Tuesday, February 28, 2006

Why The Count of Monte Cristo Wasn't an Investor: Hidden Emotions = Poor Choices

One of the true "blessing-curses" that comes with having a Ph.D. in psychology is the introspection, that instinct to revisit decisions to determine the deeper, underlying factors behind them.

It can be a painful exercise, but is almost always a worthwhile one. And the revelations may surprise you. I'll relate a recent anecdote. But this is no tale of investing, my friends.... this is a tale... of revenge!

I decided last month to buy some JDSU (recently voted the "The Worst 5 Year Performer" by Wall Street Journal Online. Congratulations - I guess).

JDSU is not the typical stock that I like to buy. It's a former highflyer beaten down beyond all recognition. It's volatile. When it's not, it sinks like a row boat with a small leak. And, frankly, I don't understand what the heck they do. And I read the company profile. Twice. See if you can make sense of it. http://finance.yahoo.com/q/pr?s=JDSU. (I double dog dare you.)

But I decided to buy it anyway. There was a buzz ("They're turning it around!"). Cramer mentioned it. Whatever the reason, I jumped in. Naturally, in keeping with what I call "Whack-A-Mole Syndrome"(TM), I bought it precisely at its high and have watched myself lose 10% in the span of a couple of weeks.

In looking back at this strange decision, I discovered something. My thoughts and emotions were curious. Off center. Not what they typically were.

You see, someone close to me had bought a position in JDSU at $13/share a while back. It was down from a high of close to 90. Seeing it as a buying opportunity, this (otherwise wise) individual uttered those fateful words... "How much lower could it go?" and proceeded to grab the falling knife as it went past.

How much lower? There is only one answer to that question and we all know what it is. In the case of JDSU, it reached a low of $1.32/share.

But that was years ago. It had climbed since then. Turned the corner. It was up over $3/share now. So I decided to I'd hop on the upswing. Make a quick profit. Get out.

It was in watching the stock drift lower that that the hidden emotions began to reveal themselves.

The person who had bought the stock at $13/share passed away suddenly in December.

He will never see a profit from JDSU.

But I could. And (damnit) I would.

I didn't care about the money. Seriously. I cared about payback -- literally and figuratively. Just a little profit. Didn't have to be a lot. Just a few bucks. I wanted this stock to give something back. The stock owed us that.

Someone forgot to tell the stock. So now I have this stock I don't want and -- for the moment -- it would appear I fell into the same trap. (Hey, I said it was a tale of revenge, not successful revenge.)

Investing isn't personal; it's business. We know this. But every once in a while the Market (In Her infinite wisdom) reminds us.

This particular case is an extreme example. I recognize that. Most hidden emotions are much more mundane. Nonetheless, I invite you to pick a stock that has bedeviled you, look back, and explore the reasons why you bought it. You may learn something about yourself or even detect a blindspot that could save you in the future.

If you like, write myself and Dr. Peterson. We'd be happy to supply an observation or just hear your story.

As for me, maybe I'll go back to investing in MO. Yes, they make cigarettes. But at least I know what cigarettes are. Besides, I have some relatives who smoke. It's not pretty. The wheezing at the top of every staircase. The uncontrollable coughing fits. Yellow fingers... I think they'd be pleased to know that Altria was giving them something in return.

Uh oh... here I go again.

Thursday, February 02, 2006

Neurofinance in the News

A Bloomberg article released yesterday ("Inside the Trader's Brain") describes the potential (and the controversy) surrounding neurofinance.

There is a lot of development here, but not a lot of hard facts yet (I'm quoted in the article saying as much). Brian Knutson and I took Adam Levy (the article's author) on a quick tour of Stanford and the neuroimaging lab last August. Adam was, helpfully, silent about the research we discussed, much of which is on-going.
But we have some excellent clues pointing to a revolution in the way markets are analyzed and traded.

One area of advance is in trader assessment using advanced technology. I've recently received interest in trader evaluations using portable devices such as that worn by Andrew Lo in one of the article photos. These devices are actually incredibly primitive, and it's still hasn't been conclusively proven that there is any predictive power in the data they report (mostly cardiac and electrophysiological variables). They are like a lie-detector. Traders don't know in advance when they're making a bad trade. This is crucially unlike liars, who are caught because they are trying to repress the true answer. However, we've recently made a breakthrough in that regard as well.

Additional advances have occurred in the way market data is analyzed, exploiting new predictive advantages. I'm starting a hedge fund based on those advances. And that's all you'll hear about that.

Of course, I'm being vague here. I just wanted to drop a note that things are definitely happening in neurofinance, and much of it is already a reality in our proprietary work - hence the lack of specifics.

One thing of immense importance in advancing this field is research grants. Currently, most research is funded by the National Institute of Health and related goverment agencies. No funds are currently available (to us at Stanford) for applied research, using real traders and investors. So if you know someone interested in sponsoring some neurofinance research.... Send an email to Richard on [email protected] or Brian Knutson.

Best wishes,