Inherent in our DNA is a natural fascination with stories; a need for a narrative offering easy explanations and digestible answers. No doubt this curiosity acts as an internal impetus driving all of us to seek out answers to intriguing questions. While it paves the way for new discoveries and intellectual leaps, it can also lead the gullible masses to gobble up whatever is being peddled by the latest guru. In the land of story seekers, the master storyteller is king. Even if his persuasive tales are riddled with errors.
In the world of trading I wonder if this natural attraction to stories lies at the heart of a mistake which I suspect is quite common – the continuous attempt to explain market movements. Searching for the “why” behind the “what”, as it were; the perpetual need to determine why some asset rose or fell on any given day.
From an economics standpoint the answer to such a question is actually quite simple. Prices dropped because supply exceeded demand or prices rose because demand exceeded supply.
Not satisfied? Well, head on over to your favorite financial media site and dollars to donuts you’ll find some pundit opining on a news item or compelling reason that ostensibly caused the price move. As if said pundit could actually enter the minds of the millions of investors that bought or sold the security in question and figure out their true motivations.
Those who focus on the underlying theory behind why a particular asset is moving in one direction or the other tend to be much slower to react when adverse conditions arise. They stubbornly cling to their version of the story, unwilling to face an alternate reality. Consider, for instance, those loyal traders unwilling to disembark from their silver spaceship which they vehemently contend will yet continue its inflation driven rise to the stratosphere. Does it really matter what the bullish story is when you have to sit through a 44% peak to trough drawdown? Silver bulls who exited when price proved them wrong have no doubt salvaged untold amounts of emotional capital. What should happen or what should have happened is a weak consolation prize to what IS happening.
Stories are a lousy substitute for a chart. An overemphasis on building theories to forecast what should be happening leads many to under-emphasize the actual analysis of what is happening in the here and now.
As a trader I find little, if any, utility from the majority of news articles out there. While sometimes entertaining, they rarely lead to the making of a better trading decision. And don’t confuse the ability to spin a compelling tale with successful investing prowess. If connecting the economic dots of intermarket relationships was a prerequisite to success, the savviest traders would be professors from academia.
In an arena such as ours where timing is everything, the ability to analyze what is happening is altogether superior to crafting a palatable theory on why it is happening.
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“As a trader I find little, if any, utility from the majority of news articles out there.”
That’s generous of you. I find no use for any story. Once the market has moved, the reason behind the move is history and no longer concerns me.
lol. What can I say? The holidays have me in a generous mood.
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