I’ve been reading “Simple Heuristics that make us Smart” by G. Gigerenzer and P. Todd, since I found it referenced in an investment book.

The authors define the term “heuristic” as “serving to find out or to discover.” In the early 1900s, Einstein used the term as “an approach to a problem that is necessarily incomplete given the knowledge available, and hence unavoidably false, but which is useful nonetheless for guiding thinking in appropriate directions.”

With the advent of information processing theory in cognitive psychology, a heuristic came to mean a useful shortcut, an approximation, or a rule of thumb for guiding search, such as a strategy that a chess master uses to reduce the enormous space of possible moves at each point in a game.

Read that last paragraph again. Isn’t that what most investors are faced with when trying to make investment decisions? Reducing variables in the decision making process is what I like to call it. Here’s how the authors describe the simplification of a decision making process:

There is a sound reason why a person might base a decision on only one reason rather than on a combination of reasons: Combining information from different clues requires converting them into a common currency, a conversion that may be expensive if not actually impossible.

That is exactly what you are faced with when making investment decisions based on fundamental analysis which, given the wide variety of information available, may require you to have the anticipating mind of a chess master.

Even if you have the time and ability to correctly analyze hundreds of data points leading to your ultimate investment decision, and the purchase of a certain mutual fund or ETF, you will still need one more thing once you are actually invested. That one thing is a trend in place to propel your investment higher assuming you took a long position.

My take on using heuristics is that my trend tracking approach filters out all of the noise and reduces dozens or hundreds of variables to only one that I can measure: The trend; is it up, down or sideways?

It’s a far simpler and more effective process, one that I have used even before I knew what heuristics were all about. The book is only interesting to a certain point for me. It’s not an easy read, and I will most likely not finish it since it’s more suited to a psychologist or therapist in that field.

This not meant to be demeaning to the quality of the book; it’s just my shortcoming that my interest in that subject is limited.

I have repeatedly talked about the importance of not only tracking a sell stop but actually executing it when the price point is triggered. Many readers have told me that this is one of the most difficult things to do. Why? Very simply, because it is an admission of having been wrong especially if that sell stop triggers a loss as opposed to locking in a gain.

Get over it! When you invest, you will have losses and admitting that you were wrong from time to time will not kill your portfolio. What will kill it is letting small losses turn into large ones.

If you need a reason to get over that false sense of pride, take a look at how Warren Buffett, one of the greatest investors of our times, handles this issue. If you think he never makes mistakes, think again. Here’s an excerpt of his letter to shareholders (page 8) for the world to see:

And now it’s confession time. It should be noted that no consultant, board of directors or investment banker pushed me into the mistakes I will describe. In tennis parlance, they were all unforced errors.

“I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.”

I like his down to earth style of describing how things are and not how he would like them to be. There are great lessons to be learned from his attitude, so take that to heart and next time you find yourself on the losing end of a transaction, swallow your pride and think how Warren Buffett handles failures.

If you openly admit to a loss, rather than trying to hide it, you might even get some (deserved) sympathy from your better half.

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

Bulls and bears engaged in a tug-of-war with the bulls coming out ahead for the week by a slight margin.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved now +1.33% above its long-term trend line (red), which means we remain close to breaking out to the upside of the neutral zone.



The international index dropped to -2.58% below its own trend line, keeping us in a sell mode.

For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

The markets zigzagged yesterday, but ended up closing modestly higher thanks to support from industry heavyweights Boeing and Microsoft. Despite this higher close, participation was not widespread, which explains why our Trend Tracking Indexes (TTIs) retreated slightly.

The domestic TTI fell to a level of +1.37% above its long-term trend line, just below the upper range (+1.50%) of the neutral zone. We will hold off with any further commitments to the domestic market until a sustainable breakout occurs.

The International TTI slipped as well and is now positioned -3.82% below its own long-term trend line, which has kept us out of this market since 11/31/07.

The markets retreated yesterday as the dollar’s record new low against the Euro, along with soft earnings and oil prices hugging the $120/barrel mark, proved too much resistance. The bears prevailed and sent the major indexes lower, although a rebound late in the session cut down on the losses.

Our domestic Trend Tracking Index (TTI) came off its high, and dropped below the +1.50% threshold to +1.48%. This means we’re back in the neutral zone and will have to wait for another breakout with legs before making any commitments to that market.

The International TTI retreated as well and is currently positioned -3.32% below its own long-term trend line. The bottom line is that there have been no changes to our investment positions.

If the domestic TTI continues to vacillate around its buy level, I will post updates as necessary in this blog so that you can easily follow the changes in our investment strategy as they occur.

Yesterday’s fairly calm day in the market pushed our domestic Trend Tracking Index (TTI) through the upper range of the neutral zone (+1.50%) to a level of +1.73% above its long-term trend line.

As I mentioned in last Thursday’s post, I like to see that level supported for a few trading days to be sure that there is enough follow through buying to support this current trend. If this comes to pass, I will announce a new Buy signal on this blog the day it occurs. I will then ease into the domestic markets with about 1/3 of portfolio value, not all at once, but over a week or so. My no load fund/ETF selections will be based on those showing the strongest upward momentum numbers.

The international Trend Tracking Index (TTI) has improved but still remains -3.01% below its own long-term trend line in bear market territory.

As I am posting this on Tuesday morning, the markets are down sharply and, barring any sudden recovery, we may end up again back in the neutral zone below the +1.50% level. This potential buy may or may not materialize. I will keep you posted.