Signals are interspersed within most of the games that I love. Nowhere are they more prevalent than in the games of baseball and investment markets. They largely go unnoticed by the pedestrian observer, the complex communication between the important players belying the perceived orderliness of the contest. However, to ignore or miss a signal often results in dire consequences, loss of a game or loss of your capital.

Many people decry baseball as dull or boring compared to more fast-paced games like basketball or football. Perhaps they are unaware of the action taking place each moment of each inning of each game. As a pitcher begins the wind-up, rather than the beginning of a play, it is instead the culmination of that play. The key participants have performed their secret pantomime designed to communicate, deceive, or reinforce the intentions of those players on their respective side.

Typically, the manger of the team in the field has signaled to the catcher the type of pitch he wants thrown to the batter through an elaborate series of signals; the catcher then signals to the pitcher (usually one finger for a fastball, two fingers for a curve, etc.); and the middle infielders will signal the outfielders with an open mouth hidden behind their fielder's glove for a fastball and a closed mouth for an off-speed pitch. For their part, the team at bat has their own communication system. Most hitters are allowed to determine which pitches to swing at, however, you will notice that before virtually every pitch the batter will step out and gaze at his third base coach. That is because his manager has signaled the coach before every pitch and he has the ultimate discretion as to what the batter can do. Many managers may want the batter to take (not swing) at a pitch in a count (2-0, 3-1) to work a walk. At a 3-0 count a manager may give a hitter a "green light" to swing, knowing the pitcher may send one down the middle expecting the batter not to swing.

With runners on base, the manger may signal for a steal, a bunt, or a hit and run. All of these occur simultaneously with the covert communication from the other dugout. Adding intrigue to the mix, the majority of the signaling being done is designed to deceive and mislead. A manager resembles a madman with a nervous tic as he goes through his repertoire of touching, tugging, and poking at himself, 90% of which is absolutely meaningless. However, once he displays the predetermined indicator (maybe it's the touch of the cap or the tip of the nose), the player is alerted that the signal or play is on. Missing this important part of the signal means the play falls apart.

In the investing arena, signals play an equally vital role in our success. What at first glance appears to be a simplistic exchange of capital for goods is instead rife with misinformation and deceit and head-fakes and head-games and attempts at whatever sleight of hand may separate a person from his stake in the game.

As we used to say, there in only one rule and that is that there are no rules. In baseball this serves as a proper excuse for notorious trickery such the spitball and the hidden ball trick. But for investors the stakes are so high that to ignore the markets signals is to welcome financial suicide. And that's not to be confused with the suicide squeeze.

Vic comments:

This is a brilliant post of yours. The stuff on baseball is very poignant, and the stuff on the markets is very suggestive — which is where I come in. Some day, when we have time, we should do it the right way, and have readers digest publish us. We should reference Dickinson's book on this, with his hundreds of layers of deception and coaches who are expert at stealing signals, and all the mechanical devices that have been used. If you don't have his book, which I guess you may not, let me send it to you.

Signals in the markets often come with the lead off batter causing a big move. There are signals before big meetings, like there were today, designed to make you think a bunt is coming when a big hit is really on the cards.

Gabriel Ivan adds:

This interview of the "wild man" by one of his employees is from last winter, but it illustrates the topic nicely. I posit here that these signals are not very powerful, though, and the dynamic hedgers have a stronger impact on price.


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