Tauntingly strange, hopelessly complex, and breathtakingly alluring, the S&P 500 guiltlessly chided convention with another Bunyanesque recovery – a 300-point upward trajectory since the bone-cold days of February. In that span the market sprouted into something disobedient, something make-believe and yet gigantic as it sardonically pushed over the woeful first-quarter obstacles of Japan policy, China foreign exchange, and sinking U.S. market multiples.
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For the grim bulge-bracket analyst, skeptical stock jockey, and forlorn media prophet, the market has been – once again - an insidious and relentless little ne’er-do-well; a spineless coward of sorts that makes flagrant mockeries of anyone who claims confidence against the confounding labyrinth of dark passages and secret chambers that surreptitiously generate the market’s future momentum.
Personally, the last three months have intersected with hours of self-examination and days of retrospect. A healthy retreat - detaching myself from the 24/7 market monologue banging around in my brain.
Certainty in Crisis
Is it me or has the financial industry – like society at-large become overly pragmatic? One where we are fairly disinterested in truth, where fresh ideals fade from the horizon of possibility, where following after truth seems to consist of turning up the volume on the drone that spews from financial media or what we believe or wish to be true? Somehow it’s now comforting to have each market day reported as if we are witnessing another docking of the Hindenburg! Better the devil we know? It’s no wonder we wake up each morning and something is missing and we’re not sure how, what, or why?
Dangers of Verbatim Repetition
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Throughout the last 300-point up-move, I was often reminded that one of the most imposing chasms standing between the everyday investor and the imaginative subtlety of financial storyline is the astonishing prominence of verbatim repetition. Accustomed as we are to forms of narration in which elements of repetition are made to seem far less blatant, this habit of constantly recycling material (Fed, China, Inflation) is bound to give investors trouble – arousing a sense of surety, depth and complexity when none exists. Other words perhaps the market’s most recent rally was thanks to nothing at all.
The Real Danger of Risk
Risk and the business of predicting risk should be considered nothing other than an abstract concept and held loosely when applied to investments chiefly because risks measurement is built upon something that doesn’t exist – chance. Because of this, risk measurement is pure illusion and quite frankly likens to answering how many miles are in the color yellow? It’s an impossible question to answer. It doesn’t make sense.
There’s no chance in nature – it’s all very tidy and precise. The passage of time ushers in an orderly set of sunrises and sunsets. Tides roll, animals are born and ultimately perish. Yet, the mere thought that investment chance can be tamed – let alone be seen or quantified – through conviction, education, or experience is absurd and the denial of it all is disturbing. Truth be told - investment risk exists solely in our minds and it’s a direct and limited function of the finite amount of information set before us.
In today’s present age we have digressed to the point where we have separated risk and risk-management out as an equivalent to knowledge as that which gives us objective fact while everything else is purely subjective. The airwaves are befuddled with all the infinite combinations of what will happen after June’s FOMC meeting, Brexit vote, or job’s report.
No one knows precisely what is going to occur, where stocks will wind up after these events. And as cheeky as it may seem or overly simplistic in its analysis, in our investment portfolios it always comes down to someone holding a coin in one of his palms and the rest of us guessing which one it is.
Ancient Danger vs. Modern Risk
The management of investment risk is a modern idea. The thought that risk can be calculated is even newer. The notion that risk can be predicted and managed is fresher still.
The word risk didn’t appear into the English language until the 1600’s coinciding with the ushering in of the early modern age and capitalism. World history fast-forwards to the birth of deism of the 1700’s where natural law and process bore the notion that has evolved to our present day where one’s fate ultimately gave way to where it was a risk – a thing that could be known, evaluated, and managed.
The problem with the modern approach to risk is we are told that confidence and knowledge is all you need. “Dwell on your success,” “do something risky,” and “there’s no failure just feedback!” Certainly this is toxicity causing a deep overestimation of our knowledge and produces too little fear or too much fear – either way it’s the same thing. Investors need to humble themselves and recognize we can’t know risk and certainly we can’t manage it.
The Chance of Certainty
Deep beneath our investment decisions lies a well-constructed belief system that we subconsciously don’t question and if something we hear that seems to contradict this – it is dismissed or it is doubted. Along with this we tend to accept what everybody believes and anything is different we doubt.
As I survey the last three months, the investor class strikes me as something held hostage – mostly reluctant to peer out too far into the swirling headwinds of bulging deficits, insufficient reforms, and spikey equity valuations; rather content to pitter-patter around the feather-bed of being too afraid or not afraid enough!