Monthly Archives: April 2012

Bull/Bear = GOP/Dem and Why Being a Good Teammate is a Bad Investing Strategy

Framing market behaviour as a battle between bulls and bears has always made me cringe, appealing as it does to some of our least productive psychological tendencies. Our first, automatic response to finding out that a confrontation is underway is to self-identify with one side or the other, a hardwired subconscious process arising from the herding impulse developed deep in our evolutionary past. Psy-Fi blog does a typically brilliant job describing the negative aspects of herding on trading performance HERE, saving me from elaboration.

Imposter that I am, I don’t just write shit down and expect people to believe me, I co-opt respectable people without their permission for support. Thankfully, in this case there exists what I think as the best general-focused blog post ever written on how to think healthily (you read that correctly), The Wrong Lesson of Iraq by The Last Psychiatrist written in 2007. Ostensibly about the masses’ response to the alleged manipulation of popular opinion by the Bush administration, the post is much more about the dangers of “splitting” –  the broad brush psychological tendency to choose sides –  and the resulting laziness and poor analysis that logically results. Conveniently, the GOP/Independent/Democrat trialectic has a close market analog in Bullish/Neutral/Bearish which will make comparisons easier.

The Last Psychiatrist writes as follows:

Splitting says: Bush is all bad, period.  Nothing he does is good, and if it is good, it is from some malicious of selfish motivation, or an accident related to his incompetence to even be self-serving.  Similarly on the other side, liberals are weak, corruptible, treasonous.

Splitting is always polar; once something is declared “all bad,” an opposite is necessarily declared all good.  Importantly, this isn’t a comparison between the two– he is bad, but she is better; it’s perceived to be two independent, unconnected, assessments, even though to anyone else looking from the outside, they are so obviously linked.  So hatred of, say, liberals is thought to be independent of your preference for Bush, but in reality it is only because you hate liberals that you like Bush.  The hate comes first.  And this splitting makes it nearly impossible to acknowledge any of Bush’s faults.

 

Yes, this will take some unpacking. A decent start would be the equivalence of the terms “permabull and permabear” with “far left and far right” as in each case the namecalling is simultaneously a statement of affiliation and an invitation to dismissal. If I’m bullish, there’s no way I need to read Dylan Grice because the term “permabear” identifies his reports as a market strategist version of Mein Kampf, the ravings of a lunatic. The same is true in reverse of China sceptics and Jim O’Neill (*raises hand sheepishly*). Note the defensive nature of these decisions – branding an opposing view as insane or misguided saves us from testing our own theories, market or policy-oriented. Paragraph two of the excerpt suggests also that the basis of our market outlook may be intensified, or even formed from, a general, personality-based dislike of either optimism (“that idiot always has the pom poms out”) or pessimism (“the bond market has predicted 45 out of the last 3 recessions so i don’t follow it”).

Now the key part:

 

But splitting is rarely about the target, it’s a convenient heuristic to get the subject out of having to accept the complexity and totality of the other, and of their own emotions about their environment.  In short, when things get heavy, it’s easier to just label black and white and work from there.

Splitting is the reaction to intense anger and frustration in those people who discover themselves to be powerless.

Since it’s all Bush’s fault, there isn’t actually any underlying problem to deal with.

 

Change “other” to “market” in the first sentence and we can pretty much print out and frame it as one of the best pieces of trading/investing advice ever written. Psychologically it is much, much easier for unsuccessful traders to claim the market is fixed rather than recognize that it is merely (at that stage of their trading career) beyond their comprehension, that more boring, tedious studying must be done and that ignorance is “the underlying problem to deal with”. The emphasis on “their emotions about the environment” is also clearly applicable to trading and investing, as numerous commentators detailing the unproductive nature of investing emotionally have pointed out.

No metaphor is perfect and there are limits to the GOP/Dem Bull/Bear comparison. The limiting aspects of labelling and framing, however, are evident in both areas. Knowledge of how markets actually function will be limited by self-identifying with any group – bull, bear, inflationista – in the same way that ideologues will always be incapable of producing effective foreign policy beyond bombing the living crap out of people until they submit, likely temporarily, to force. Persistent success in investing and trading requires a nuanced, detailed understanding of factors affecting asset performance that is not generally possible by just being a good teammate with fellow bulls or bears.

Askers vs Guessers in Finance: Askers are Annoying, Rich

Any follower of @Real_Interloper is aware of my fixation on the issue of Extroverted versus Introverted personality types and the possibility that Introverts will be devalued in a service-based, technology-heavy economy. * There is a subset of this discussion which relates closely to relative success in the financial industry – Askers versus Guessers – which is helpful in understanding the frequent annoyances experienced by clients and prospective clients of investment banks.

