「WISE GUYS」# 2

. . . practical thinking . . .

〈Financial advice does not exist!〉

 

 

It seems to me the way some people think about investing is really unsafe.

They seriously believe there exists an animal called financial advice.

Let's consider one rather well know maker of coin recommendations on social media. Contrary to accusations he's not doing pumps and dumps, no.

(He does make jokes. Also exist various bots that buy any coin mentioned by his account. Traders realized that he's a celebrity and most people don't read white papers and just listen to anyone famous. Unless he's using a bot himself, the price adjusts back to normal within too short a time for him to profit from it. And some people can't recognize obvious humor as such. — Humor and wit and intelligence are intimately related.)

What he seems to be doing is actually quite rational for somebody like him, who has significant funds for investing. He's hedging.

Any coin that is borderline decent he's buying.

He often tells others about it — what he's buying.

Many of these coins are competing.

Some caution is needed here. That which is rational for sufficiently large investors isn't always the same as what's rational for everybody else.

It's not just a question of investing what you can or cannot afford to lose.

The quality of a good in a market is never, ever sufficient to predict which good shall win how much market share. Furthermore, it's easier to deal with many small losses and a few large gains than the same average comprising many small gains and a few large losses — he almost certainly knows that.

So he buys any coins which he thinks are better than borderline acceptable.

He often declares what he buys — speaking in a way that's more precise.

Tense is important in language. People ought speak more precisely.

``   I   bought/sold X, because . . .   ''

``   I'm currently thinking about buying/selling X, because . . .   ''

It's not necessarily something you or anybody else should do if you lack the funds to properly hedge, because you can lose quite a bit of money.

Yet it's unlikely that *he'd lose if he does all he recommends, it seems to me.

This is what large hedge funds do to get returns with relatively lower risk. I'm not sure most people realize that. The foolish interviewer who talked with Jim Simons at a TED conference asked him what research he does to get returns with lower risk. Simons told him that he hires good scientists to do creative research. The interviewer led and Simons did not correct him; basically all the research in the world is not really sufficient.

Nobody in finance bothers much with whether individual investments have done well or not. That should be more widely known; they're fully aware that the quality of investments is neither sufficient nor even necessary for investments to do well. No, rather they look at baskets.

Look at the buzzword bingo bullshit surrounding machine learning, statistical learning. Too many investors imagine it's deep new research. (Gentlemen: read books! Do you know what's an example of convolutions? Averages!)

Unfortunately, if you are among the people who lack the resources to get, for example, (1) a full basket with (2) a large amount of each investment, you either do not profit when one or two go way up, or you are gambling and lose quite a lot. The risk for them, for these people, is higher than they think — and maybe they are better off not investing — even if they miss out.

Even then, when it's done incorrectly, making many different investments, is often just increasing your risk. It's not always simply decreasing it.

And risk is also inversely proportional to how much control you have over the investment and how you finance it.

You have less control if you are leveraged. Losses go below a threshold and you're compelled to realize those losses, to sell. You're just not able to wait.

You've almost no control over coins. You have more control over a company in which you're on the board. So investing a little in coins may be risker than investing a lot in a startup or something like that.

What matters is context!

And beware that it's not even anything simple like 50% what you invest in or 50% what your resources are. It's 100% of each of these and yet other factors! I'm paraphrasing the psychologist Donald Hebb and biologist Conrad Waddington regarding contributions of nature and nurture — which interact according to an epigenetic landscape.

Significant misunderstandings about risk seems to me to be behind all the conversations about whether some statements are pump and dumps. Yes, some are. Not so, however, in most cases. Rather those something else.

Actually, for anybody who's below a context specific resources threshold, almost any recommendation is far riskier than for somebody else with greater resources — but most people don't realize this.

Risk is defined for all investments one makes together and it furthermore depends on resources one has. The "knock out" probability during a decline in value is higher for those with fewer resources. There's no such thing as an investment that is a good investment for everybody. Whether it's good or not is significantly context sensitive. Therefore risk is symbolic.

The same investment S — same amount and same asset — is often a riskier one for A than for B. Let's suppose that A has far fewer resources than B.

Then what?

Then A gets knocked out of the market if the value of S sufficiently decreases. A cannot in that case invest in anything else and possibly recover or profit, while B will simply go invest in other assets. A has too meager resources; but that has nothing to do with the intrinsic properties of the investment being considered . . .

The same investment S — same amount and same asset — can be very risky for A and not significantly risky for B depending on what else they'd invested in, and can be risk increasing for A and risk reducing for B.

No financial advice exists. Only general theory exists.

Theories are often true. But they're not advice. They're not advice any more than knowing the principles of quantum mechanics helps predict where the football goes in a game.

All recommendations are just historical summaries of what one investor did or wants to do — opinion pure and simple.

Even this statement not financial advice.

(Comment below why that's the case.)

Walter Wriston said it. Risk is not a dirty word. All the same it is something that's underestimated and overestimated and misunderstood and that leaves many people confused.

There are obviously bad investments in a market; there are not universally good ones. And that is yet another reason why the rich get richer and the poor generally do not. (Be careful!)

The relative is more significant that the absolute.

That's long been the opinion of the mathematician and the physicist.

It's easy to earn money; but you know what? It's easier to lose it.

IN OTHER WORDS . . .

It's riskier for individuals without sufficient resources to invest in the same asset as an institutional player, such as a large fund. The hedge fund may have the resources to recover from a crash. The small investor is simply broke and out of the market.

The large investor has significantly many diverse and sufficiently above threshold investments. If a few of them increase substantially he's safe.

If it increases the probability of that an asset will lower risk even if later that asset ultimately declines in value.

If that one asset, however, is all or most of what an investor has . . . then he's increasing his risk — which he's also doing if he invests very small amounts in too many diverse investments.

That also doesn't work — for the same reasons.

Any public buy/sell recommendations can only be treated as revealing a preference, opinion, theory, or simply being a historical description of what the recommender did or thought about doing. The same buy/sell that's good for one individual may be rather bad for another individual.

Even personalized advice isn't really quite that. Perspective, anticipations, risk appetite, stress, etc, etc., affect what a risk means for the individual. And that in turn affects what the individual ought do or in fact does.

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