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Wednesday, August 17, 2022

The Machine – The Reformed Broker

There is no more unhealthy behavior among investors than to fixate on each day’s stock market action as though it contains some bigger answer about what’s to come. Weekly closing prices contain some interesting information. Longer term trends, like multi-month moving averages, are also somewhat useful in terms of understanding the broader trends. It’s good to be aware.

But daily market data? Hourly? There’s nothing there. It’s fodder for conversation. I try to make this point in public whenever I can. It’s tempting to overweight the things we are seeing with our own eyes in real-time. We have to fight this temptation. It leads nowhere good.

This morning the Dow Jones looks to be opening around 300 points higher. It could close 300 points higher, or 600 points higher, or down 500. In either case, this tells you almost nothing about what that might mean for Wednesday, Thursday or Friday. Obsessing over every gyration and, worse, believing that there is some important action you need to be taking based on this, is a surefire formula for long-term underperformance. There is no promised reward for trading harder than someone else. Effort doesn’t factor into this business the way it does in other endeavors.

So if trading harder doesn’t help, what’s the right answer? Only trading smarter. How many trades do you realistically expect to be of the smart variety? More trades don’t usually lead to better outcomes. In most cases, more trades make things worse. Sometimes (very often), the smartest thing to do is read a book or go fishing.

One thing almost all investors have in common is that they spend their first five years thinking there is an answer out there. If I can only figure out what’s about to happen, I will win! You cannot talk them out of it; they have to learn that this isn’t the thing through trial and (lots of) error. The very worst thing that can happen to a young investor is overnight success. It teaches and reinforces all the wrong lessons. I know how to do this, see, just look at my year to date p&l! Only failure imparts the kind of market wisdom that will keep you in the game. And someone else’s failure, observed from afar, will not be enough. It must be experienced firsthand. If you’re new to the market, I won’t be able to talk you out of these learning experiences. I don’t want to. Have fun, pay attention to how each twist and turn makes you feel. Become aware of these feelings and draw on the memories you’re accumulating. You may need less than five years. You may need more. Some guys (usually guys) don’t ever figure it out. I know fifty year old day traders who are tending bar at night to pay the bills. That second part is not in their LinkedIn bio.

Yesterday, during a sell-off of almost 700 points in the Dow, millions of investors became bearish about the future because of the availability of negative stock prices right before their eyes. Some of these same investors will see this morning’s green opening and say to themselves “Actually, it’s not that bad maybe. I’m not as bearish today as I was yesterday…” This is called the recency bias and it affects all of us, in all aspects of life. Every time the Knicks grind out a win against a tough opponent, I can visualize them going deep into the playoffs. Then they lose to Orlando the next night and I can visualize them trading half the team and starting over with a new rebuild. The bipolarity of this sort of sentiment shift is unhealthy in a sports fan. It’s downright toxic for someone who is trying to invest for financial goals that are twenty years into the future.

I like to share solutions to the problems I write about and end things on a positive note. My solution to this undeniable mentality we are afflicted with is very simple: Turn it off. No alerts. Yahoo Finance wants to keep you engaged and make your phone buzz all day long. This index is at a new high, such and such stock is down more than the market, etc. This is what their advertisers are paying them to do. Nothing wrong with that, but no one is forcing you to play along.

As a professional, it’s kind of important for me to be constantly aware of what’s going on in the markets. We operate rules-based strategies which mitigates my desire (ability!) to react to something I see in the markets and start pulling levers. I’m just like you – I have a tendency of getting more bulled up when prices are rising and then becoming cautious when they’re in retreat. This is an instinct and it’s so deeply ingrained in most people that rules – set in advance – are the only good answer.

But where you’re probably not like me is that you don’t have to be as on top of everything as I do. It’s probably not part of your job or how you make your living. You should not take that advantage you have over professionals for granted. Use it. Lean into it. Turn off the alerts. Read articles to gain perspective. Watch CNBC to hear the opinions of others who are living inside of the machine. Check out the Wall Street Journal. See what the tweeters are tweeting. Then digest these opinions while taking a moment to recognize where they are coming from. Who is saying what? Why are they saying it?

And then count your blessings that you are living and working outside of this machine. The stakes are lower for you each day. The need to know about every new development is lesser. You are lucky. Work with that. Remove the prompts from financial apps that force you to peek every hour. No price alerts. No breaking news alerts. No text alerts. You don’t need it. There aren’t many actions you can take from it that will prove to have been in your best interest in the fullness of time. Find something more interesting to occupy your time and energy.

The machine benefits anytime it can impulse you into action or hijack your attention. You benefit every time you don’t allow that to happen.

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