Jan

20

Sparked by an article on euphemism in politics, I have been studying the tendency of market participants and commentators to present themselves in a favorable light. The topics I have reviewed include the theories of boasting, euphemisms, biases in self reporting, self evaluation bias (325,000 entries), the superiority complex, the halo effect, and presentation of self in everyday life and deception. Nothing quite fits. However, considering that there are 132,000 entries for "as predicted" stock market on Google, I feel the topic deserves some serious consideration. Lacking theories or quantifications exactly on point, I'll have to take a crack at the subject myself.

My previous forays into this subject in Education of a Speculator started with the consideration of how the oracle of Delphi was able to maintain its prominent place in Greek life for over 2000 years. I concluded that the key was never to administer a forecast that could be falsified, maintain an impressive site and a mystical ambience, evaluate your forecasts yourself, deceive with the startling forecast when you already know the answer, and mix in Bacchanalia. I gave examples of market people who had adopted these principles and classified them as mystic (the secrets of pi), unappreciated (I stood alone in making the forecast), other worldly persons ("the parking lots are as empty as the ships in the harbor"), mathematicians (the lognormal distribution explains it), the traditionalist (the opera chairman, the palindrome and the abstract mathematician use my methods), the Washingtonian (I met with the Fed chair often), the correlation expert (soybeans traditionally fall before a rally in bonds), the loner (I am on an around the world cruise), and the Insider ("a bullet bid has been made").

I also reported favorably on the late Harry Browne's magnificent analysis of self administered reports. He gives repeated hilarious examples of "as predicted" that actually weren't the way they predicted. He also gives examples of pretended modesty in admitting a gap in accuracy that is designed to make you feel that the forecaster is so much more honest than you or I that he's a model of integrity as well as a genius. (Such a deceptive technique is particularly relevant today as the world's worst forecaster in my opinion, the weekly financial columnist, who has been consistently bearish on stocks 100% of the time while the Dow went up from 800 to 12,500 over 40 years, admitted in his January 22 column that he gave a terrible forecast in saying that oil would go to 70 before 50). "The only thing positive about that prediction was that it didn't take more than a wink for us to be proved wrong." This technique is also detailed in The Perfect Lie of distracting attention from the real deception (i.e. his grotesque record on stocks, while admitting the oil statistics to be wrong).

Such a typology holds up pretty well after 12 years, but I feel it misses the essence of all the "as predicted" ones. For example, it doesn't focus on the multiple prediction, the person who predicts so many things that he has to be correct on one of them. A beautiful example of the same, as it's so compact, would be the person that says "X is the key level" and then boasts about being right if it goes up or down from that level. Also missing is the retrospective forecast, the forecaster that lets you know that he was bullish well after the bull move has started. Another omission is the survival biased forecaster, the person that reports just the fund or stock results that are extant right now, leaving out the results of the funds that have folded, or less insidiously, just the years or the results that were completely unfavorable. Another omission is the academic forecaster (the academic who writes a paper uncovering an anomaly with almost a clarion call for funding contained in the retrospective low priced impacted data presented). Another more subtle fudger is the person who reports their results while the going is good and then hides ostrich-like in the sand when the going is bad. (I have used a variant of this in my own business where I was happy to report while I was making returns sufficient to win awards but stopped when the going got tough. All I can say in my defense is that I figured that if my future results were good, it would create less supply against me and more demand with me. If they were bad, why should I give my adversaries the platform on which to drive in the final nails?)

Here are preliminary suggestions for those who wish to present performance figures without undue boasting and hype:

1. All results should be presented with a view of providing the truth, the whole truth, and nothing but the truth, and should be accompanied by a statement to that effect.
2. Particular care should be made to present the results of programs and funds that are no longer in existence or no longer reported for any reason with which you are associated. For example, one should never report 40% a year returns on the one program or two programs that you still have outstanding if others, invariably involving much higher amounts of money under management, have been eliminated.
3. A complete enumeration of money contributed, money taken out, profits made, commissions taken out, fees taken out, and net to customers should be made by month.
4. A similar enumeration should be made for any funds the manager was associated with that are not included in 3. (for example, the biotech fund or the growth stock fund or the trend following fund in stocks that is no longer in existence)
5. All changes in style of investment, markets invested in, fee schedules and leverage used should be noted with a fair discussion of how this would change results.
6. Third party arrangements of any kind with selling groups or brokers or service providers should be enumerated by year.
7. The independent third party that reported and calculated these results should be noted and addresses should be given and auditors enumerated.

In addition to following the above guidelines where applicable, those who make forecasts should add the following:

8. The exact time and levels of the items being forecasted and what it is you are forecasting and how to measure what is being forecasted.

