Gyroscopic Investing

I am putting this under Gold simply because the point I am going to make is especially applicable to the gold bug and anti-gold bug camps and the narratives embedded in each.

The title "Narratives Drift Away" means that there are at any given point in time many different storylines in the marketplace, but narratives later shown to be false have a way of just fading away.  All narratives provide some type of reasoning for why a market is going to go up, down, sideways, or blow up.  As reality unfolds, some narratives are validated, and some are shown to be false, though they are usually all based upon some system of reasoning that has appeal to some segment of the market.  Currently, I find the deflation narrative to be based upon sound reasoning, but that of course doesn't mean that it is going to unfold as predicted.

The interesting thing to me is the way that stories that turn out to be totally wrong just tend to evaporate, and the tellers of these stories never seem to be tracked down and branded a "teller of false stories."  Craig has touched on this point before about how every salesman of a point of view has a story to tell, and he seeks to tell it with confidence and conviction.  If the story turns out to be wrong, it's normally not an existential crisis for the salesman--he just moves on to the next storyline.

Over time, it is ironic that people tend not to notice this process of many equally plausible narratives being squeezed through the bottleneck of reality, with many stranded in the realm of the human imagination.  Another dynamic that people tend not to notice is that doom-oriented narratives tend to more easily gain traction in peoples' minds, whether or not they eventually come to pass.

With respect to gold, note how the narrative in the 1970s was that the dollar was headed toward zero and gold would always rise.  In the current bull market for gold, there seems to be a lot more skepticism about the role of gold in an investor's portfolio, and the anti-gold narratives reflect that (even though they have been totally wrong so far).  At some point, the current anti-gold people will be right, but who knows when that will be?

Ultimately, I think that the narrative-related insight that is valuable to investors is what what Nassim Taleb calls the "narrative fallacy"--i.e., our tendency to take a more or less random sequence of events and build a narrative around them after-the-fact, which may be accomplished by simply re-imagining the past based upon current social or political agendas (as public school textbooks are wont to do), or to just pick out one of the countless competing narratives from the past and suggest that this one was spotted as the "true narrative" by some prescient market observer all along.  HB makes this point in many of his writings.

The problem we encounter in trying to untangle all of this confusion is that we often have our own unconscious narratives which spill over into our rational decision making without us realizing it.  Examples include: everything the government does is bad, everything the government does is good, humans are basically bad, humans are basically good, I am an un-lucky person, I am a lucky person, etc.  In each case, we tend to interpret reality through filters of which we may not even be aware, and thus make decisions which we believe to be based upon pure rationality when there is a large dose of reality curve-fitting to a preconceived narrative structure at work.

One of the beauties of the PP is that it allows for (and isn't harmed by) the dominant market narratives, even if they are later shown to be silly or even delusional--NASDAQ 5,000 and the blow off top in gold in 1980 are great examples.  Part of what makes the PP such a durable strategy is that it can enjoy the benefits of almost any market narrative without being pulled into the muck of either a mania or a panic, but when the narrative begins to drift away, the PP has no separation anxiety. 

The PP recognizes that there is simply no way of reliably picking the right narrative, and thus seeks instead to place a bet on all possible outcomes while still managing to provide the investor with a solid inflation-adjusted return.

MediumTex wrote: If the story turns out to be wrong, it's normally not an existential crisis for the salesman--he just moves on to the next storyline.

If you spin enough stories one will be correct, and the others forgotten in the landslide of rhetoric.  If one story "forecasts" a bear, the Nostradamus-like reputation can endure quite some time.

MediumTex wrote: Ultimately, I think that the narrative-related insight that is valuable to investors is what what Nassim Taleb calls the "narrative fallacy"--i.e., our tendency to take a more or less random sequence of events and build a narrative around them after-the-fact, which may be accomplished by simply re-imagining the past based upon current social or political agendas (as public school textbooks are wont to do), or to just pick out one of the countless competing narratives from the past and suggest that this one was spotted as the "true narrative" by some prescient market observer all along.  HB makes this point in many of his writings.

It is the customized Post hoc ergo propter hoc...

MediumTex wrote: The problem we encounter in trying to untangle all of this confusion is that we often have our own unconscious narratives which spill over into our rational decision making without us realizing it. 

There is only one true narrative:  If I invest in (insert strategy or fund) it will go down.  I think because the PP is a specific strategy, and also includes Gold—in what is interpreted as massive weighting—this truism can be particularly pronounced.  Add LT Treasuries to that (Bull Market for decades til I invest in them) and now you're really cooking!

Roy

Great post, Tex. The narrative fallacy describes much of what we see put out as market analysis. Humans love a good story, even about events that nobody could possible predict ahead of time. The market is made up of millions of people making millions of decisions for their own self-interests. To think that anyone could know why the markets are or are not going to do something ahead of time is just not possible.

The PP's formulation does not attempt to predict prosperity, inflation, recession or deflation. Indeed, it really doesn't even care what triggers these events. It just wants to have assets in place to deal with them effectively if they should occur.

I still look back in amazement in 2008 for instance and LT bonds. The economic theory of the PP designed by Browne and Coxon held that US Treasury LT bonds would do well under a deflation scenario because their review of history and economics showed it. But the portfolio had not been put under that kind of stress since it was first created in the late 1970s - It was all just theory. But 2008 happened and it was interesting watching as theory and reality meshed together and the portfolio design worked as expected.

