Editors Choice

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Thursday, 26 October 2017
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Black Box

It is a fundamental fact of almost all markets, that for every trade there is a buyer and a seller. If that’s the case then clearly there is nothing “factual” about a market, and, like physics, for every opinion there is an equal and opposite opinion. Otherwise there would be no trade and everything would be perfectly priced and predicted.

But it isn’t, for the simple reason that share prices are not a science they are a combination of science and emotion, of left brain (information and logic) and right brain (emotion). If investing and trading was all about left-hand brain decisions, as some would suggest, then it would be easy, we’d all be value investors and billionaires. And if it were all right brained decisions, we’d all be behavioural psychologists.

Instead, it’s always somewhere in the middle and no matter what your conviction, what approach you have nailed yourself to, and no matter the faith you have in that approach, or someone else's, if someone disagrees with you, trades and affects the price, your opinion is imperfect, as is the opinion of the person doing the opposite.

And so the stock market becomes eternally difficult. You can be ‘right’, but if people who are wrong trade the stock, you too can be wrong, even when you are right, because the share price is about supply and demand, not wrong and right.

Value investors, traders, set & forgetters, quants, diversification advocates, ETFs, they are all trying to cut a living out of selling you their way as offering a higher probability of success. Some even suggest they offer ‘certain’ success, but the truth is that it is all valid and invalid at the same time and as long as it is a cauldron of everything not one thing, it will be hard. Luckily it will also be interesting and intellectually stimulating.

On the basis that the opinion of anyone who trades a stock is valid, I have a problem with page two, yes, page two of Benjamin Graham’s 1939 bible, the Intelligent Investor, which makes the statement that trading the market on “technical approaches” is “as fallacious as it is popular”.

Page two! He could have left it to the appendix. In those few words, which are now 78 years out of date, Benjamin Graham erected, seemingly forever, a wall between two investment approaches, investors and traders, and never the twain ever met again, in fact they have been at war ever since.

Investors will tell you about traders being people in front of their computers in the middle of the night with sunken eyes and McDonald’s mayonnaise dripping down their T-shirts rapidly buying and selling anything that moves without any attention to quality. And traders will tell you that investors are a bunch of brainwashed zombies in a Benjamin Graham inspired fantasy world in which all you have to do is invest once, close the market for ten years, and retire to bed. To traders, fundamental investment is also as fallacious as it is popular.

My creed is to keep an open mind to everything. Using everything, not one thing. Listening to everyone and in particular, valuing anyone making an effort to pick stocks. I respect anyone making an effort in our space, an effort to predict a price or take a view. Even the ridiculous and sensational have their story and you cannot shut your mind to anyone and anything that might influence a share price.

If the Intelligent Investor hadn’t been published maybe we’d all be doing a lot better. Blinkers allow you to focus, but they’re no good if you can’t see everyone else running in the wrong direction, and being a herd, they can do that for a long time, leaving you to piously wag your finger in poverty from the sideline.

You can join the Brighton Black Marubozo sect if you like, they are making an effort ot pick stocks, but do it because you like the people and the pub, not because they have faith in one approach.

In my world I can identify the focus and value add of many subscription products and competitors, and am prepared to subscribe and buy for their particular skill, focus, or information. But do not believe them when they confidently tell you this is all you need. No one approach can afford to be too sure of itself.

Investment is not about faith in a black box. The only way to make money out of a black box is to sell one and there are a lot of expensive black boxes out there.

 

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