The popularization of the Asker/Guesser Paradigm began with a blog post by Andrea Donderi quoted by the Guardian HERE:

We are raised, the theory runs, in one of two cultures. In Ask culture, people grow up believing they can ask for anything – a favour, a pay rise– fully realising the answer may be no. In Guess culture, by contrast, you avoid “putting a request into words unless you’re pretty sure the answer will be yes… A key skill is putting out delicate feelers. If you do this with enough subtlety, you won’t have to make the request directly; you’ll get an offer.

The most obvious general manifestation of Asker/Guesser are the dudes that internalize the dating scene as a numbers game, and will spend an entire night at a bar getting shot down until some definition of success is achieved. The necessary psychological equipment for this practice is incredibly thick skin, an ability to soldier through mass rejection that would emotionally cripple a Guesser.

The stereotypical retail broker is virtually the Platonic ideal of the Asker. Successful brokers are often immune to rejection, criticism or introspection.  To provide a specific example, I was once involved with a merger where the retail wing of one company combined with the capital markets department of another. About a month in, a broker sent an email to all capital markets staff informing them that they would be required to switch all of their investment accounts into the new retail division, and since this was the case, they might as well sign up with him.  No such policy was ever discussed or established. When confronted, the broker just said, “Oh, sorry, I must have made a mistake” and went on with his daily routine.  Didn’t work, on to the next.

Not everyone employed in finance is an Asker and self-doubting Guessers are particularly prominent among strategists and economists.  Askers however, particularly in their most subtle form of investment bankers, tend to make the bulk of the money. This makes sense in that the asking is generally for money, and Askers rightly demand their cut.

The Asker/Guesser dichotomy operates on a continuum – very few people are 100% oriented either way. However, the differences are so fundamental that communication between the two groups is often fraught with danger. The Guardian article describes this well:

An Asker won’t think it’s rude to request two weeks in your spare room, but a Guess culture person will hear it as presumptuous and resent the agony involved in saying no. Your boss, asking for a project to be finished early, may be an overdemanding boor – or just an Asker, who’s assuming you might decline. If you’re a Guesser, you’ll hear it as an expectation.

I suspect that Asker/Guesser issues form a significant part of anti-finance sentiment.  Finance asks to maintain its current privileged status and an audience guesses that this represents a sense of entitlement.  Guessers, including politicians and regulators, could potentially be surprised at the extent to which rank and file financial employees would accept a puppy-like smack on the nose or, in more common trading floor parlance, told to go fuck themselves.

 

 

*Two aspects of Introvert/Extrovert interest me most. One, that the rise of extroverts corresponds to Professor Cowen’s Great Stagnation thesis. Two the possibility that the necessary skill set for success has made an almost exact 180 degree change from the 19th and early  20th.

Higher Education as The Big Marshmallow Test

This is not going to be an easy post for me to write but I will commit off the top to avoid wallowing in personal travail. The issue however, the signaling component of higher education, is for a dropout like myself fraught with highly defensive emotional bias that will underpin everything I write. The extent to which my dropout status disqualifies me from providing an opinion on the matter is really the pivot around which I want this post to revolve. I should thank professor Cowen yet again for recent posts like this one that provide the window (or cover, depending on your perspective) to write this down and have even an outside chance of anyone reading it.

Some combination of a diligent guidance counselor and a hysterical mother meant that a weeklong battery of IQ testing at the University psych department accompanied my late-high school academic fall from grace. And although I have frequently wished this were not the case, the results were as expected for my psychopathically arrogant teen self. The point, in hindsight, is that the drug-addled misery that was to follow was entirely caused by a lack of maturity and general fuckedupedness.

It is my sincere belief that well over 50% of the population has the intellectual capacity to earn an undergrad degree, particularly if given direction as to where to focus. This is not to suggest that intelligence is not an important factor in the late-teen, early 20s streaming of the population. It does imply that for the middle of the bell curve, the overwhelmingly deciding factor is maturity that for the majority success or failure regarding higher education is in many ways one vast, complicated marshmallow test.

I assume that most people reading this have earned an undergrad and I’m highly curious as to their reaction to the above sentiments. Is it “Well, winners win” as my old friend JC used to say or more popularly “Do or do not. There is no try”? Fair enough, if so. None of this is to demean the consistent hard work and diligence that academics require. It should be a decisive advantage. But for how long?

My question in the end is whether there should be a statute of limitations on the importance of higher education in determining future wealth and status. The issue is entirely hypothetical admittedly – I’m not going to suggest a multi-trillion dollar “No Teen Left Behind” government program nor do I have any delusions that efforts will be made by the academically successful to drain the moat that protects their career advancement from the lesser-washed. But still, one wonders whether the increasing cynicism as to the tangible, ex-signaling benefits of higher education will result in recognition that talent lies elsewhere, with those that failed the Big Marshmallow Test and matured late. As the labor force shrinks, it is conceivable that two 35-year olds with similar work histories will be judged on largely equal footing, without respect to academic achievement that ended more than a decade previously.

