Dog Kisses, Wolf Vomit, and Investing

Our quote of the day is taken from a Time article about cutting edge research into canine cognition and behavior:

“If we happened to spit up whatever we just ate, I don’t think our dogs would be upset at all.”

The gist of the quote is found in the following passage:

The first rule for scientists studying dogs is, Don’t trust your hunches. Just because a dog looks as if it can count or understand words doesn’t mean it can. “We say to owners, Look, you may have intuitions about your dog that are valuable,” says Hauser. “But they might be wrong.”

Take for instance the kiss a dog gives you when you come home. It looks like love, but it could also be hunger. Wolves also lick one another’s mouths, particularly when one wolf returns to the pack. They can use their sense of taste and smell to see if the returnee has caught some prey on its journey. If it did, the licking often prompts it to vomit up some of that kill for the other members of the pack to share. The kiss dogs give us probably evolved from this inspection.

Believe it or not, this example is relevant to investing, finance, economics, politics, and pretty much every other human endeavor, as it nicely illustrates the gaps that can exist between beliefs, perceptions, and reality. When we interact with a dog, we can’t prevent ourselves from thinking human thoughts, thoughts that are also deeply embedded in our biological and cultural backgrounds. That means that for most of us, when another person kisses us excitedly about the face and mouth, they are demonstrating the affection they feel for us (though sometimes it’s other emotions, as Fredo Corleone could attest). And in most cases, that’s probably what the other person is thinking too. But apparently that might not have any resemblance to what a dog is thinking when it “kisses” you. Nonetheless, we tend to believe it is a “kiss”, primarily because receiving affection, real or perceived, makes us feel good. But it’s an interpretation that is probably not well grounded in reality.

In the investing world, decisions and behaviors are not always grounded in a solid assessment of reality either. For example, while it might have felt better to sell risky assets in February or March of this year and be done with it, the reality is that it would have imposed a severe performance cost (to this point, anyways). Likewise, it feels good to own assets that are in popular demand, like homes from 2003-2006, tech stocks from 1998-2000, and so on. The overwhelming use of “momentum” indicators in the investing business indicates that the majority of professional investors are prone to the same kinds of mistakes. While the continuing prevalence of herding behavior in financial markets might be comforting to individual members of the herd at most times, it’s almost certain to cause episodes of significant harm.

Studies of successful investors and traders have found that while they experience the same emotions and discomfort as every other person dealing with risk and uncertainty, they have developed skills that allow them to manage emotions with reason and discipline. Specifically, they have a firm grasp of the fact that they are involved in a probabilistic endeavor that may not turn out well in every case, and they apply consistent decision making processes, even when it would feel better to run the other way. While you may never need to develop the ice water veins of a successful trader, or the steely nerves of a contrarian investor,  there are a couple of old adages that, because they are well grounded in reality, should help all investors avoid excessive reliance on emotion when making financial decisions:

What goes up must (eventually) come down.

Don’t put all your eggs in one basket.

Of course, in the world of human-canine relations, it probably won’t cause any harm to believe that a dog kiss is, well, just a kiss. It sure beats the alternative!

URLs:

http://www.time.com/time/magazine/article/0,9171,1921614,00.html?xid=yahoo-feat

http://www.youtube.com/watch?v=FcFlp6kl508&feature=player_embedded

DISCLAIMER: Symmetry Capital Management, LLC is a Pennsylvania registered investment advisor. The foregoing is not a solicitation to buy or sell any security, or a recommendation to engage in any particular investment strategy.

The first rule for scientists studying dogs is, Don’t trust your hunches. Just because a dog looks as if it can count or understand words doesn’t mean it can. “We say to owners, Look, you may have intuitions about your dog that are valuable,” says Hauser. “But they might be wrong.” See TIME’s video “The New Frugality: Doggie Day Care.”

Take for instance the kiss a dog gives you when you come home. It looks like love, but it could also be hunger. Wolves also lick one another’s mouths, particularly when one wolf returns to the pack. They can use their sense of taste and smell to see if the returnee has caught some prey on its journey. If it did, the licking often prompts it to vomit up some of that kill for the other members of the pack to share. The kiss dogs give us probably evolved from this inspection. “If we happened to spit up whatever we just ate,” says Horowitz, “I don’t think our dogs would be upset at all.”The first rule for scientists studying dogs is, Don’t trust your hunches. Just because a dog looks as if it can count or understand words doesn’t mean it can. “We say to owners, Look, you may have intuitions about your dog that are valuable,” says Hauser. “But they might be wrong.” See TIME’s video “The New Frugality: Doggie Day Care.”

Take for instance the kiss a dog gives you when you come home. It looks like love, but it could also be hunger. Wolves also lick one another’s mouths, particularly when one wolf returns to the pack. They can use their sense of taste and smell to see if the returnee has caught some prey on its journey. If it did, the licking often prompts it to vomit up some of that kill for the other members of the pack to share. The kiss dogs give us probably evolved from this inspection. “If we happened to spit up whatever we just ate,” says Horowitz, “I don’t think our dogs would be upset at all.”The first rule for scientists studying dogs is, Don’t trust your hunches. Just because a dog looks as if it can count or understand words doesn’t mean it can. “We say to owners, Look, you may have intuitions about your dog that are valuable,” says Hauser. “But they might be wrong.” See TIME’s video “The New Frugality: Doggie Day Care.”

