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Searching for a Narrative

I love the webcomic XKCD. Not only is it incredibly nerdy, its surprisingly on-point in terms of its take on reality. I found the comic below to be a good example of this:


But whereas I find sports commentary to be somewhat plausible (because its about a specific person or small group of individuals that you might be able to interrogate and make inferences about), I think this is especially true on press describing the stock market.

Take the recent massive market downturn which occurred on Thursday, Aug 4th. Almost immediately, every press outlet had to have an explanation – people talked about fears of a Eurozone crisis, fears that the US and Chinese stimulus which have propped up global demand would vanish, fears that the US would be downgraded, and even talks that this was the media’s fault or the role of greedy banks using flawed computer systems.

The question that you never hear the press answer but which may be more relevant than all these narratives: is it even possible to know? You can’t ask the market what its thinking in the way that you might be able to ask a sports player or even a sports team, and its hard to run controlled experiments in the way a scientist might. And, while the psychology of the buyers and sellers certainly plays a big role, I think the simple truth is this: there is no real way to know, and its not only pointless to speculate but possibly counterproductive to try to explain the market’s movements. We’re all  hardwired to want a reason for something which is insightful and reveals something – but the fact of the matter is that trying to find reasons that aren’t necessarily there or even possible to validate pushes people into investing time and energy trying to control or understand things they can’t.

In my mind, its far better to take Warren Buffett’s approach: don’t waste your time on things you can’t predict or control or understand, take what you can get (the price of a stock or an asset) and make a decision based on that. Who cares why someone is offering to sell you something for $100 that is worth $200 – just make the right choice.

Published in Blog

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