Markets, Lies and Garbage
The quality of our discourse is decaying. This was once a standard complaint about the tone and depth of our national political debate. Now it has spilled into the financial realm.
Shall we blame Twitter, trolls or bloggers? I am unsure of the underlying reason. But as we have seen far too often, financial discussions seem to entail people arguing at cross-purposes. Bull-bear debates devolve into winning the argument at any cost. Previously, we had a true competition of ideas in the marketplace. Now, we have discussions that range between disingenuous and useless.
The hunt for the truth has been replaced by the search for bragging rights.
Price discovery, like so many other things in our society, depends on a robust and open debate. Intellectual arguments can and do sway investors about their investment postures and positions. Efficient markets eventually find their way to proper pricing, but that “eventually” can take a long time. As John Maynard Keynes observed, “Markets can remain irrational longer than you can remain solvent.”
Perhaps a few examples might illustrate the point. In discussing the debate over gold, money manager Ben Carlson observes:
Gold is down almost 40% since it peaked in 2011. But it’s still up almost 350% since 2000. Although since 1980, on an inflation-adjusted basis, it’s basically flat. However, since the early-1970s it’s up over 7% per year (or about 3.4% after inflation).
If you want to have an intellectually dishonest argument about gold, simply cherry-pick the timeline that supports your argument. These sorts of debates play to other people’s confirmation bias. The typical “Yes, but” argument uses a small, selective data set to further the argument, while ignoring the complete picture and larger data set. This deceptive technique is often effective on retail investors, who are not familiar with the statistical flaws of biased sample sets and form-fitted back tests.
These arguments don't help price discovery; they certainly don't aid anyone’s understanding of precious metal prices. But you might pick up a few more Twitter followers along the way. If they happen to lose money in the process, hey, past performance is no guarantee of blah blah blah ...
Gold is notorious for its legion of fanboy and hyperinflationistas followers. But I would be remiss if I ignored equity cheerleaders. Stock jockeys can be just as intellectually dishonest as the gold bugs. Carlson again:
Over the last 3 years the S&P 500 is up over 21% per year, while the 5 year returns are almost 16% annually. It’s been on fire. But if you go back 15 years to include both the tech bubble and the Great Recession, the S&P is only up around 4.3% a year. Extend your time horizon to 1980 and the performance is almost 12% per year. From 1928 to 1979, annual returns were much smaller, at around 8% per year. [Starting after the Great Depression] improves annual performance to 10.7% a year from 1933-1979.
You can easily cherry-pick the timeline that best supports your own investment position.
These sorts of insincere debates seem to be everywhere. The Internet has made it terribly easy for anyone with a computer to post any absurdity they choose. The perfect quote for this discussion is Benjamin Franklin’s admonition: “A lie gets halfway around the world before the truth has a chance to get its pants on.” Except of course, that it was said by Winston Churchill. This is exactly the reason why we must pay heed to Abraham Lincoln, who once tweeted, “You cannot believe everything you read on the Internet.”
If Lincoln were a trader, he would note this is especially true in finance. As we saw last week, one can easily massage whatever data set you select to produce the desired result.
But here’s the thing: Eventually, even the most disingenuous arguments crumble. Markets do find their appropriate pricing, though it is hardly as predictable or rapid as the early proponents of the Efficient Market Hypothesis have claimed. I have always thought the “E” in EMH would be better off standing for “Eventually.” What we have is an eventually, kinda, sorta mostly efficient market.
Misleading and hypocritical arguments eventually are defrocked. Sometimes their advocates suffer reputational damage, though often they don't.
No, we didn't have $100 billion in municipal bond defaults as one market sage predicted. Gold isn't at $5,000 an ounce, Dow 36,000 didn't happen, we didn't get hyperinflation or a collapse of the dollar.
It is noteworthy that most of the bad arguments have a fear component built into them. Fear of societal collapse, fear of missing the upside, fear of the unknown, all of it a result of the distinct negative bias that rules the human mind. It is this annoying tendency to focus on the potential downside that creates risk aversion, a quality built into the species over the millenniums to ensure your ancestors survived. Everything is a trade off.
The result, to paraphrase science-fiction writer Theodore Sturgeon, is that 90 percent of everything is garbage. He would have made a very fine observer of the financial scene.
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Barry L Ritholtz at firstname.lastname@example.org
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