Thoughts on a Sunday

• What is it that makes people “invest“ in equities? 
• How are the investments people make affected by news events​?
• What is the difference between an investor and a trader?
• What role does one’s individual psychological experience play in investment decisions?
• Are the emotions of Fear and Greed important to your investment decisions?

​People invest in equities for a variety of reasons. Capital appreciation, income, inflation protection–all are valid reasons to invest, but in my opinion the primary reason people who can afford to invest do so is because they are programmed to believe that this is a proper use of their resources. 

News events can cause people to react on different levels, but changing investment goals isn’t something that changes immediately for the retail investor. Investors don’t react to events, but rather  to longer term trends. The difference between a trader and an investor can best be explained as one where a trader is willing to accept the risk of spotting the beginning of a trend change, as opposed to one who is willing to initiate or follow trends. The Venture Capitalist is an investor whose risk taking is based on trend creation. The worker with a passive 401K has his basic investing career set up for him via corporate guidance. There are multitudes of intermediate versions of the above criteria. Each one of them helps satisfy our primal emotions of Fear and Greed. 

It’s my opinion is that we develop our individual standards for investing or trading based on our personal realities. There are no two people who share any one path. Shakespeare looked at the difference between Nature and Nurture and aptly named his work “The Tempest”. A Prince acts like a Prince when abandoned on an island, where he meets a Princess who is still a Princess even though she herds sheep on that same island. We are all affected by events based on our personal history.

There are no two events that are exactly alike. While it may be true that “Those who can’t remember the past are doomed to repeat it,” the past is not a known quantity. For the most part, history is written by the victors. Their vision of the past is filtered by the results of time between Then and Now. You can rationalize any headline depending on your personal biases.

Putting this in context of the market’s reaction to news, the past may give us a good idea as to the meaning of an event, but whose meaning is it? As Ben Graham pointed out,  “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” For example, when there is trouble in the Mideast and many fear oil inflation, others see–should their view of history be confirmed–a conflict that is closer to being resolved. One person’s fear may be another’s vision of a better future. 
As Terry Laundry wrote in a 1997 paper on T-Theory

It takes a special state of mind to “sign up” for a short boat trip, in a flimsy landing craft, to a beach completely controlled by hordes who have anticipated your arrival and have set up every imaginable way to do you in. Buying into major market opportunities presents a similarly discouraging picture. You may have good reason to anticipate profits, but if a great opportunity does indeed exist, nearly everyone will be against you, including your friends, and the predominant opinion expressed by your peers, including people you respect, will be that you are embarking on a foolhardy enterprise.

There are always going to be inconsistencies between how the market may react to a specific event. It doesn’t mean that news doesn’t influence the market, but we each have our personal biases as to how we interpret events. I could show you charts of how “the market” reacted to different events in accordance or discord to what we would normally expect. If these inconsistencies didn’t exist, there would be no immediate “voting”, and all we would be doing is “weighing”. 

I’m reminded of the mathematician Goedels first theorem of incompleteness. Basically it states that any mathematical system is either incomplete or inconsistent. My personal view of reality is in tune with that concept on philosophical grounds. We are all not the same, and we don’t look at the universe around us in the same manner.

One example of how the market showed different responses to events can be found when one looks at the Great Recession. Why couldn’t we reverse it earlier? Why didn’t the market react earlier? Perhaps it was because the attempts missed the mark, and no one saw an end in sight.

Some may point out that the market shrugged off the Federal Reserve’s early attempts to stop the damage by lowering interest rates. If one was only considering those attempts as the “reason” the market continued to fall, they would be ignoring other events that occurred in the same time frame, such as the failure of major financial firms, and the fact that no one was going to borrow money at any interest rate. What turned the market around in March 2009? It could have been the exhaustion of sentiment but there was also a fresh attack to halt the recession not by lowering interest rates, but by large scale asset purchases.

If you’re inclined to think that the Fed is evil, or that it is irrelevant, you can dispute this. 

Our charts can give us a pathway for the future, but obviously none of them can dictate Price. Those of us who spend an inordinate amount of time studying these charts do not all have the same biases, and our results will be based on those biases.

The future is non-linear, and so are our lives. Have a great Sunday.