My Review of "The Drunkard's Walk"

The book, "The Drunkard's Walk: How randomness rules our lives," looks at randomness and really randomness plays a greater role in what happens with humans than people, in general, think. I found the book to be exceptional. Although I have always suspected what the book claims, the book backs up its conclusions with mathematics. Plus, it does it in a fun way, making for a very enjoyable book, also. Although not specifically a financial or investing book, the book really is helpful in understanding such stuff. Some points which I noted are....

1. Human intuition is ill suited to uncertainty since in the 1930's researchers noted that people couldn't make sequences of random numbers nor recognize a random sequence.

2. Sometimes in life things happen which can't be foreseen.

3. The amygdala in the brain is active when making a decision, hence decisions are emotional.

4. Rewards work, but punishment doesn't. The opposite is just regression to the mean.

5. Examples which are more likely due to randomness - Roger Maris/1961, success of certain movies and studio heads.

6. Research has shown that people will assign greater probabilities to outcomes which are described in greater detail, the "availability bias."

7. Arithmetic didn't really exist until the 16th century, hence probability not understood before then.

8. DNA in courts - lab error = 1/11, DNA = 1/1B, so chance of error more like 1/10.

9. The Law of Sample Space - Gerolano Cardano - the Book of Games of Chance - 16th century.

10. The Probability of Points - 2 entities competing.

11. Pascal's Triangle - if need to know # of ways in which you can choose some # of objects from a collection that has a > or = #. Pascal's wager -odds about consequences of a pious life, 1/2 if G-d exists, ie. if pious. Confusing, but discussed.

12. Sweepstakes - cost of mail cheaper than chance of winning. Lottery, odds of winning same as one person dying driving to place which sells lottery tickets, but not advertised that way. Dice and roulette wheel are not perfectly balanced, so some uncertainty, not predictable.

13. The book mentions calculus and how it is composed of 1) a sequence, a succession of elements,b) a series which is the sum of the sequence of elements, and 3) a limit where the sequence is heading. But, in Zeno's paradox, the paradox is resolved because of constant motion, no stops. That's how Bernouli attacked the the relationship between probability and observation - toss a coin 10x maybe 7 heads, toss a zillion times expect 50% heads. Bernouli's Golden Theorem - large enough sample to ensure confidence within a certainty. Too small of a sample = the law of small numbers. For instance 1/3 chance that 5 of a CEO's performance will reflect his ability, so better to analyze his abilities rather than just look at results.

14. Bayes's Theorem is discussed where conditional probabilities. Prosecutor's fallacy/ mistake of inversion - just because A happens then B doesn't mean if B happens A will happen. Examples are SIDS deaths and OJ trial.

15. Understanding and quantifying random error led to a new field - mathematical statistics.

16. Wine tasting influenced by all kinds of things, price, context. Statistical measurements include standard deviation, standard deviation squared = variance. Also the Error Law known as a normal distribution or bell curve - in certain cases can expect certain proportionality of results. But, social physics not all normal, like Pareto principle - 80/20 rule or regression to the mean concept. Brownian motion shows Drunkard's Walk, randomness.

17. Book mentions V2 rocket attacks in WWII and cancer clusters, more due to randomness than predictable patterns. The human need to feel in some control interferes with the accuracy in perceiving natural events.

18. Lorenz's Butterfly effect - just small changes can lead to massive differences in results. Plus, unlike laws of physics, human affairs are too complex to predict. Asymmetry makes things impossible to predict, yet look predictable on retrospect, like the stock market. Also, people failing or in poverty may be more random than predictable.

In summary, a terrific book - will likely change the way a reader looks at things, or if a reader does think that way the book will show the mathematics behind it, in a very readable form. 5 out of 5 stars.

The "Joseph Oppenheim Kicker Theory" to Investing

For everything in life, including investing, I always look for what I call a "kicker," something extra which increases the chances for success and/or reduces the chances for failure, or just adds something beyond the main goal(s). Let's say you are looking for a job. Maybe one pays less but is located where people come to vacation - with many fun things to do and great weather - I would say it has a kicker. Same with investing. Some investments protect against inflation, some against deflation, but there are also some which protect against both even if the don't offer bigger rewards. This "kicker" is really a built-in hedge or diversification. I like the word, kicker.