As always, I’m exaggerating the case to make a point. I am well aware that hundreds of thousands of people without degrees have a net worth in the millions of dollars. Failure to get a degree is not a guarantee of lifelong poverty, although I can attest that it certainly feels like it at the time.  It is also not the case that I’m inviting readers to a pity party on my account – things have turned out pretty well for me and I have been insanely lucky in many regards. I do, however, retain a great deal of sympathy for those that for self-inflicted (my case) or other factors, were distracted at the exact point in time when the academic fork in the road that would go a long way to determine their future success was directly in front of them. I’m biased, clearly, and dramatically so. But I suspect and hope that the current hand-wringing regarding the limits of conventional higher education, combined with demographic factors and the need for constant workplace re-education, will result in more work environments where advancement is determined by proven ability, and less dependent on a maturity test that occurred at a specific point in time.

Standing By for the China Growth Hiccough

One of the favorite tactics of the more Gricean, scaremongery strategists in the early 2000s was a chart comparing the post-peak performance of the Nikkei and the S&P 500. There was never a lot of effort spent on the “why” of the seemingly inexplicable correlation between the two, the Japanese and US economies being so structurally different. Japan, with a giant, manufacturing-based trade surplus using the adapted technology of other nations (early 1990s patent reform remains a vastly underrated factor in the tech bubble) was faced by issues, the inbred keiretsu structure most prominently, that Teddy Roosevelt had taken care of for us (or so we thought). The persistence of the Nikkei/SPX correlation was, and is to a great extent, considered a statistical anomaly.

Investor psychology and the profit-driven (but not insidiously evil) influence of the finance industry are the two factors, which are demonstrably unchanged between the bull markets of Tokyo in the 80s and Silicon Valley in the 90s. The pattern is likely repeating itself in China.

My argument, roughly that China is following the same bull and bust pattern found throughout history, is dependent on distinguishing between the two types of market rallies. In the first, the Manic Type most widely associated with the Tulip Bubble craze, is an adolescent version where most professionals are aware that they are just dicking around, playing Greater Fool. Retail-related fads – Krispy Kreme, Crocs, Beanie Babies, Hoola Hoops and likely LULU sometime in the next ten quarters – feature prominently here. Everyone knows there a “best before” date on the whole thing, it’s just a matter of trading it and finding the exit before a fickle public gets bored.

The adult, Structural Economic version of the bull and bust cycle is a much more serious operation. It involves real, tangible change that dislocates economies across the entire planet for the richer: think steam engine, Internet, cotton gin, Ford’s assembly line, global trade (and the insurance business that made it financially feasible at the initial New World stages), China.

Examples of market reaction to the latter, major trends are remarkably consistent and numerous: well over 80% of Britain’s 19th century rail network was built after the collapse of rail stocks in 1846. The hundreds of American auto manufacturing companies active in the mid 1920s bankrupted their way to three. The same pattern will inevitably hold true for post-bubble technology networks in this century. In this light, using a more macro interpretation and a longer time arc, it is not difficult to see the Great Depression as the awkward adolescent stage of America’s technology-driven march to global economic dominance. The Asian Currency Crisis is a quicker version of the same process for the Asian Tigers. The pattern is evident in each case – a legit, undeniably powerful trend attracts far more investment than it can efficiently digest in a short period, inflated asset bubbles collapse, the actual sustainable trend takes hold.

In all likelihood China will eventually become the world’s largest economy but that’s not the point, at least for developed world investors. Economic changes to the degree being experienced in China have never occurred in history without a serious hiccough that makes every investor wet their pants for a considerable period. And currently, each passing month brings signs of structural stress in the Chinese growth engine – NPLs, inflation, social unrest, property price deflation, corruption, suspicious accounting – that make it increasingly difficult to argue that somehow China will be the first entity ever (and the largest by a wide margin) to transition smoothly from mammoth investment bubble to sustainable growth. This argument involves a New Paradigm.

Sell-side China bulls frequently imply that to be bearish on China-related investments is somehow analogous to long-term bearishness on the Chinese economy, an interesting rhetorical flourish designed to sustain investment in the short term. It would be far more interesting to hear the ways in which China will avoid the “investment bubble/collapse/then steady growth” process that economic history teaches us to expect. Indiscriminately shoveling money at legitimate trends until they break is just what we do. The odds, particularly in light of recent data, that we will have another chart to place alongside the 1980s Nikkei and 1990s S&P 500 appear much higher than an extrapolated straight line growth path into the Chinese century.  I’ll wait for the hiccough and buy with both hands.

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