My father was never ever wrong, or at least that’s what he thought. It’s still is a running joke in our family to try and get dad to say “sorry I was wrong“.
We used to joke about his inability to admit he was wrong, but I stopped laughing when, while studying psychology, we learnt about narcissism. Things aren’t as funny when they have a label, especially if it sounds as bad as narcissism. I felt a little sad that my dad, who I love, may not be a strong righteous man. That instead his pride, insecurity, lack of insight and self reflection were probably behind his inability to admit being wrong.
For whatever reasons I’ve swung the other way. I find it easy to admit I’m wrong and spend a lot of time trying to determine if I’m wrong and why I was wrong. I consider focusing on the downside and trying to figure out how you’re wrong important attributes for an investor, hence I’m often both stunned by and intolerant of other investors who are unable to admit being wrong. Before I get to my negative example I’d like to call out Cullen Roche at Pragmatic Capitalism for his shining example of self reflection. Even the title of Cullen’s article Three Things I Think I Think illustrates his humility.
I score Cullen 1.5 out of 3 this time on the things he thinks he thinks. I’m also pretty certain that he’s open minded enough to consider the excellent replies he has received and to perhaps change his mind. I’ll simply say you shouldn’t use outliers to form a general view. In this case the Forbes 400 rich list to form a view on social mobility. There are always exceptions to rules and while it’s good to think about them it’s also important to realise that exceptions don’t negate the general rule. In this case, it’s a bloody tough road if you come from a poor family and those of lucky enough to come from a middle class Western family or better should always remain humble enough to realise we’re lucky.
I loved Cullen’s second point. ‘Value’ investors all too often overlook the voting machine, but unlike Cullen I see no inconsistency in the concept that in the short-run the market is a voting machine and in the long-run it’s a weighing machine. Here’s what I said back in 2009.
In the Intelligent Investor Benjamin Graham commented on the market, “In the short-run it’s a voting machine, but in the long-run it is a weighing machine.” For some reason most market participants focus on the second part of that statement, they concentrate on the weighing machine. As a fusion investor I find equal value in both parts. In the short-run the market is a voting machine. In the short run the market is a voting machine. Come on say it with me 21 times a day for the next 21 days. Then you’ll no longer expect the market to ‘do something’ or to be in-line with your economic reality, you’ll no longer think the market is crazy.
People are driven by fear. They sold out on the way down out of fear of losses and now they’re buying back in out of fear of missing out. Understanding basic human nature is why psychologist are one of the best performing professional groups in the market. They understand the voting and respond to it.
Back in 2009 I said it was time to focus on the voting. Now it is time to focus on the weighing machine.
As I said in that 2009 article “Hopefully, you’re not surprised when I say there is no point in making [market] calls. You simply want to know where the game is at and the probability of each side winning.” It’s time to update my comment from back then. While I was on margin back then I’m now carrying a lot of cash. Why? Because bargains were plentiful in 2009 and now…well if you know any bargain please let me know.
My own view is there remains way to much focus on calling a
bottom top and looking for signs of a market bottom top based on historical analysis. While it is important to be versed in the market’s history and use that knowledge as a rough guideline, my focus is on the here and now. Selling fully valued stocks and buying undervalued has been and remains my strategy.” [As an aside, I love this saying, if history was the key to financial success, librarians would be the richest people in the world.]
Finally this graph by Meb Faber via John Hussman brilliants illustrates why it’s not wise to disregard value. In the short-run anything can happen and the market is indeed often irrational, but in the long-run value counts.
If you don’t like ‘bitchy Dean’, it’s time to stop reading.
Equity markets are not zero sum
Over the weekend I tried to correct well known blogger/tweeter Tren Griffin on what I thought was simply a sloppy mistake. Tren said “Mr. Market is bi-polar. There’s a winner for every loser since the game is zero sum after fees. When muppets lose, someone else must win.”
I’m sure most of you know, but for those who don’t “zero sum” is a simple concept that means exactly what it says on the can, that is, losses and gains equal zero. As equity markets return on average 10 percent a year they are clearly not zero sum. I’ve seen other bloggers go to some length to illustrate that equity markets are not zero sum, but for my money it doesn’t get any simpler than a 10 percent average annual gain is not equal to zero. Not even close.
In my book Tren then committed so many ‘crimes’ I feel obliged to call him out.
1. Rather than use his own logic and arguments he quoted others and stated they all agreed with him.
2. He was wrong. I’m not sure if it was a lack of comprehension or, more generously, if we were talking at cross purposes, but the linked articles highlighted that alpha is mostly a zero sum game. I agree with that and pointed out to Tren that he’d extrapolated the idea of alpha being zero sum to the entire equity market. Please let me reiterate, 10 percent annual returns clearly proves that gains and losses in the market do not sum to zero.
3. Tren continued to post links to articles that circled even further away from the point, e.g. active vs passive management. My dad used to do that, if he wasn’t winning an argument he’d change the framework rather then admit he was wrong.
I also disagree with the concept that for every winner there is a loser. Yes in aggregate market out-performance must come from under-performance. But people sell and buy stocks for myriad reasons and to think in such simplistic terms as winner/loser is unlikely to be of any benefit to an investor. Except to think why they may be the loser! In this post Peter Phan provides a good anecdote of why this dogmatic rationality is problematic. Yes I know I’m linking to an article rather than using my own logic, what can I say, I love irony. Also Peter illustrates my point rather than highlights my mistake.
Further, market returns to individuals/institutions are not equally distributed. It’s closer to reality to say that for every winner there are 2-3 losers. It’s also worth considering that a 7 percent annual return, which some may call a loser, may actually be a winner on a risk adjusted basis. I could go on, but I doubt anyone is still reading.
Of course I could be wrong about all the above and I’m clearly out of sync with the majority of investors, as 16 people re-tweeted and 16 favourtied this tweet by Tren “Tech stocks are down from when they were up, but are still up from when they were really down. This up and down pattern will continue.” I read that to my 10 and 12 years kids and they laughed as much as I did. I thank Tren for giving us a lovely family moment. In fairness Tren may have simply been trying to better explain his point of view and I appreciate the time he took to reply to me, but wonder if that was driven by pride or selflessness.
And finally, it’s OK to be wrong, just don’t stay wrong.