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Friday, December 28, 2012

The Normalcy Bias and Procrastination


Presently there exists a uniquely positioned psychological dilemma in our financial markets. For private businesses and small cap public entities the capital markets have come to a standstill. There are no banking opportunities and now the investor side of the equation has all but dried up completely.

The major causative factor in this phenomenon is the normalcy bias. The following best describes the normalcy bias:

"A quirk of the human condition is for the mind to desire normalcy so intensely as to consciously or subconsciously disregard knowledge that is disruptive to a pre-conditioned reality. This phenomenon is an important part of crisis management and market psychology. The consequence of a normalcy bias is that warning signs of a potential crisis go unnoticed or are interpreted optimistically. When a crisis occurs people are so overwhelmed by events inconsistent with a desired reality they lose their ability to make decisions. Researchers believe when the mind encounters an entirely new experience or event it attempts to match that reality to relevant experiences of the past. If there are no matching experiences the mind enters into a kind of feedback loop resulting in passivity. This lack of action as a response to risk is called negative panic and it culminates in a dangerous inability to act assertively in crisis. In essence, the psyche struggles to come to terms with what is really happening, paralysis follows.

The afore-mentioned paralysis exists in the form of procrastination which is always a negative factor for any financial decision making process. One can always measure their loss in both the present and the future based upon procrastination. Nothing good ever comes from procrastination, it is a no-decision which is in itself a very discernible decision.

Investors of all types large, small, fat, skinny, intelligent, ignorant etc... Are suffering this malaise. Once they understand and become aware of it, they can be awakened and the ability to make smart decisions about money will return like fresh meat after a thaw.

We now have many people who are stuck in the paralysis by analysis cycle, this is why so much money is on the sidelines and people believe they want to stay in cash. By treating the symptom we will not cure the disease. The core of the procrastination is the normalcy bias, which is being promulgated in a continuous state of unawareness.

The initial step in correcting this psychologically driven procrastination cycle is to overcome the fear of change. Just as the normalcy bias overcomes individuals in disaster based crises, it now exists due to the ineffective awareness of a permanent changing economic environment. Everything old will not be new again. Gone are the days of happily reminiscing for a return the good old days of the past. We have recycled into a global economic trend and investors need to start embracing the way opportunity will present itself in this type of environment. Of course it will look, feel and be abundantly different. Old trends have become meaningless and provide no benefit for any forethought into smart decisions about money.

Not only do investors have to make this leap, but investment advisors, financial planners, family and business advisors such as CPA’s etc.. all need to make the leap as well. The ostrich approach to sit around and wait until things return to normal is a sure-fire failure driven approach.

The second step once fear is lifted is to practice a counter-intuitive approach to investment observation. Plain vanilla investment approaches will not keep you above water in the present financial environment. The need to embrace alternative investment opportunities is paramount to financial survival. Understanding the motivation of Wall Street institutions and their direct connection with government impact on the economy becomes more necessary than ever before. Your investment success is now mandated upon several additional factors including geo-political factors that impact the entire universe of industries and investment sectors. How does taxation, regulation and government oversight impact the entire industrial universe has to be taken into account when looking at any single business entity within that specific universe.

These are big changes and they are difficult adjustments for investors and consumers alike. By embracing these changes and fearlessly diving into the new financial market place you can master the on-coming surge of great opportunity and successfully overcome all obstacles in making smart decisions about money. What you cannot afford is the infinite losses assured through procrastination.

Learn the Psychological Triggers that will inoculate and insulate you against scams, fraud and predatory sales tactics.

