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We came from a recent meeting overseas with investment strategists and thinkers. As we’ve pointed out before, we make our living in the financial markets. It is a wonderful place to be for those who are connoisseurs of the absurd, as we are.
For one thing, “the market” is a bigger and wilder place than most investors seem to want to believe. A participant in the markets must grapple with the fact that little is in his control. Much of what happens over any stretch of time involves a lot of forces interacting and creating cascades of complexity that are hard to wrap one’s brain around. In the absence of such understanding, much of what happens seems a matter of luck or randomness. Meaningless.
It is, in short, a lot like life.
And yet… The thing that strikes us most among our peers is the earnest and never-ending effort to bring order to this chaos. People go to great lengths to explain small changes in stock prices, for instance, over short stretches of time. They go through great lengths to come up with rational ways to predict prices.
And the models people dream up to explain what they see are inherently ridiculous. For instance, there are a number of so-called “chart readers” in markets, or technicians. They think see patterns in stock charts and ascribe great meaning to certain of these patterns – such as when stock prices break through imaginary support lines or arbitrary moving averages.
To us it seems like reading entrails.
Indeed, it really represents a great futile struggle to give meaning and order to what is inherently unstable and whirling, even contradictory, even aberrant and irrational.
This also applies to life. People are constantly searching for meaning in events, struggling to fit them in some greater order for how the world ought to work. They are reluctant to see how small they are.
Another great allegory for life that makes this clear is the sea. Man is very small next to the powers of the great oceans. The sea makes man’s absurd condition hard to miss.
One of the great absurd novels is Melville’s Moby Dick, as Albert Camus noted. (Camus: “I could, at least in the realm of creation, list some truly absurd works. (Melville's Moby Dick, for instance).”)
The novel is absurd on many levels…. in Ahab’s futile quest, in the great power of sea and the White Whale… the meaningless quest … the feeling of being alone that touches all of the characters… the fine line they walk with suicide… death is always very near…
“If a painter of the Absurd has played a role in my idea of literary art,” Camus wrote, “it is the author of the admirable Moby-Dick, the American Melville.”
“I wonder,” says Stubbs, one of Ahab’s officers, “whether the world is anchored anywhere?”
The absurd man reasons that it isn't and he is not concerned. He knows life has no meaning and, therefore, he is free. He cheerfully accepts this fate, looks down into the abyss with a steady eye and is happy.
Ah yes. Markets are indeed absurd...
ReplyDeleteIn regards to the absurdity of “entrail readers” (i.e. chartists), though, I wonder what you would make of this statement:
The inability to read a tape and spot trends is also why so many in the relative-value space who rely solely on fundamentals have been annihilated in the past decade. Markets have consistently experienced “100-year events” every five years. While I spend a significant amount of my time on analytics and collecting fundamental information, at the end of the day, I am a slave to the tape and proud of it.
Before responding, keep in mind that this particular speaker and “slave to the tape” – a global macro trader named Paul Tudor Jones – has made many billions of dollars for both himself and his clients... and furthermore that Jones’ flagship fund, the BVI Global Fund, is known for running twenty-plus years without a single down year.
(In 2008 I believe BVI Global was down somewhere in the neighborhood of 5-10%, taking its first loss due to credit-related exposures. Jones himself was up something like 25% on the year in his own chart-infused trading P&L, a performance which saved BVI Global’s total return from being much worse.)
All that to suggest is -- if I am not too rude in suggesting -- perhaps empirical observation should have a special place for those who embrace the absurd.
If all the respectable botanist literature told me that blue daffodils cannot exist, for example, but I then came across a thriving patch of blue daffodils growing in my neighbors’ garden, I might have to say “hmm”... on a more philosophical level, this same type of open-mindedness might apply to the hidden nooks and crannies of life.
Or maybe not...
Well... I don't want to get into the specifics of debating one approach over another. They all have weaknesses and weak practitioners, which are the dominant set in any case.
ReplyDeleteI mean, you bring up PTJ. No matter what method I pick to make fun of, someone will point out a guy who made it work. I could say astrology is nonsense in markets and somebody would write in about how some guy is making a fortune with it.
And the quote you raise is just nonsense anyway. I could pull out a half dozen quotes about some practitioner of one set accusing the other of blindness and stupidity. That's high school stuff.
Whatever.
The main point here is that man is small, that the world is chaotic and unpredictable. And that we should hold what we think we know lightly. That much that happens - even in markets - is just meaningless noise.
Inigo
Ouch! Looks like I touched a nerve. Shades of college, when I started enjoying the thrust and parry of debate too much and all of a sudden wound up being the jerk...
ReplyDeleteRe this: I could say astrology is nonsense in markets and somebody would write in about how some guy is making a fortune with it.
