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What's with Muda?

edited September 2011 in Fund Discussions
Hi Guys,

The Japanese have a great term that summarizes unnecessary work, inefficient effort, and wasted time; the single word is “muda”. We do a lot of muda when constructing and monitoring an investment portfolio.

Scottish philosopher and economics thinker David Hume observed that “In proportion as any man’s course of life is governed by accident, we always find that he increases in superstition.” Since investment performance returns are not controlled by anybody, we are subject to uncertainty that is often interpreted as bad luck when an investment sours. That is an uncontrollable accidental outcome.

To compensate for our misfortunes we sometimes fall under the spell of false prophets, to the charades of charlatans, or to the superstitious beliefs that some wizard can reliably foresee the future. That is abject nonsense; it is surely not commonsense.

Reflect on the unimpressive, and in some instances dismal, records accumulated by acclaimed market wizards and gurus. The CXO Advisory Group has a lengthy posting that documents the performance of 84 experts, not all of whom have a sufficiently large record that permits a statistical rating. Notice how the accuracy listing scales between a 67 % high to a 23 % low correct score. The average successful score typically hovers around the rather mundane 50 % level.

Here is the Link to the CXO survey:

A 50 % accuracy rating is equivalent to a coin flip probability. It should be much better because the equity marketplace has historically delivered positive returns about 70 % of the time annually. Given that statistical loading, a guru should be correct in excess of 70 % of his predictions to demonstrate any special skills at forecasting future results.

If I were to project positive returns every year forever, it is likely that I would accrue about a 70 % successful forecasting record. Note that the highest rating scored by the CXO guru participants is currently below that level.

Also, because of a few of their dubious crystal ball mystic readings, some of the so-called gurus on the CXO list belong in a flaky fringe category of financial wizards.

Another aspect of our investment profile is our tendency to overreact to a dynamic marketplace. These changes are overemphasized and overly analyzed by a duplicitous media seeking attention. These same market gurus understand that bias, and build a career satisfying our fears with seemingly daily updates. Excitement and explanations proliferate in this environment. Most of them are simplistically wrong.

In the Roman Empire period during the reign of Nero, writer Gaius Petronius observed that “We tend to meet any new situation by reorganizing; and a wonderful method it can be for creating the illusion of progress while producing confusion, ineffectiveness and demoralization.” We reorganize our portfolios far too frequently.

Numerous industry and academic studies have demonstrated that “frequent trading is hazardous” to the wealth of individual investors. Since women are typically more cautious investors than men, and consequently trade less often, these same studies have discovered that, on average, women generate outsized returns relative to their male counterparts.

Annually, the individual investor mutual fund performance survey reported by Dalbar also documents the underperformance of private fund owners relative to the returns delivered by the funds themselves. Over a long time horizon, we only claim about one-third of the returns generated by the funds that we buy.

We investors get into hot funds too late, and often bailout of currently poorly performing funds too early. There appears to be a regression-to-the-mean tendency in play among mutual fund products. As a cohort, we have failed to demonstrate any market timer or trading acumen. But we are predictably proactive. Unfortunately, much of our misdirected efforts are muda. It is counterproductive and destructive to end wealth.

One obvious answer to this debilitating dilemma is to avoid over-activity. Don’t permit our emotions to dictate ill-advised action. We must take time to engage the deliberate, analytical portion of our brains. As Jason Zweig concluded in his “Your Money and Your Brain” book, all good decisions require a merging of the reflective and reflexive portions of our brains to reach solid investment decisions. Patience and balance are needed attributes that must be consistently applied. And costs always matter.

Stay cool and deliberate during this stressful period. The rugged equity landscape is just the market being the market, warts as usual. Volatility has its rewards as well as its pitfalls. Depending on your investment style and strategy, an investor can profit by just recognizing and integrating market volatility into his investment program planning.

The easy access to all the endless investment information is a double-edged sword. It should improve our decision making if it is properly assimilated and interpreted. However, there is such an Intel abundance that it likely saturates our ability to put it in context and analyze it correctly. It could be overwhelming. As management educator John Naisbett said, “We are drowning in information, but starving for knowledge”. The mixed metaphor aside, Naisbett is on-target.

I am not comfortable given this overload condition. I continue to search for ways to simplify. The emerging science of Knowledge Discovery in Databases (KDD) potentially offers techniques that will enhance forecasting accuracy. It is very complex mathematically, and today is mostly a promise rather than a functioning actuality. I classify it as experimental data mining with added constraints and enhancements.

KDD deploys conventional data mining methods, but augments it with a priori insights, expert advice, market models, multi-parameter inputs, screening for bad data, and numerous and frequent computer iterations. IBM researchers have worked on the problem for years and have generated some successes. But it is a tough slog and not yet ready for prime time. It may never be.

Here is a Link to a website white paper that I recently discovered. I am a rookie in this arena so I can not vouch for its accuracy or completeness. I am now in a learning mode. For what its worth, the introduction seems honest enough and the paper is current. Good luck. The Link is:

Hope springs eternal. KDD seems to violate Occam’s Razor to keep things at their most simple level. I suspect I’m guilty of muda with my attempts at understanding KDD.

Best Regards.


  • edited September 2011
    Howdy MJG,

    Thank you for the write. As my time is limited today (likely from too much "muda"; I will only say (with tongue planted firmly in the cheek), "if investments would just stand still and not be moving targets, my "muda" and profit score would improve!

    Away from this, I find myself sometimes trapped in "superfluous redundancies".

    Take care,
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