9. A complete enumeration of all forecasts made over the last five years with the information required in #8.

10. An assessment of the accuracy of the forecasts made in the past, with the bad forecasts as well as the good ones equally featured.

11. A measure of the a priori likelihood of the forecast being true due to chance factors alone, for example, the forecast that oil will be higher in the future would have a 100% a priori chance of being true.

12. The independent party, like Hulbert who has vetted your forecasts or advisories in the past.

13. The amount of self interest the forecaster has in what he's forecasting. For example, whether he has a position in the recommendation, did he front run, and what his policy is in extricating from the forecast with respect to his own positions.

No matter how carefully one develops a set of guidelines, it will always be possible to violate it in some way even when someone is not overly lax in presenting the truth, the whole truth, and nothing but the truth. As such, a letter from the forecaster describing any problems or gaps that the user might have in using the forecast should accompany the forecasts. For example, was the manager once managing a considerably larger set of assets? Has his organization changed now that he is a mere shadow (what used to be called a ghost in the stock markets of the 19th century) with a much smaller organization? Or have the financial circumstances of the manager changed so that he has an interest in a Hail Mary kind of prediction because he has been so devastated recently or as in the case of the weekly financial columnist, he's been short for so long that if he ever closes his trade, he'll realize a 1500% percent loss or so?

These are just preliminary suggestions. Remember that even with perfect reporting, past results have little or no reason to be predictive of future results because of the problem of ever changing cycles, and ageing as described by Bacon. However, exceptionally bad past results would seem to be somewhat predictive to the extent that they usually result from excessive fees and grind paid to the house.

I would be interested in any augmentations or suggestions that the readers might make here that would improve reporting and predictive methodology so that the users will have a better backdrop for decision making.

Vic further adds:

What he wrote for Mr. Wiz and myself, which he considered his best book, was that "when a master seems to fall into a trap, be doubly careful." This is an extension of what the able Mr. Mee had in mind and I am sure that Mr. Grandmaster Nigel Davies will have a few apt comments on this point.

Vincent Andres comments:

Another omission is the survival biased forecaster, the person that reports just the fund or stock results that are extant right now, leaving out the results of the funds that have folded …

This reminds me of a scene in Groucho Marx's biography (hope not to confound). Groucho was negotiating a contract about an advertisement using his image. The man proposes Groucho $500. Groucho laughs and says no. The man proposes Groucho $5000. Groucho also says no. The man proposes Groucho $15000, and Groucho agrees. Then the man brings out of his pocket a $15000 check, already written.

"By the hell, how did you know I will agree at $15000?" asked Groucho.

Well, I have four pockets said the man. In pocket one a $500 check, pocket two a $5000 check, pocket three a $15000 check, and pocket four a $30000 check.

Aaaaaaaaaaaaaarg! said Groucho.

Sorry for the approximate English and certainly an approximate remembrance.

Hany Saad adds:

While this is a very valuable framework for thought and it definitely will give one a significant edge in markets as well as the proverbial "don't take things at face value," I suggest looking at the other side of the coin, which admittedly is less common but every bit as valuable in solving market puzzles. I am talking here about the money manager who only talks about his losses and how tough it is to manage funds yet one realizes at year end that he outperformed all his peers by a large margin. The money manager who always starts his speeches with "I am a smaller fish than I like to admit" or "what do I know" or "after a very tough year" or my all time favorite, "yes, finally a good one" in response to a congratulation over a trade so outstanding that it can no longer be hidden under the carpet. The money manager whose performance is so mediocre that he was debating retiring in his thirties and only stopped when he realized that this year could be a good year as well … so why not? The lessons are very valuable since this practice keeps the enemy away and prevents envy, or so goes the tale. The only problem with such a practice is that year after year, the adversary starts noticing your bluff, and as he's leaving your office after you utter your usual "yes, finally a good year," you hear him murmur invariably "yeah, right."

It is mind boggling how people learn so quickly that you are laying low, but they hardly ever call your bluff when you practice your shameless grandiose on them a la Ableson.

Gordon Haave offers: 

The most common euphemism that I noticed was the naming of every downturn in almost any asset price as a "correction." One of the reasons that I find it notable is that those who call it a correction invariably are implying that the long term trend is still up. Well, if the future price will be higher, then why is having it go down today "correct" in any manner?

A good example of this would be today's bloomberg story about Rogers saying that the downward movement is just a "correction" and that the price will later go up to $100. If the price is going to $100, then any significant downward movement is not a "correction." Rather, it is a "mistake."

I for one think that oil is going to stay down, but that's not the point. The point is that this idea that anyone who is long can at the same time justify or excuse a downward price movement as being an ok event will still proclaim a long term rise in price.


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