www.karlschilling.com

Saturday, December 8, 2012

Value of Research


The truth is the free market has always been the staple success of capitalism. There market allows for winners and losers, of course there are many market manipulations that have long permeated the scene. These manipulations have broadened the loser pool in order to enrich a small group of winners.
There is a reason for successful manipulation though and it is in the basic premise of laziness. Unfortunately for losers they are simply lazy and dependent which turns them in to investment victims. The manipulation I am discussing here is perfectly legal and it plays within the rules, yet it is a tilted game and the losers are unaware they are being manipulated.
So what is this manipulation and how does it occur? The simple answer is financial media. In general investors rely upon many different levels of financial media for their information. Most of the time this information touted through the financial media is enticement for investors to buy whatever in order to enrich those who have paid for the media platform. If you as an investor rely on the pundits who are paid via advertising, or even company remuneration then you are receiving biased information meant to entice you to use your money at the risk level and allow others to have a risk free ride on your losses. This is simple supply and demand and it shows itself in the concepts such as pump and dump schemes and the oldest loser in the history of the markets which is buy high and sell low.
So how do you get a fair chance at making money in the markets? The answer is the old fashioned way. Your research should begin with basic business principles on how good companies become great. From that platform you can then look into industries and sectors that are leading the way. Once you have this basic education (all of which can be self-taught) you will reverse engineer the process. By reverse engineering you will start top down, which is looking at industry first, then the overall market for that industry drilling down until you find companies that are leading market share in those specific industries. Once you land on these companies you begin to reverse engineer their internal fundamentals and then their stock history.
This sounds like a lot of work and in some cases it is, yet this work is non-biased (of course you will have to identify your own personal bias level, but that is another story line) and it will be work that pays off in your financial decision making process.
Now, the information you need is all available in public filings for any companies you want to research and there is incredible amounts of information available on industries and sectors as well. (Simple Rule #1 is NEVER invest in a company that does not produce public filings) All the information you need is readily available and if you can read and comprehend some basic tenets of markets and business you will be able to identify your own winners. In doing so you are providing a reasonable risk profile for your investment opportunities. When you rely on others for these decisions you are increasing your risk profile by taking on the potential underlying bias and conflict of interest that is under the surface. This invisible manipulation is what introduces you to a zero sum game in which you have been set up to lose by design.
Does this mean you dismiss your advisors or brokers? NO, it simply means you have a process to vet their recommendations. If you find that their recommendations continually fail your due diligence process (research) then fire them and find new professionals to work with. The point is to uncover and reject manipulation when it appears.
Lastly, the financial periodicals ( I won’t name them, but you can find them on any newsstand) including the penny stock, small cap issues that appear in your mailbox are all PAID for and have underlying motives. Those motives are simply to tout the companies, funds etc.. that pays the most for the ink on the pages. In the case of the freebies that appear in your mailbox these are often paid for by non-affiliate shareholders of the company being touted. These shareholders are often paying for the media piece in order to solicit buyers who they can sell off to while watching the stock rise on the back of the new buyers.
The end game is your money deserves the best chance for success, this is always dependent on your making smart decisions about money. The best chance you have is to do your own homework.

Wednesday, December 5, 2012

Why having a Counter-Intuitive Approach to Investing is a Must


Whether you are a high net worth investor or an average Joe, you must reconsider all you think you know about investments. The economic climate has undergone an unheard of evolution. Common sense financial staples no longer contribute to the growing trends in the markets. Change has always been a purveyor of obstacles, yet most of these obstacles are self-inflicted.

The ability to embrace change and actually warm up to it has always been a gift of being counter-intuitive. The vast majority of our population doesn’t take well to change. The obvious emblem of this was the vastly popular book “Who Moved My Cheese” in which Ken Blanchard made the case for counter-intuitive thinking.

I submit that we are now in the greatest time of change that our society has witnessed over the last century. Everything old is not going to become new again. Unfortunately we raced towards moral hazard and have accepted the fate that comes along with ignoring the simple and common sense principle of moral hazard. The issue is not debating the virtues of moral hazard, the issue is accepting change and enriching your life through a counter-intuitive mind set about investing.

Hockey Icon Wayne Gretzky said that his success was due to the fact that his philosophy on the ice was to “go where the puck was going to be and get there first” now this is highly counter-intuitive behavior. Well, as an investor you need the same philosophy, “understand where we are headed and make decisions based upon this forecast.”

Here are several points to consider in your counter-intuitive approach:

1.      The US will be heading into recession once again.

2.      Invest in companies that are recession proof and thrive during recessionary periods.

3.      Avoid all dividend paying companies that are not recession proof.

4.      The US will continue to expand debt at an unheard of pace.

5.      Follow the financial products and services that correlate positively with increasing debt.

6.      Commodities, oil&gas, precious metals all trend upward as debt increases.

7.      The US government has set their sights on the qualified retirement plans (401k, IRA, SEP, Keogh, any ERISA based plan) which have approx. $13-16T in assets under control.

8.      The government snatch on these plans will begin with a plain vanilla tax reform act which will reduce maximums, limited tax deductions and moderate the percentages of investment vehicles.

9.      The second stage assault on qualified plans will be a mandate on what types of investment vehicles the funds may invest in (The government will require a huge percentage be invested in US treasuries)

10.  The final assault will be a GRA (government retirement account) much like social security this account will freeze your principal funds and turn them into an annuitized retirement payment with you having no control over your funds.

At the Advocacy Network our goal is to inoculate and insulate investors and consumers from scams, fraud and predatory sales tactics. This is a preventative process, not a reactionary one. In order to fully insulate you requires a counter-intuitive approach. Most people will not agree as they will stay put in the normalcy syndrome continuing to believe that things will return to the same as they once were. The rubber band has snapped and we are not going back to any familiar circumstances. The change is already occurred and is continuing to evolve, don’t allow it to consume you. Self-reliance will be at a premium and those who take a proactive counter-intuitive approach will be the biggest winners.