``Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”-Warren Buffett
Recently I’ve been drawn into some discussions about how being “right” might lead to more audience following and how being “right” may come in the face of being unpopular.
As a student of the markets, we understand that incentives drive everybody’s actions.
Conventionalism As Camouflage
Here are some examples of the divergent underlying incentives that impel for some of the actions by market participants:
-For traditional sellside analysts-generate literatures that would prompt clients to trade short term or ‘churn’ accounts.
-For conventional bankers- sell ‘one size fits all’ financial products to a diversified consumer base.
-For many subscription newsletter editors-write wild and audacious forecasts that would elicit attention and/or peddle short term snake oil ‘technical’ outlooks.
-For mainstream economists or financial experts-the need to be seen communicating on the conventional vernacular, as conventionalism secures their career reputations in terms of advancement or job shifts. As the illustrious and chief adversary of the Austrian school John Maynard Keynes once said, ``It is better for reputation to fail conventionally than to succeed unconventionally."
By seeking the comfort of the crowds, there is always the pretext behind what John Maynard Keynes says as being ``better to be vaguely right than exactly wrong.”
In other words, conventionalism is frequently used as camouflage against efficacy.
And for most of the above, divergent risks have apparently been sidelined for profit motives.
Yet, one must realize that for different market actors there are different perspectives from dissimilar incentives and these are the dynamics behind analyzes (reports or studies), communiqués or even quotes from news accounts.
As our favorite iconoclast Nassim Nicolas Taleb warned in Fooled By Randomnes of relying on mainstream media as main source for information, ``Most journalists do not take things too seriously: After all, this business of journalism is about pure entertainment, not a search for truth, particularly when it comes to radio and television”
In A Bull Market, Everyone Is A Genius
There is an old Wall Street cliché that goes “Everyone Is A Genius In A Bull Market.”
That’s exactly what we’ve been saying for the longest time.
NO matter what mainstream experts write about under present conditions; be it pertinent to the technical charting picture, micro fundamentals stories- industry, corporate (prospective merger & acquisitions or earnings) based or even from the macro dimensions, the coincident rise of the market security prices simultaneously with their Panglossian sentiments makes it appear they can’t do anything wrong. Genius has been at work.
Fundamentally these mind frames can be identified as cognitive biases; particularly,
-the fundamental self attribution bias- or the tendency to attribute positive outcomes on skills while negative outcomes on misfortune or as Nicolas Nassim Taleb describes in The Black Swan ``We attribute our success to our skills, and our failures to external events outside our control, namely to randomness. We feel responsible for the good stuff, but not for the bad. This causes us to think that we are better than others at whatever we do for a living.” We previously discussed this in Situational Attribution Is All About Policy Induced Inflation.
-and the survivorship bias or the winner’s bias-to quote Stephen Dubner of Freakonomics, ``The behaviors of winners are remembered and dissected far more thoroughly than those of losers, and given greater weight, even if the outcome was decided by a tiny margin.”
Put differently, people tend to selectively tunnel into so called “winners” at the expense of the overall picture.
Again from Nassim Nicolas Taleb, ``The mistake of ignoring the survivorship bias is chronic, even (or perhaps especially) among professionals. How? Because we are trained to take advantage of the information that is lying in front of our eyes, ignoring the information that we do not see.” (emphasis added)
In short, everyone, including experts, punters, scalpers or investors, can be right for the wrong reasons!!
Machlup-Livermore Model Applied To The Phisix and Berkshire Hathaway
This can be exemplified by looking at the Philippine Phisix from the big picture figure 1.
Figure 1: Phisix: Rising Tide Lifts All Boats
While the Commercial Industrial index (blue gray) have outperformed alongside with the mining index (green), generally ALL major sectoral indices have been on an uptrend (Phi-all violent, Property-Blue, Holding-red, Banking-black candle, Service-orange, and Phisix-gray) since bottoming out in late 2008.
As caveat we seem to be seeing some of the major indices as rolling over (possibly heralding for a temporary corrective pause)-specifically the holding, the property and service indices.
Nevertheless, any security specific underperformance relative to the general trend represents as the exception more than the rule. And it would be apt to quote a reminder from Edwin Lefèvre or a.k.a the legendary Jessie Livermore…
``I NEVER hesitate to tell a man that I am bullish or bearish. But I do not tell people to buy or sell any particular stock. In a bear market all stocks go down and in a bull market they all go up...I speak in a general sense. But the average man doesn’t wish to be told that it is a bull market or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing.”
In essence, Mr. Lefèvre’s empirical observation goes hand in hand with Austrian economist Fritz Machlup’s conclusion that stock markets have increasingly been driven by inflation [as previously discussed in Are Stock Market Prices Driven By Earnings or Inflation?], where inflationary policies propel investors sentiment and ultimately gets reflected on the market as seen in the rising and ebbing tide phenomenon or our Machlup-Livermore model.
Yet, even Mr. Warren Buffett’s flagship the Berkshire Hathaway which has consistently outperformed the S & P 500 for over two decades could be used as paramount yardstick (see figure 2)
Figure 2: Bigcharts.com: Berkshire Hathaway Also Reflects On Rising Tide
As you would notice, Mr. Buffett’s Berkshire has basically outperformed the S & P when the monetary landscape has been accommodative, from which has likewise been reflected on sprightly markets.
Yet, when liquidity had been drained from the system as a result of the recessionary forces (from overinvestments in technology and communications in 2000) or during the banking crisis of 2008, Berkshire has fallen almost more than the losses of the S & P 500 (both during the dot.com bust of 2000 and the Lehman meltdown in 2008).
So even the world’s most venerated investing guru has been subject to ebbs and flows of INFLATION!!!
The point is: anyone can mesmerize themselves with the delusions of market prices exhibiting conventional metrics while ignoring the fact that the impact of inflation to the prices of diverse financial markets including the currency market has been intensifying. In short, misdiagnosis leads to wrong therapy or errant investing actions.
To excerpt Agora Publishing’s Bill Bonner, “people seem to come to believe just what they need to believe – just when they need to believe it”, even if they are unsubstantiated by evidences or by facts.
And this is what distinguishes us from the mainstream.
