My Top 10 Peeves

The author discusses a list of peeves that share three characteristics: (1) They are about investing or finance in general, (2) they are about beliefs that are very commonly held and often repeated, and (3) they are wrong or misleading and they hurt investors. In this article, I discuss a list of peeves that share three characteristics: (1) They are about investing or finance in general, (2) they are beliefs that are commonly held and often repeated, and (3) they are wrong or misleading and they hurt investors. The first peeve is that there are many who say that such “quant” measures as volatility are flawed and that the real definition of risk is the chance of losing money that you won’t get back (a permanent loss of capital). The second peeve is the overuse of the word “bubble.” Third, not only are insufficient data often driving our decisions, but the data we have are often used with the wrong sign; the three- to five-year periods most common in evaluating asset class, strategy, and manager selection decisions are a good example. The fourth peeve has two parts. First, the idea that we will ever find, or should find, one real culprit for the recent financial crisis is wrong. Second, the typical narratives and debates about the crisis conflate two events—a real estate/credit bubble in prices and a massive financial crisis. The question of who should shoulder the blame for the real estate bubble and who should shoulder the blame for the financial crisis do not necessarily lead to the same answer. The fifth peeve, admittedly more in the true spirit of a “peeve,” deals with things that people should stop saying. “It’s a stock picker’s market” is one of them because it doesn’t really make much sense. The overuse of the word “arbitrage” has led to a loss of the word’s meaning. “There is a lot of cash on the sidelines” is a fallacy that must be debunked; there are no sidelines in investing.Sixth, if you deviate markedly from capitalization weights, you are, by definition, an active manager making bets, but many incorrectly fight this label; they call their deviations from market capitalization—among other labels—smart beta, scientific investing, fundamental indexing, or risk parity. Seventh, much of the discussion of hedge fund returns is just not cogent. Eighth, the brouhaha over high-frequency trading is massively overwrought; HFT is mostly a good thing, not an evil conspiracy to crush Main Street. The ninth peeve is the fact that companies with executives who execute stock options still carry out buybacks to “prevent dilution,” which is nonsensical. The final peeve is that the ability to hold a bond to maturity and “get your money back” versus a bond fund that doesn’t have this ability seems to be greatly valued by many even though it is, in reality, valueless.