Letting Go of the Why

Watching the drama unfold over the past couple of weeks in the Greece should make a few things clear to investors. First of all, no one really knows what’s going on in the markets.

I remember listening to a very well-respected European hedge fund manager give a talk in 2011 about the potential for a Greek exit from the European Union. He put the odds at close to 95% and even gave a specific date for when it would happen. It sure sounded like an intelligent take at the time based on the reasoning he laid out. It didn’t matter.

If you’ve been following the Greek saga from the start you begin to realize that even the experts on the situation are pretty much just making it up as they go. How often do the economists change their odds for the probability of a Grexit? Maybe stop guessing since your forecast is worthless in a matter of hours? Trying to place odds on the likely outcomes of these types of political scenarios is like trying to count cards in blackjack when the dealer re-shuffles all six decks after each hand.

Some of the most brilliant people I’ve met are terrible investors because they’re constantly seeking out ways to explain why things happen the way they do in the markets. Even when you’re right about the way something transpires in the macro picture, you may come to the wrong conclusion about how the markets will react to that event.

When you’re constantly looking for a catalyst to explain every single move in the markets you start to see signals and correlations that just don’t exist. Most of the time we won’t know exactly why the markets moved a certain way until much later. Sometimes even with the benefit of perfect hindsight, investors still can’t agree on the specifics of the cause and effect. But to some the ‘why’ in the markets will always seem easy after the fact, so they keep searching for the answers.

Of course, there will always be focus on the ‘why’ because people crave a good story. And many of the intelligent people who work in the industry are overconfident in their abilities. It becomes an ego thing, which is why so many investors take the markets personally when it goes against them and their chosen catalysts.

Long ago I decided to let go of the ‘why.’ It’s not worth it to constantly try to play the guessing game about how things will work out with every single headline event. There’s no need to add unnecessary stress to an already complex market construct. I don’t know if the Greece situation will lead to a correction in the markets. Maybe it’s a catalyst. Maybe it’s just an excuse for investors to sell who have earned large gains over the past few years. Maybe it passes with no market damage like it has for the past few years.

Either way, investors have to ask themselves the following question when preparing for the eventual correction in the stock market: Do I want to be right about the reason for the fall or do I want to have a plan in place to deal with the inevitable losses when they occur? The two don’t have to be mutually exclusive, but trying to outguess the markets doesn’t constitute much of a plan when losses start to pile up.

Someone will end up being the hero and stick the landing when all is said and done with this situation. In my experience, heroes don’t last too long in the markets.

Further Reading:
Don’t Take This Personally
Why It’s So Hard to Change Your Mind About the Markets
Pop Quiz Hotshot: What’s the Line in the Sand?

 

 

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  1. Dhawal Nagpal commented on Jun 30

    Ben- great post! Indeed, news and all the commentary is just empty calories. In my previous life as an analyst, I would be asked by the PM – to “find out what’s going on”.. “make some calls”… “don’t just sit there”.. “heck, you don’t even have Factset on”..then any random explanation by me will be succeeded by fist waving at the Fed, Greece, Gold, Obama.. you name it..

    Yes, people have learnt to be cocksure in this business. Not that my value investing brethren are any better- they are very sure that IV of this stock is $23 and we will get there in 2 years 🙂 I think its the feeling of being in control. If I knew how Greece will turn out- I can “navigate” portfolio through rough waters.

    How about turning off the TV? And following a good process of buying cheap ?

    • Ben commented on Jun 30

      It is funny how people always have to know ‘what’s going on’ like they have any control over it anyways. I think that illusion of control is something most people can’t let go of.

  2. Pacioli commented on Jun 30

    So, it’s definitely true that it’s a fool’s errand to be trying constantly guess the ‘why’ explaining the market’s every move. I don’t think this point is even controversial.

    Probably a much more interesting, worthwhile, and instructive conversation would be a post around what exactly constitutes “a plan in place to deal with the inevitable losses when they occur”.

    No (serious) investor is going to try to argue that the ‘why’ of general market movements is very important. But once you’ve (rightly) let go of that pursuit, what IS the right approach?

      • Pacioli commented on Jun 30

        Thanks for the link. I didn’t know you had a book. Look forward to checking it out!

        • Ben commented on Jun 30

          Thanks. Just came out last week. Let me know what you think.

  3. 10 Thursday AM Reads | The Big Picture commented on Jul 02

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