1. "Fear of Regret - An inability to accept that you've made a wrong decision, which leads to holding onto losers too long or selling winners too soon." This is part of a whole cycle of denial, anxiety, and depression. As with any difficult situation, we first deny there is a problem, and then get anxious as the problem does not go away or gets worse. Then we go into depression because we didn't take action earlier, and hope that something will come along and rescue us from the situation."

--Simultaneously criticizing investors for, "holding onto losers too long" AND "selling winners too soon," is tantamount to criticism for failing to predict the future.  The implication seems to be that using a professional can help you avoid these dilemmas.  Apparently--- because-- professionals CAN predict the future?

2. "Myopic loss aversion (a.k.a. as 'short-sightedness') - A fear of losing money and the subsequent inability to withstand short-term events and maintain a long-term perspective." Basically, this means we attach too much importance to day-to-day events, rather than looking at the big picture. Behavioral psychologists have determined that the fear of loss is the most important emotional factor in investor behavior."

--This is exactly the same point stated in reverse.  How does one objectively distinguish between "short-sightedness" and "holding onto losers too long" or "selling winners too soon" except in hindsight?  (i.e., when you fail to correctly predict the future.)

3. "Cognitive dissonance - The inability to change your opinion after new evidence contradicts your baseline assumption." Dissonance, whether musical or emotional, is uncomfortable. It is often easier to ignore the event or fact producing the dissonance rather than deal with it. We tell ourselves it is not meaningful, and go on our way. This is especially easy if our view is the accepted view. "Herd mentality" is a big force in the market."

--Excuse me, doesn't the "...ability to change your opinion after new evidence" imply you should in fact react to short-term events?  Contradicting the previous criticism where you should only be "looking at the big picture?"

4. "Overconfidence - People's tendency to overestimate their abilities relative to individuals possessing greater expertise." Professionals beat amateurs 99% of the time. The other 1% is luck. The famous Clint Eastwood line, "Do you feel lucky, punk? Well, do you?" comes to mind.

In sports, most of us know when we are outclassed. But as investors, we somehow think we can beat the pros, will always be in the top 10%, and any time we win it is because of our skills and good judgment. It is bad luck when we lose."

---In our opinion, it depends where and how you compete.  Am I foolish to take on a sumo wrestler in ice hockey?  Or a sprinter in a distance event?  We submit at least two weaknesses, or blind spots, apply to many professionals (and their mutual funds):

1) they dogmatically believe they must always be fully invested, and

2) they are often better off "wrong" as long as they're wrong in the same direction as their peers.  (i.e., job #1 on Wall Street is staying employed.) 

These limitations lead otherwise-smart pros to make decisions with my money that are better for them than they are for my money.  Call me crazy but, given these "blind spots," I feel like I have a chance in competing against many investment pros...

5. "Anchoring - People's tendency to give too much credence to their most recent experience and to show reluctance to adjust their current beliefs." If you believe that NASDAQ stocks are the place to be, that becomes your anchor. No matter what new information comes your way, you are anchored in your belief. Your experience in 1999 shows you were right.

As Lord Keynes said so eloquently when forced to acknowledge a shift in a previous position he had taken, "Sir, the fact(s) have changed, and when the facts change, I change. What do you do, sir?""

---Who gets to grade the curve between "anchoring" vs. "holding onto losers too long" or "short-sightedness" criticism?  We submit there is never a single "right" answer.  Except, of course, for those investment pros who can reliably predict the future.

6. "Representativeness - The tendency of people to see patterns within random events." Eric Frye did a great tongue-in-cheek article in The Daily Reckoning, a daily investment letter (www.dailyreckoning.com). He documented that each time Sports Illustrated used a model for the cover of their swimsuit issue who came from a new country that had never been represented on the cover before, the stock market of that country had always risen over a four-year period. This year, it is time to buy Argentinian stocks. Frye evidently did not do a correlation study on the size of the swimsuit against the eventual rise in the market. However, I am sure some statistician with more time on his hands than I do will brave that analysis."

---Seeing patterns where there are none simply re-states Mauldin's comment in the same article, "stochastics, RSI, chart patterns, Elliot Wave, and so on -- just don't work."  They're both correct but hardly qualify as advice on how to invest your portfolio.

* * * * * *

In our estimation, vague advice like this can be dangerous.  Moderately-artful sophistry can employ these five points to justify literally any investment decision or strategy.

Even so, at the end the day, we concede John Mauldin is a very popular and successful guy.  We don't ignore his thinking or advice lightly.

We do recommend, however, recognizing where Mauldin comes from:

1)  Advice from a $5,000 research report, particularly when endorsed by Mauldin, or any highly-paid professional, may scare civilians into thinking they need a professional to manage their money.  A cynic might think this was the plan...

2) Mauldin makes money when you invest in the hedge funds he recommends.  Maybe he makes more money if your hedge fund investment does well, but he still makes out either way.  Only your own money is at actual risk.

Conclusion: The most useful advice in this treatise was, "Past performance is not indicative of future results."

Beyond that as usual, we recommend readers think for themselves.