For instance, let's say I want an investment which will protect me against deflation, but in case I am wrong and the opposite happens, inflation, then I can also win. This would be different that just buying a hedge or diversifying. Hedging and diversifying are also important tools, however, if one can essentially find the equivalent already built into the investment or decision, that is a "kicker" and in my opinion makes for a better investment.  So, in the case of such an investment, like a higher rate long-term Certificate of Deposit (CD) would be a protection against deflation, however if the CD has a low or reasonable early withdrawal penalty, one could always easily exit the CD and open a new one with a higher rate at a minimal cost, if inflation happens and interest rates unexpectedly go up significantly.

Another example. when selecting a stock, first I look at it as I would in buying a business, essentially shares of a company I would like to own completely if I could. So, thinking along that line, I would want a businesss which would do well no matter what happens with the economy. That would lead me to a company providing some kind of low-priced staple or service which people need all the time.

Another example, I always recommend investing in quality assets, be they stocks, bonds, etc. Even though potential rewards might be less than with riskier assets, there is always a premium paid for quality and due to unforeseeable situations, it might be difficult to dispose of a non-quality asset. So, in such a case, I call quality a kicker. Another case, CDs come without paying a commission, again, a kicker. Same with buying a home, look for a kicker -like it can be also used as a vacation home, etc

Sure, some might want to speculate and thereby obtain a greater return if one is right, that is by taking greater risk, but that is where I separate a speculator from an investor and I only want to think of myself as an investor, that is building in some protection while not getting greedy. Greed is not good and speculation and greed seem to go hand in hand.

My New Book is Just Published - "Become a Private Investor"

It's available at Amazon.com.

Portfolio - How to become a "Private Investor".

Calling oneself a private investor is when one earns one's money entirely by managing their portfolio of investments.

There are many ways to become one, like by winning a lottery then quitting one's job then investing the money, or likewise through inheritance or another way by essentially starting with enough money. However, I'll cover the approach which is possible for basically the average person. These are steps which can work. Obviously, it could be possible to skip some of the earlier steps, depending on an individual's circumstances and how one might have altered their life's goals over the years.

1. Start with a goal of wanting to be a private investor. Perhaps, like from childhood, wanting to reach an early stage in one's life where they no longer want to either be an employee or be self-employed which requires running day-to-day actual operations in a business. Another way to look at it, is by owning assets where other people do the "work", per se. This is not much different from owning a business, just one step removed. In fact, Warren Buffett essentially has done that, by buying entire companies, then using the cash flow from those companies to buy other investments -like shares of stock in major companies plus holding other securities. In this case, though, I would envision a child expecting to work at a normal job, but using the cash flow to build up savings and investments in order to no longer need the job. Plus, it is an advantage to have one's job(s), and education leading up to it, serve to prepare a person for such a vocation, I'd say being well-versed on lots of things.

2. Learn that it isn't how much you earn, but how much you spend and save from what you earn, that is important. I have noticed that there basically are two kinds of people, those who never save no matter how much they earn and those who save no matter how little they earn. Sure, there may be a middle road, but rarely. It is a mindset. Obviously, it is the latter mindset which is necessary to become a private investor from humble beginnings, and the sooner one can embrace that mindset the better. What goes along with that is to learn that it really is possible to enjoy life to its fullest, really very simply - public parks, home cooking, using coupons, etc, etc. In fact, it can become a pleasant challenge, in learning how to navigate such a lifestyle.

3. Start early in saving and investing, and reading about investing. Even if you just have just one FDIC-insured CD and one stock, you begin to build up a knowledge of investing. Knowledge and experience are the keys. Let's say one begins as a teenager, by the time the person is in their 30's or 40's, one has maybe 20-25 years of experience and accumulated knowledge. So, targeting perhaps the mid-40's to be in a position to become a full-fledged private investor is certainly reasonable.

4. Then, just follow my post, Portfolio -"Investing Approach". It really isn't very difficult, just requires a mindset and a desire to learn.

Also, it should be remembered that if one has embraced the mindset of being able to enjoy life to its fullest while living inexpensively, one's portfolio need not be extraordinarily large. I do have a blog, "Joseph Oppenheim Philosophy" which does look at some thoughts which might be of help to potential private investors.