What’s Your Story?

What’s Your Story?

Link: David Atwood Blog – Speakeasy – What’s Your Story?

Many of the day to day events we experience are random, unexpected, and otherwise unplanned. We are often inclined to thread these singular events and their unintended consequences into the fabric of a story, one that helps to explain the connection of these random events to the time and people close at hand. In the book, Fooled by Randomness, Nassim Nicholas Taleb points out how we humans are fallible with our “knowledge”. We tend to view the world as more explainable than it really is.

Definition: Pareidolia (parr-i-DOH-lee-ə) – the psychological phenomenon of perceiving pattern in randomness.

So how does Pareidolia lead us into trouble with investing? When we don’t know that we don’t know something, it can be far worse than facing what we know we don’t know. The purpose of this dialogue is intended to explain some potentially damaging behavior that may arise from the false precision of a good and plausible story.

It is no secret that the “lost decade” has frustrated many fair weather investors. Many folks will commiserate over the lost opportunity of making a fixed rate of return, or investing in other asset classes such as real estate or gold, or even the comfort of stuffing money in a sock and tying it to a bedpost! While I’ve never tried the latter, our basic nature pre-disposes us toward the Do-something Syndrome, if only to shake things up with the intention of altering the environment.

The Do-something Syndrome is acting without a sensible reason. Our behavior creates a feedback loop from the environment we’re in. If we experience something positive, we are likely to repeat the behavior that we perceive to have caused it. The opposite is also true for a negative experience. We change what we perceive is not working and that is a big part of how we adapt.

Given a choice, where there is a 50/50 chance for a successful outcome, flipping a coin offers the immediate relief of changing the circumstances.

Beware of the 50/50/90 Rule: Any time you have a 50/50 chance for getting something right, there is a 90% probability you will get it wrong!

We will act in ways that are contrary to our best interests if we don’t understand the consequences. Ego, greed, envy, fear, and the mindless imitation of other people will cause us to do dumb things and suffer the pain repeatedly. Seeking the approval of others, along with great talent and a high IQ, are no match for good habits, character, and the temperament of rational thought.

The outcome of doing something simply because we can’t stand being still can be like confusing activity with progress. There is no point in running if you’re on the wrong road. In the quest for perfection, anything that isn’t worth doing isn’t worth doing well!

Environics is a firm that studies the sentiments of investors and sells the research to investment firms. A recent survey revealed that 15-30% of investors are willing to change advisors with the intention of improving their circumstances. The lost decade is proving to be fertile ground for sowing the seeds of discontent and the change that comes along with it. The resulting story line is familiar. Various random bits of information are meshed together forming a good and plausible story. It can be told like this.

Excessive compensation, poorly defined incentives, ineffective regulation, lack of supervision, and generally poor behavior on the part of others has created an unfair environment favoring a select few. Toss in the American debt, a presidential election, and the southern Europeans that don’t work enough or pay enough in taxes and the plot is set! The chapter titled, Restoring Accountability, is where the harsh forces of capitalism are driven by the motion of voting with the feet. The Do-something Syndrome is in action right now.

I look forward to benefiting from these widespread client/advisor dislocations however; in good conscience I can’t say that making change for the sake of change is going to help matters much. The reality is that stock markets are inherently random, especially in the short term. Changing the environment by changing advisors or fund managers will do nothing to change the randomness of events and there are likely to be unexpected consequences if the decision to change is not particularly rational. There is a much bigger picture to consider, one that considers the value of assets.

Nick Murray, an investment industry pundit, uses the last major market meltdown to make it perfectly clear the role of advisors with these five lessons learned.

“Let’s start with the following scenario. On October 9, 2007, the S&P 500 index made its all-time high reflecting the mood and sentiment of investors in American business. By March 9, 2009, the S&P 500 had dropped 57% which had never happened before during our lifetimes. We didn’t know when it peaked, we didn’t know how long it would last and we didn’t know when it ended. The banking system in the US failed and was propped up on the back of tax payers, the lenders of last resort. The credit function around the world ceased to exist and it happened quickly. The subsequent rally and recovery roared back 80%, the most significant rally in our lifetime.
1) I will never have any idea what the economy is going to do in the next 12-18 months.
2) I will never have any ability to anticipate what the market is going to do over the next 12-18 months.

(Buffett’s best friend Charlie Munger commented on the same clairvoyant ability, “We don’t think anyone else can either and we’re just as good at not knowing as they are.”)

3) The more traumatic the next series of economic or market events, the less likely I will be able to anticipate them or time them.
4) (a) There is no statistical evidence for the persistence of performance. Future performance is random as compared to past performance.
(b) At critical turning points in the investor’s lifetime, relative performance will not save you; it isn’t going to matter.
5) The world did not end, because it does not end.”

(Warren Buffett commented on another matter, “The system is incredible at unleashing the power of human potential. It isn’t going away.”)

The big picture includes the current menu for the crisis du jour along with the rational thought about price and value. The larger story looks beyond the random events and considers the probabilities and especially the inevitable. There is a growing middle class around the world scurrying about with the intention of creating a better life and they will, just like we have. They don’t watch CNN or BNN and it doesn’t matter. We will do well to look beyond randomness and focus more on the story told by the big picture.


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