Wednesday, July 15, 2015

The Pitfalls of Proof By Example

During my IBD® Meetup last evening we broached the subject of proof by example.  For those of you who don't know what that is, have a quick look here.

Proof by example can get you into trouble in a lot of different ways but things escalate to a new level when it's involved in your trading process.  There's a way to make it work for you, though, so in today's post we'll examine some negative aspects while focusing on actionable tips to get around them.


The Pitfalls of Proof By Example


Let's start with a quick example of a scenario that could get you into trouble.  If you live in the U.S. you have noticed a steady decline in the presence of cigarettes in our culture:   

  • There have been class action law suits against the tobacco companies  
  • Smoking has been outlawed in public in places like New York and California
  • Many restaurants no longer offer a smoking section
  • Taxes on cigarettes are higher than ever before
  • Teen smoking is on the decline
  • We don't see cigarettes on TV or in movies like we used to.  
  • There are fewer billboards and magazine ad's
  • We see commercials for products like Nicorette, e-Cigarette, and Chantix - all designed to undermine the tobacco industry

Sitting around chatting with your friends, someone in your group may cite these examples as proof that tobacco companies must be a bad investment.  After all, look at all of these negative things impacting their businesses!  They will continue to dig up facts and figures that illustrate their point of view on the matter.

However, they'd be wrong to do so.  The truth is that tobacco companies are thriving - just not in the United States!  They've adapted their business model and taken advantage of international markets where these restrictions and cultural changes haven't taken root yet.  Asia, Africa, and Europe still consume tobacco at an astonishing rate which is easy to overlook when you're stuck in that proof by example mindset.



Breaking The Cycle



Making generalizations is something we all do.  It's hard wired into our DNA and is partly the reason for our survival as a species.  However, when your financial future is involved, it's critical to find ways to make it work for you.

If you have an opinion or a theory on something, that's fine - but you had better test it out before you tie a theory to your finances.  We live in the ultimate information age, with access to every side of every argument at our very fingertips, so one thing that I like to do is, seek out contrarian points of view for my assumptions.  

Challenge yourself to no just focus on facts that only support your opinion.  Review the facts that run counter to your opinion and if your views can withstand that level scrutiny, you'll have the peace of mind required to engage in data driven trading versus emotional trading,


Not All Generalizations Are Bad


Generalizations can give us a feeling of comfort and it's actually OK to stick to your comfort zone.  For example, I have a negative opinion on penny stocks.  I'm sure there are still some opportunities when trading penny stocks but my own generalizations have kept me out of the mix there.

My comfort zone is growth stocks but I like to give myself some mobility within that comfort zone too.  I've learned that I'm comfortable expanding my approach to focus on growth wherever it exists.  Even if it's not actually a stock but, instead, an ETF, or a foreign index. 


Are You In The Tampa Bay Area?


My son and I are in the early stages of planning a live 2 hour presentation of our funnel method for selecting stocks along with a crash course on how we like to incorporate options into the mix.  We are looking to do this on a Saturday some time in August

We need at least 12 participants at $50 each to cover our cost for the venue and refreshments etc.  If you would be interested in attending, please let us know by clicking here. We will firm up the plans and the date once we can confirm the interest level.  If you have questions, you can always reach out to me directly at investorspotlight@gmail.com

Happy Trading!





  




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Do not take a position unless you are prepared to sustain a TOTAL LOSS. Your loss could include the money you invested as well as commissions and transaction charges.


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