I’ve never been asked which college/university major is best for being able to outperform in the markets, but I am guessing that those choosing to major in philosophy (specifically those specializing in epistemology) or psychology (specializing in cognition and perception) will do better than most others, especially finance and accounting (the limited academic exposure I’ve had to finance and accounting suggests to me that the education delivered in these fields still render people ill-equipped to the financial marketplace).
It is becoming increasingly difficult to separate reality and fiction with some of the media reports on various matters. It is like reading the news on the morning of April 1st, except you’re doing it every day. For example, on the trivial matter of Major League Baseball‘s planned re-opening parameters in the light of COVID-19:
Major League Baseball players will be prohibited from taking showers after games and there will be no fist-bump celebrations or spitting sunflower seeds in the dugout, according to a return-to-play guidelines drafted by league officials.
This is a clever article because it hits on what I believe is the “two realities” theme that we are seeing in COVID-19.
In markets, determining what the reality of the market is, the reality of the underlying company you’re looking at, and your own reality are essential elements to determining your standing. For example, if the market has a pessimistic reality, but the actual reality is neutral, you can ‘win’ by going long if you assuming your own read of reality is correct (coupled with a future change in perception of market reality). Knowing your own standing in regards to your perception of reality is the most difficult of these three.
The funny thing is that there is evidence that we do not need to see reality for how it actually is to survive (this is a difficult to understand lecture, but if you do understand it, you will be much better equipped to handle the financial markets than most).
Going back to Major League Baseball, the two realities that this article hits is:
1) Those that believe that the ever-tightening restrictions of activities due to COVID-19 are justified. Those reading this would be “Oh, OK. Makes sense. Showering creates aerosols, people shower in proximity with each other in stadium locker rooms, so it helps prevent the spread. We must all do our part, including Major League Baseball players.” This caters to the ‘acceptance’ crowd.
2) Another reality is “This is completely ridiculous. You expect to play outside in 35C summer heat for three hours, and not being able to shower after?? This is all about control of people through top-down bureaucratic decree, socialism, left-wing politics, etc.”. This caters to the ‘rejection’ crowd.
The ultimate irony is either reaction goes down a path of no return, where intellectually once you’ve committed the costs of reversal are high – the analogy is digging yourself deeper into a pit makes it more difficult to get out of it. Once somebody has bought into a narrative, the chances of that narrative being mentally confirmed with subsequent articles increases. Social media is very good at accelerating and filtering for these processes, which is one explanation for the increasing amount of polarization we are seeing – only for those that have bought into the ‘two reality’ trap.
Human brains are very well wired to analyze two options and make a decision. We have much less of an ability to consider scenarios with three or more options (the paradox of choice), although most of what we see before us are the consequences of multiple variables, and most of the decisions we face actually have more than two options.
Availability bias is something to always be remembered when dealing with reality sortation – are there alternative, not-before-your-eyes explanations of reality that is not being presented in front of you?
Put this into the context of the markets, where the reaction we are seeing to the markets jumping up roughly 30% from the March 23, 2020 lows is “The economy is shut down. Unemployment is well above 10%. Deficits and debts are massively increasing. Businesses are going bankrupt like never before. Why the hell is the market going up?”.
The market knows about the economy, unemployment, deficits, debt, and bankruptcies. What other variables is the market taking into consideration that people fixated on a certain number of variables cannot see?
It is nearly impossible to engage people on any basis than those of their own selected reality. It is very rare where presented evidence actually gets people to change their minds – usually such evidence ends up being reinforced into the present beliefs in a manner that is quite creative. You see this all the time in cults.
One reason why I choose to engage in the financial marketplace is because I have found no better forum that allows you to quantitatively determine the outcome of others’ perception of reality. If you get it wrong, you lose money. If you get it right, you win money. What makes it particularly challenging is in obvious certain cases reality is not at all close to what it actually is – you can still be “wrong” even when being right. A great example of this is if you shorted Tilray stock before September 19, 2018, it would have been a virtual guarantee you would have lost.
(FYI on Tilray – on September 19, 2018 it reached a high of $300 before crashing. If you had shorted the day before, the VWAP was $144, and if you had shorted just a week before the VWAP was $104 – there would have been no way you could have survived the short before September 19, 2018 except with a very small position.)
So my advice for superior performance is simple to write, but very difficult to execute in practice. Make sure not to embed yourself into a reality or narrative too deeply. Be willing to discard it, or shade it down in the face of contrary evidence. Question the veracity of the evidence. And finally, keep your sense of humour whenever you see retail cashiers behind a 2 inch thick bulletproof plexiglass wall, while seeing a fan blowing your potentially COVID-19 infected exhaled breath to the back counter.
This was a great read!
The Youtube video on reality & perception is a new one for me, and delightfully thought-provoking. Thanks for sharing.
Is there a dangerous semantic here? There is the “reality” and the perceptions of the market participants. We place bets so the claim goes, when we think the market’s perceptions aren’t aligned with this reality. But this so-called reality doesn’t exist yet. It is some future outcome.
So being successful requires not only recognizing the misperception of others but also enough recognition of the uncertainty factor associated with a favorable outcome.
For Tilray – we make the correct perception that the judgment of the long-term buy-side was awry in Aug/September 2018, but as well the correct reality was that the upper limit on the stock price was highly uncertain. So despite the former, the latter argues against going short.
I haven’t read your link yet, but your post reminds of a book that I read almost 30 years ago (Reality isn’t what it used to be – Walter Truett Anderson). I still have it and think about it sometimes, now.
Paraphrasing a little parable from the book:
Imagine three umpires. One is a modern thinker. The second is a post-modern thinker. The third is an ultra-post-modern thinker.
The modern umpire says “I call them the way they are”
The post-modern umpire says “I call them the way that I see them”
The ultra-post-modern-umpire says ‘They ain’t nothin’ unless I call them”
Twitter and social media are full of modern umpires. So is pretty much the entire neo liberal establishment. This is how why we get so much diametrically opposed views to sort through. The more we read the news and social media, the more confused we can become.
Central banks through “forward guidance” and other tools are basically acting like the third umpire. Rules are only rules until they aren’t.
I agree with you Sacha when you say “One reason why I choose to engage in the financial marketplace is because I have found no better forum that allows you to quantitatively determine the outcome of others’ perception of reality.” We get to see every day the clash of moderns with competing views and see outcomes right out of left field (to stick with baseball) shred investment theses.
Thank you both for your comments.
When I penned this article, I was particularity proud of the piece and gave some extra attention when editing it, despite it having no actionable ideas in it whatsoever!