Rangers played the Bruins, or the Knicks played the Celtics. Kids from New York would beat my door down to bet FOR New York, kids from Boston, FOR Boston. Not once did some kid from New York ever say, the Knicks are going to get their butts kicked, give me Boston and 5. There’s no joy in betting AGAINST something. Only money. Which is why I was happy to bet against both the Knicks and the Celtics, getting points or favorable odds from both sides. (A nice little business; kind of like selling lottery tickets.)

Retail investors – and I suspect American retail investors in particular – have what I call a “permanent upside bias.” We want to invest in things we believe in, that will grow, that will make us happy and rich and skinny and “the new 30.” On top of that, we don’t want to “sell” things we don’t believe in anymore. Where’s the fun in that? We don’t believe in dumping (as a society, we won’t even dump waste). So not only do we never take short positions, we never sell soon enough either. It’s one of the major reasons experienced institutional investors and “insiders” beat retail investors all the time. They’re unsentimental, and they’ve learned when and how to sell.

Being long in equities is the ultimate herd mentality. I’m not saying that learning to love your inner short will be like taking candy from a baby. I’ve just always been curious why the same irony and skepticism that pervades our view of all the other aspects of our modern American lives doesn’t also inform our view of our investments. Made a profit in last week’s Obama mini-rally? Maybe you should think about taking the profit for a change.

One response to “Other People’s Money 2 – “Permanent Upside Bias”

  1. Inveswting with emotion and illogic is the best way to lose in the long term. You invest to make money. Some people won’t invest in tobacco companies, or companies that manufacture Nuk-u-luhr power plants (altria and GE). and other won’t invest in companies that offend their religious sensibilities. Other will not buy a mortgage that is against their religion. All of these alternative investments distract the investor from the bottom line.

    Energy, and oil in particular, has become politicized. Hydro and Nuclear plants are taboo, even though they produce no greenhouse gases. Angolan rebels and Iran missile tests coordinate fear tactics to push the price of oil up in early Spring, this year is not working due to global economic slowdown.

    Diversity is the best investment strategy, betting it all on Bernie Madoff was sheer stupidity.

    Show me the Money!

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