If you can show me someone with a twenty-year track record making substantial gains from astrology, I’ll eat my hat. I thought the twenty years of documented institutional-scale returns part was kind of key in separating the “lucky flukes and hacks” argument from the rest... there are many paths up the mountain, but only a few have a statistically meaningful twenty-year track records attached. Some chart based methods on the $100MM-$1B+ scaale are included in that rarefied group, though none of the pseudo-science ones from what I know...
Anyhow, above and beyond the charting issue – which doesn’t really matter as you suggest – I just wanted to underscore the idea of open-mindedness a bit more by playfully pointing out what struck me as an almost theological assertion (as far as certain aspects of the market are concerned). Empirical evidence may be given the “samsonite test” – poked, prodded, dissected and otherwise beaten to a pulp – but not ignored in my humble opinion. I will vigorously defend the value of empirical evidence on principle because it is a very important guiding tenet in the abstract, above and beyond the specifics of the debate (markets, biology, cooking methods etcetera).
But anyway, hard-headed as I am, I can catch a hint when delivered loudly... so I’ll now withdraw and not cause any more trouble...
Bah, it is impossible to offend here. It is all in fun and none of it matters anyway.
ReplyDeleteOne point though: You seem sure in your empirical knowledge, but you cannot be.
You are making the old case rate probability versus base rate probability fallacy.
In other words, PTJ has a 20 year track record. So what? You don't know how many people made the attempt in the same way he did.
If 10,000,000 people made that same attempt and lost it all and PTJ made it, I hardly think you would say it was a good strategy.
None of us can know of any of this. Even the slick-minded empiricists are blind, or blinder, than the rest of us.
Inigo
Good to know that skins remain thick. I will make a more concerted effort to behave myself as a guest in your house regardless.
ReplyDeleteWith all due respect though... the same case you are making against me now is the one that random walkers make against value investors.
And so, fittingly, the defense I offer looks strikingly like the one Warren Buffett used in his "Citizens of Graham and Doddsville" argument.
That is to say, just as the collected superior-return citizens of Graham and Doddsville were gst too similar in their approaches and thinking processes for the group's accumulated success to be a fluke or a product of random coin flipping, the same observation is true of the chart-using community upon which I make my case.
In otherwords, if PTJ were just a one-off guy out of nowhere then, sure, there would certainly be a trained orangutan / statistical fluke case to be made.
But the reality is that, if hard pressed... or sufficiently motivated by a large enough wager... I could bring to your consideration not one, not two, not ten, but at least a dozen or more impressive track records of twenty years or greater duration -- all produced by market participants with a similar cohesiveness in chart-based philosophy and approach that Buffett spoke of in defense of value investing. (Perhaps call them the "citizens of Trend and Chartville," with apologies to Mr. Buffett.)
And so, while I agree that the slick-minded may indeed be blind -- even perhaps willfully so! -- I would further humbly remind that, when it comes to knowledge and the ability to assess and amass empirical proof, there is a fine line between healthy skepticism and destructive nihilism.
If there is no knowledge to be had and no certainty to be had whatsoever, than all pursuit of knowledge (and indeed all investing activity) would be futile (in the bad sense of the phrase, not the good).
When I endorse the value of empirical evidence, I only do so under the theoretical auspices of a fair judgment in the impartial court of reason, to as great a degree as such is possible... to challenge that particular ideal would be to challenge the advance of science and the advance of all knowledge really (in my humble opinion).
Though blind, perhaps some of us can be one-eyed kings in the land of the blind... or, barring, that feel our way forward in the dark with our hands...
Yes, but I am not sure even Warren Buffett's essay is all that valid.
ReplyDeleteI mean, I think that PTJ or WB would make money in markets more by force of their own talents than their methods.
How much of Warren Buffett's fortune is really due to the fundamental analysis of Graham-Dodd versus his own talents, intuitions, luck and circumstance? I would submit more of the latter.
And for PTJ, I would also ask: How much is due to chart-reading and how much to the other factors of unique talent, judgement, luck, circumstance, etc.? Again, I would say more of that latter.
Empirical track records of all stripes are over-rated in my view.
Having said that, I agree that there is a fine line between healthy skepticism and nihilism. We are somewhere close to that line in this discussion.
And just to wrap up: I threw chart-reading under the bus in my initial post because it was easy. I think you would admit that the vast majority of chart-reading going on is as far from PTJ as steak is from tofu.
I could have easily thrown value investors under the bus also. The vast majority of those that call themselves "value investors" are clowns.
I am not defending one method over the other, just casting skepticism over the whole enterprise. In this, I guess I am closer to Nassim Taleb and his Black Swan arguments.
We just know so little and yet pretend otherwise. Most do not hold their convictions as lightly as we do.
Yes! With those clarifications I cheerfully concur...
ReplyDelete