Test for Investors; Do you have what it takes to be a value investor?

giraffs

Test yourself…………….

Each of four cards on a table has a letter on one side and a number on the other, but you can only see what is on the side facing up. What you see are two letters and two numbers:

A         4           D           7

Suppose the rule governing these cards is that if a card has a vowel on one side, it has an even number on the other side. Which two cards would you turn over to find out whether the rule is true? Take no more than twenty seconds.

Now go to the real world: Can you name at least two psychological/analytical errors that you see in this clip.

https://youtu.be/Cxjdj5_5yNM Take no more than 4.5 minutes–length of the clip. The investment bankers each have MBAs, CFAs, Accountng degrees etc. They are SMART!

Total time for test 5 minutes.

2016_templeton   Hand-out to go with the above talk in 2016.    A good discussion of the psychological strength needed to apply value investing principles.

13 responses to “Test for Investors; Do you have what it takes to be a value investor?

  1. Note page 20 on the Templeton hand-0ut. All you need to know to be a bargain hunter. The catch is fortitude and inhuman patience.

  2. Hi John,

    Congratulations for your blog.
    All I see was greed. But this is easy looking at things in perspective and in the past after things went south. At that time most people thought Michael Burry was crazy.
    Anyway, great blog, thanks again.

    • What PSYCHOLOGICAL errors, biases did you see in the video BEFORE the market went south.

      If someone is blind and extremely drunk and goes speeding off in a car through heavy traffic–though there is NO Guarantee–what are the odds of an accident?

  3. Great representation of what Munger called a “miasma of easy money.” The bankers have this smug, “masters of the universe” sense of entitlement — an attitude that tends to preclude discussions about assumptions, whys, etc. So to answer your question, one error is assuming your skill is the reason for your success. When riding a wave of asset inflation (housing and the related financial instruments), it’s easy to think you and your institution are hot stuff.

    This is one of the reasons why I’m opposed to the Federal Reserve on ethical grounds as much as financial: their easy-money, low-interest policies promote short-sighted financial/monetary debauchery that brings out the worst in people.

  4. I think the biggest biases i see here are Group Think/ Confirmation Bias and Optimism Bias i.e house prices will keep going up and will never go down for whatever reasons we can come up with.

    • Thanks GC. Yes, one of the many reasons beside the fallacy of central planning and the conceit of perfect knowledge.

      DK: Yup. all three. Plus the bankers never DSIPROVED their own thesis–that housing prices couldn’t default en mass. Did they even question the crazy guy’s assumptions with historical data for the past 2000 years? How about mass defaults when the Roman Empire collapsed.

  5. Thank you for the fun card test. I must admit I originally misunderstood the question, and concluded there were no two cards to prove the rule true for all cards. I cheated and looked up the answer.

    I believe the answer is to turn over the A and 7 cards.

    The rule “if a card has a vowel on one side, it has an even number on the other side,” says nothing about non-vowel cards, so if you turn over the 4 and it is a non-vowel the rule is not violated. This is where I erred.

    The rule is violated if you turn over A and see an odd number. It is also violated if you turn over the 7 and see a vowel.

    Regarding the clip, I noticed the young male analyst says that millions of Americans must default on their mortgages for the CDSs to pay off and that it has never happened, therefore it can never happened. He ascribed past performance with future results. Doesn’t he read the disclaimers?

    The bankers were also overconfident. They wrote off someone willing to take a massive position opposite them as a loon. The loon was right.

  6. 1. Answer for question 1 is cards A & 4
    2. answer for question 2 is the which PDV is zero and the marking is shown at 100 and the year shown is 1880s

  7. A& 4 is incorrect. See comment above. You fell to confirmation bias.

  8. Also the fact that Burry was a Doctor with no formal training in finance probably led them to the conclusion that he was an idiot (Pavlovian associacion). What a beautiful situation of information assymetry he crafted for himself!

  9. Sotos: The bankers never looked at the underlying data or facts. The just blindly made assumptions–especially the one about housing NEVER going down across the whole country. Great Depression.

    Nothing changes…………..the band plays on.

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