Don't Make the Trading Gods Laugh
Today’s discussion is aimed at the individual investor, though certainly the professionals might take something from our philosophical musings this morning.
The bull market that dates to March 2009 is now entering one of its more interesting -- and perhaps dangerous -- phases. Not hazardous, mind you, from a market perspective, but from a behavioral one. Mr. Market will do what he is going to do, and that is unknown and unpredictable.
However, what isn't unknown and is very predictable is that YOU are going to do something very foolish and self-destructive. The only variable is whether you are going to do this sooner rather than later.
A quick explanation.
The noise box in your den (and on the wall of your trading room) has been tallying a catalog of potential crises and hazards. That parade of terribles seems to be getting longer each day. Although none of them are new, it is as if all of them have suddenly risen in unison, a chorus of noise, funk and angst. Markets are expensive, the Federal Reserve's stimulus of quantitative easing and zero interest rates is ending, the euro is collapsing, deflation is a threat, rates are rising, residential real estate is a mess, biotech is a bubble, oil prices are plunging, Grexit will arrive any day. Forty years of darkness! Earthquakes, volcanoes...The dead rising from the grave! Human sacrifice, dogs and cats living together...mass hysteria!
OK, I got carried away. But for the dead rising from the grave, human sacrifice and 40 years of darkness, all of these things are real.
However, the ability to turn these macro concerns into an intelligent -- and profitable -- investment thesis has eluded humanity for as long as I can remember. Look no further than the macro-trading hedge funds that have done so poorly in recent months. Macro funds are the very vehicles that are supposed to a) anticipate, b) position in front of, and c) profit off of these big macro events. Only they haven’t been able to do so. Despite a strong start to the year, storied names have all suffered significant setbacks.
For example, Fortress, with $66 billion in assets, had big loss that forced out several executives. A macro hedge fund managed by the GLG unit of the Man Group is closing. Harness took a big hit as well, and investors pulled $4.2 billion out of hedge fund giant Brevan Howard. Much of these losses were due to the Swiss National Bank's decision to end a peg for the national currency, the franc -- and nobody saw it coming. Not to read too much into this, but these results look like a telling sign as to the success of the funds' investment models.
No one ever knows the future, but humans harbor this illusion that they have a sense of what is happening, some idea of what will occur, and an ability to control their fates as events unfold. The Gods find these qualities quirky and amusing, always worth a chuckle on Mount Olympus.
Humans are adorable.
Back on terra firma the recent surprises combine to chip away at the lies humans tell themselves to get through their day. Each unexpected result reveals in a small way how much the previously believed clarity was only a mirage. Eventually, the accumulation of truth startles its recipients with its unwanted message: No one knows nuthin'.
Don't misunderstand or dismiss my criticism as arrogance or hubris; my single greatest strength isn't that I am smarter than everyone else, or a better trader, but rather, that I am willing to admit how little I know.
Despite the rhetoric from pundits and the rising noise levels, investors have the same options they have always had: First, you can take a guess when the bull market will end. You can listen to the self-promoters, pundits and other charlatans seeking the limelight, none of whom have a clue about what the future holds or have the slightest interest in your financial well-being.
Or, you can make a long-term plan and stick to it.
Just remember, the trading gods are watching. And they find you hilarious.
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Barry L Ritholtz at email@example.com
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