Gil’s Musings

Investing: To Play or Be Played

There are a multitude of reasons why investors who are transactional do very poorly relative to the market as a whole. The emotion of what and when is fraught with pitfall. Why do we do it? Because we are wired to see patterns that don’t exist, and we love to make a game of everything. Some people spend a lifetime repeating the process only to claim the game is rigged against them. When you are using current info to predict the future, yes it is.

This often happens because we are unwilling to admit that what happens next will be a surprise to most. We take current info and project it into the future without any assumption that changes will occur along the way. We then get defensive about our positions and refuse to hear the new info, especially if we are already behind. We also are wired to think in terms of worst case scenario. We tend to prepare for events outside the bell shaped curve in statistics. We find thin tail events appealing because they have a remarkable payoff that is extraordinarily unlikely. Lotteries survive on this instinct. All of this mental quirkiness leaves us unwittingly unprepared for the most likely outcome.

The current spike in volatility has to do mostly with two trends unfolding: higher interest rates and trade war tariffs. Both can stall or reverse course quickly, and investors in defensive cash or other hedges could get head faked out of their shorts. Just think back to ten days ago when Jerome Powell said the Fed’s interest rate path was more neutral. Stocks suddenly jumped 800 points on the Dow.

With all of Trump’s faults, he appears a practical man. He also gauges his successes with stock market affirmation of his policies, and he tweets about it. If the stock market is going down, he loses face. Accordingly, you can expect tariff talk to be short lived. It is already having effect on China, with recent reversal of oil duties. I’m going to make a bold prediction about the next curve ball we don’t see coming. I think we can expect a small flurry of mini-successes and a declaration of a truce on tariff talk. Anyone who waits for that news to re-enter the game will be doing so with several touchdowns already scored against them.

Just another reason to stay invested with a personal risk mix appropriate for all seasons. Let the game play itself, instead of your emotions allowing you to get played.

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