Take for instance the kiss a dog gives you when you come home. It looks like love, but it could also be hunger. Wolves also lick one another’s mouths, particularly when one wolf returns to the pack. They can use their sense of taste and smell to see if the returnee has caught some prey on its journey. If it did, the licking often prompts it to vomit up some of that kill for the other members of the pack to share. The kiss dogs give us probably evolved from this inspection. “If we happened to spit up whatever we just ate,” says Horowitz, “I don’t think our dogs would be upset at all.”

Our Interview with Jon Heller

Jon Heller, a financial planner and longtime financial writer, was kind enough to interview us for his Cheap Stocks blog. Jon’s a smart, interesting guy who shares our passion for deep value investing, and we recently spoke with him about our investment philosophy, our current outlook, and a couple of favorite names in our actively managed Opportunistic Portfolio. We’re also happy to note that the interview was picked up by the Seeking Alpha website.

URLs:

http://stocksbelowncav.blogspot.com/2009/05/cheap-stocks-interview-art-patten_26.html

http://seekingalpha.com/article/139767-interview-with-art-patten-president-of-symmetry-capital

DISCLAIMER: The foregoing information does not construe an offer to buy or sell securities, nor is it a recommendation to follow any investment strategy. Clients and/or principals of Symmetry Capital Management, LLC may hold long, short, or derivative positions in any of the securities mentioned.

DISCLOSURE: As noted in the interview, certain clients of Symmetry Capital hold positions in HIMX, RMT, and THMD.

A Couple of Trinities

Trinity #1 – CFO.com carried an interesting article from The Economist on Thailand’s recent bungling with capital controls, a problem related to the ”impossible trinity” of domestic liquidity, exchange rates, and capital accounts. We’re not so much interested in the trinity or the theory behind it as in this tidbit — the authors correctly point out that, although this episode might have reminded the markets of the currency crises associated with the ‘Asian Flu’ in 1997, it’s actually quite different [diametrically opposed, in our view]. Where the 1997 crisis was marked by capital outflows, the current challenge facing emerging Asian economies is one of capital inflows, a symptom of the so-called ’savings glut’ theorized by some economists in recent years. I suspect that many non-theorists would be curious to know how the world could go from a shortage of savings to a glut of savings in such a short span of time, given that we tend to think of ’savings’ as a reserve of wealth accumulated over long periods of time. The answer actually has to do with the money creation process, which is controlled largely by the U.S. Federal Reserve, and how this process influences the use of existing assets. Rather than delve into the theory behind it, we’ll just offer this pithy rule of thumb: when Federal Reserve policy supports a high real rate of interest, the demand for savings rises, pushing up the marginal cost of investment capital; while a low real interest rate dampens the demand for savings, thus lowering the cost of capital available for investment. From roughly 1996 to 2002 (ignoring the runup to Y2K), the Fed enacted policy that tended to raise the real rate of interest, and ended up causing all kinds of trouble globally, as capital became scarce: Asia in 1997, Russia in 1998, Argentina in 2001, and finally the U.S., starting with commodity and cyclical industries in the first half of the period, and ending with the infamous corporate debacles and bear market slides of the period. Since 2003, the Fed has kept the real rate of interest historically low, thus encouraging a ‘glut’ of savings available for investment globally. The recent episode in Thailand merely shows that both extremes (too tight or too loose) have global consequences.

Trinity #2 — Another Economist story carried on CFO.com discusses the ‘misaligned triangle’ between public companies, private equity, and investment managers, as articulated by Morgan Stanley strategist Henry McVey. The basic thesis is that long term investment by publicly traded firms is falling short of the level required to ensure long term profitability, because: (A) the executives of public companies are tending to hoard cash as a reserve for hedging against regulatory risk and for buying back stock in order to boost earnings per share and thus maximize expected compensation; (B) private equity firms are often attracted to firms with cash on the balance sheet, but rather than putting that cash to work in long term investments, their interest is typically in maximizing short to intermediate term cash flows, which naturally precludes capex; and (C) rather than fighting for the cash reserves that public shareholders are entitled to, many fund managers instead accept the performance pop their portfolio receives whenever a private equity bid is at a significant premium to market (or more precisely, to carry value). This is a great example of agency theory in action, and leads us to take a rather interesting long view: in coming decades, more and more of the heavy lifting related to investment will be carried out by closely held private firms (or consortiums of such firms), while larger pools of capital will take over an increasing share of financing such investments. In fact, we can think of several current examples that might mark the beginning of such a trend, and thus lend support to the hypothesis. The long term impacts on markets, investors, businesses, and governments could get very interesting.