Philosopher, Juris Doctor, surfer, trader, investor, musician, black belt, sailor, semi-centenarian. He lives on the mountain in Kona, Hawaii, with his family.
The Myth of Persistence, by Jim Sogi
There are basic characteristics of markets and their participants which create opportunity for the speculator.
Of these, the myth of persistence is the deepest rooted, the most damaging, and presents the most opportunity. On a practical level people believe that current conditions will persist, and cling to that belief in the face of change. We see it daily in the markets. The truth is embodied in change rather than persistence. This is the most basic law of all.
Eastern philosophies state that all suffering and loss is caused by change. The suffering and loss arises from the myth of persistence, the illusion that the status quo will continue. In the markets participants hope trends will continue, that fixed systems will continue to work, that their luck will continue, that low long term rates will continue. They won't. They will change.
Alex Park responds:
A related idea I read from a CIA document entitled the 'Psychology of Intelligence Analysis' that discussed the pitfalls and traps of various modes of analysis.
One concept I found of use was the author's discussion of how can analysts so often get it wrong and by a considerable magnitude. He described the (familiar) scenario that when you look back at given geopolitical events and connect the dots it all seems so obvious yet at the time it was anything but clear.
One explanation he gives is that at any given time there is a prevailing view (meme) to explain the situation. New evidence may come to light that puts the prevailing view in doubt. However, rarely is the new evidence so overwhelming that it causes a re-assessment of the prevailing view. Instead the new evidence is dismissed or explained away so that the prevailing view remains intact. Only when the evidence is so over-whelming or enough evidence piles up does the prevailing view give way. At that point you look back you see that all the warning signs were there if you had just read them correctly.
I have seen this same theme appear in two separate arenas. One was in an interview with Steve Jobs (posted on List 2/3 months ago i think). I cannot fully recollect the context but, in describing his life, said that at the time it is difficult to connect the dots and see where they are leading you. Only when you look back do they make sense and take on a significance. Similarly, E. O. Wilson, a sociobiologist, made reference to the fact that in science it is much easier to start with an 'end-product' and works backwards to identify its source (e.g. look at evolution of an organism and see what selection pressures impinged upon its development) than it is to start at any given point and move forwards to a solution. (e.g. look at today's ecology and predict future adaptations of organisms).
In market terms this is the descriptive vs. predictive dichotomy. It is much harder to predict than describe. That said, it also suggests that the answers are there if we only look hard enough and have the abilities to understand their meaning. I presume this is the province of the hedge fund stars.
Alston Mabry responds:
When I look at the past, it seems so easy to create coherent, rational stories that explain what happened and why. However, when I do a one-eighty and look at the future, it is blank.
The Katrina landfall on 29 August would seem to be an excellent case study in what the market at least partially anticipated (e.g., NGS), and what it did not (e.g., GVA). And the key would be finding ways to anticipate what others do not expect.
The natural fade is a situation where it is clear what everyone expects and how everyone has prepared for that expectation. The image that comes to mind is the magician who can focus the audience on what his right hand is doing, while he completes the real trick with his left.