The recent spotlight on the media’s involvement in the election is a really good example of this weeks discussion. There is an old trader’s saying that goes something like; “believe none of what you hear, believe some of what you read, and believe half of what you see.” How and where we get our information is important. Information is the critical component to our decision making process. I often liken my decision making process to a funnel. You take large amounts of data into the funnel to form a narrow conclusion in the end. The other way I look at my decision making is to take an idea and then immediately try to disprove it. For example, I might come up with an idea that the sky is blue. I then don’t go looking for information to support my thesis. I look for information that disproves my idea seeking out the notion that the sky is not blue, it is say- purple.
So, I’ll circle back to the media in a bit, but lets start with the “information” from Wall Street. Wall Street is a huge marketing machine. Their job is either to sell a product or to generate some sort of transaction. That’s it. Their job is to generate a profit for them, not necessarily for us. If the customer makes a profit along the way that is fine, but the primary objective for a Wall Street firm is for it to make money. In all of my years in reading financial reports, I’ve never come across a line item in the income statement that identifies how much the customers made in the quarter! So in order to market something, one needs a story, a narrative. In the markets, as the drum of that story gets played longer and louder, people begin to buy into that narrative. In many times, the security or the asset being marketed by Wall Street will actually move in the direction of the story – up or down, depending on the story which just reinforces the behavior. In the old days, much of this misinformation was delivered through tipsters. Today, there are numerous avenues to spin a narrative. Over time, history has not been too kind to Wall Street “research.” It has been well documented the many conflicts of interest within these firms. I remember reading something along the lines that at the height of the dot-com bubble 97.5% of Wall Street firms had either a buy or a hold on the companies in their “research” universe. So “research” is one way to market a story. Another way is through the media.
Today “media” is one big catch-all category. I don’t view the media in terms of good or bad, but more like a discount retailer. Quality was thrown out the window for volume many years ago. I’ll leave astroturfing out of this discussion since this practice is clearing deceitful. So the media’s goal is to get eyeballs. Again, they need to sell a story. I remember when I first got into the investment business over twenty years ago, every morning I’d read the New York Times and the Wall Street Journal. Why? To help give me a better perspective to draw conclusions. It was actually amazing. You’d have the same exact data, but the word choice each paper would use to tell a different narrative was at first quite startling to me. Getting back to the media coverage of the election, the over-riding message was that if Trump was elected, the stock market would collapse. The world was somehow hi-jacked by the flat earth society again, and if Trump was at the helm, we’d for sure sail right over the edge. A litany of “facts” were cited to further give legitimacy to the narrative. Now that Trump has won, and jaws dropping, the stock market didn’t collapse, but it went up. Now, conveniently spun, Trump is being hailed as the second coming of Ronald Regan. I’m using this as an example not to be political, but to illustrate, man like a light switch, the news flow goes from bad to great, and it is all garbage. Trump is not the second coming of Ronald Regan, but if you are still drawn to seeking out articles about what a bad president he is going to be and his cabinet members…blah blah blah, please stop. You’re not being neutral. You don’t want to seek out information to simply rationalize your thinking to provide yourself more comfort, or dis-comfort in this case. You are putting energy into something that is out of your control. I’ve often described my approach to investing, and I guess to life to some degree, like a tree bending in the wind. If a tree lacks the ability to be flexible when a gust of wind kicks up, the tree will snap in two. In the capital markets we don’t want to be snapped in two. It is important to be neutral to the data (it is neither good nor bad) and flexible in our interpretation of that data. It really boils down to two different kinds of risk: information and price. When the information is glowing and all is great, the information risk (the risk of bad information) is quite low. But the risk we care about, price risk, is quite elevated. This is why all stocks top out on positive news. This is why Wall Street invented the term “averaging down.” Averaging down was a marketing ploy to convince it’s customers to continue buying the stock after the trend had changed, so that the Wall Street firms had someone to sell their own inventory to. When the information risk is high (bad or just volatile news) the corresponding price risk is low. You want a strategy that allows one to buy low price-risk and sell high-price risk. It truly goes against all human nature to think this way.
Humbly,
P. Franklin, Jr.
December 4th, 2016
All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.
Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results.
