The Collaborative Fund blog has an insightful post about how “every forecast takes a number from today and multiplies it by a story about tomorrow.”
It sums up the sentiment that investment valuations, economic outlooks, political forecasts all follow the formula: Something we know multiplied by a story we like.
Despite living in the age of big data and data-driven decisions, narrative drives price and price drives narrative.
“Human beings cannot comprehend very large or very small numbers. It would be useful for us to acknowledge that fact.” – Daniel Kahneman
Stories matter. Greatly.
Because the best stories win.
Systematic quant funds with a non-discretionary approach have always found it difficult to capture mind share.
Most quant funds profess to not knowing where the market is headed. And this lack of narrative is none compelling.
We want to be persuaded by a story about tomorrow.
Story trumps data in our attention-starved echo chambers.
When asked to share about the market a “the market is unpredictable, we don’t try to forecast it” stance comes across to the questioner as uppity and disengaging.
To close that gap, here is a candid take on today’s market to spark the conversation:
1) The V-shaped equities rally has everyone thinking that they are a Warren Buffett or Elon Musk with great ability, never luck, to churn out stellar returns for their personal portfolios.
2) Even though each individual thinks of her/himself as above average and more rational – even potentially having an individual edge on the market – investors tend to move in herds because there is safety in numbers. A truth is: Individual investors have nothing on how institutional incumbents play the game/game the system.
3) People have short-term memory: Viewing the past with rose-tinted glasses and hindsight bias about their prior emotions and investment decisions.
“Investors as a group don’t learn from booms and busts because when people say they’ve learned their lesson they underestimate how much of their previous mistakes were caused by emotions that will return when faced with similar circumstances.” – Collaborative Fund blog
4) There will always be a place for knowledgeable and data-driven investment advisors to consul and guide (handhold) clients about the fundamentals of investing; and how portfolios fits into the shifting landscape.
5) Being bullish about developing markets, including China, feels like the right answer. From a historical and data-driven point of view, do not underestimate the dynamism of the U.S. market to eventually “get things right” for sustained growth and outperformance.
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Featured image: Hedgeye (#Process Art)
Email hello @ alphalyticscm dot com for more about our investment strategies: (i) High performance targeting 25% CAGR and (ii) All Weather targeting better performance than equities with similar stability as bonds.