The PP didn't need a guru saying "A banking induced credit crunch as a result of sub-prime mortgages is possible, therefore you should hold asset X just in case." It was just a solid understanding of economics that did the work. No narratives were needed to properly position an investor to prepare for the possibility. The entire incident was taken care of just through solid design.

Re: Tracking predictions...

Many years ago I took time to listen to a popular investment radio show podcast. However, I listened to the previous year of the show, not the current year.

I did this because I wanted to see what was being said a year prior and what actually happened over that time.

What I found was that the information and predictions in the podcasts were just about worthless. The predictions, if they were concrete, didn't happen. General predictions may or may not have happened (no better than chance). Etc. Hot stock tips were flops and stocks that were being berated turned out OK. The market predictions were all over the map and were not actionable.

Yet when you listened to the shows the interviewer and guests all had great narratives about what they were saying. They were confident and believable. They presented a good case for their outlook. They sounded like experts. But they were pretty much all wrong. Or I should say wrong enough that anyone listening couldn't tell ahead of time whether what they were saying would have been a profitable move or not.

After doing this, it broke my inclination to believe anything an investing expert says about the future. I don't care what their credentials are, how many books they've written or what interviews they've given. I just don't listen to them or act on the information they present.

Roy wrote:There is only one true narrative:  If I invest in (insert strategy or fund) it will go down.  I think because the PP is a specific strategy, and also includes Gold—in what is interpreted as massive weighting—this truism can be particularly pronounced.  Add LT Treasuries to that (Bull Market for decades til I invest in them) and now you're really cooking!

Roy

Here is another way of looking at this idea:

I actually enjoy the down days for the PP because it allows me to see how the PP deals with and absorbs different flavors of adversity.  I wouldn't enjoy it if all days were down, of course, but the way in which the PP performs under fire is, to me, the most fascinating thing about watching its performance as time rolls on.  It's sort of like watching a "Rocky" movie, knowing that somehow he is going to win in the end, no matter the opponent.

I think one good investment strategy (with any allocation method) is to get everything ready to push the "buy" button...and then wait a month.  This approach allows the investment gremlins to set about making sure that what would have been your entry point will be followed by a decline, which you can then take advantage of with your actual entry one month later (which is always vexing to the gremlins).

No matter how dumb the approach above sounds, I have actually had pretty good luck with it (sometimes accidentally).  I often have the intuition that what I believe to be my own independent thought is actually being replicated by many other people who are (unbeknownst to me) following the same line of thinking that I am, which may or may not be prudent, but it is still a manifestation of herding behavior, no matter how independently I may feel I am acting.  The one month rule takes this perception of personal independence of judgment and adds a bit of randomness to the timing, which can pull you away from the herding behavior of your likeminded brethren throughout the market whom you have never met (and may not even be aware of).  

In a sense, the tendency of investments to go down right after you buy them may confirm that your investment thesis was sound and you were acting on it at a time that many perceived to be correct.  The problem, of course, is that after this entry point there are now relatively fewer new buyers (since you and your likeminded investment posse of strangers are now in the market), which results in weakness in demand, and thus your new investment goes down.  

Guess what happens when you start to get rattled?  The rest of your posse is also getting rattled...and thinking about selling.

The degree to which overall market psychology mimics an individual investor's psychology (no matter how clever the investor thinks he is) reminds me of that scene in "The Princess Bride" when the Sicilian is trying to reason through which goblet contains the poison.  Despite his best efforts and shrewd analysis he still came up short.

Just for fun, here it is:

Man in Black: All right. Where is the poison? The battle of wits has begun. It ends when you decide and we both drink, and find out who is right... and who is dead.

Vizzini: But it's so simple. All I have to do is divine from what I know of you: are you the sort of man who would put the poison into his own goblet or his enemy's? Now, a clever man would put the poison into his own goblet, because he would know that only a great fool would reach for what he was given. I am not a great fool, so I can clearly not choose the wine in front of you. But you must have known I was not a great fool, you would have counted on it, so I can clearly not choose the wine in front of me.

Man in Black: You've made your decision then?

Vizzini: Not remotely. Because iocane comes from Australia, as everyone knows, and Australia is entirely peopled with criminals, and criminals are used to having people not trust them, as you are not trusted by me, so I can clearly not choose the wine in front of you.

Man in Black: Truly, you have a dizzying intellect.

Vizzini: Wait til I get going! Now, where was I?

Man in Black: Australia.

Vizzini: Yes, Australia. And you must have suspected I would have known the powder's origin, so I can clearly not choose the wine in front of me.

Man in Black: You're just stalling now.

Vizzini: You'd like to think that, wouldn't you? You've beaten my giant, which means you're exceptionally strong, so you could've put the poison in your own goblet, trusting on your strength to save you, so I can clearly not choose the wine in front of you. But, you've also bested my Spaniard, which means you must have studied, and in studying you must have learned that man is mortal, so you would have put the poison as far from yourself as possible, so I can clearly not choose the wine in front of me.

Man in Black: You're trying to trick me into giving away something. It won't work.

Vizzini: IT HAS WORKED! YOU'VE GIVEN EVERYTHING AWAY! I KNOW WHERE THE POISON IS!

Man in Black: Then make your choice.

Vizzini: I will, and I choose - What in the world can that be?

Vizzini: [Vizzini gestures up and away from the table. Roberts looks. Vizzini swaps the goblets]

Man in Black: What? Where? I don't see anything.

Vizzini: Well, I- I could have sworn I saw something. No matter.First, let's drink. Me from my glass, and you from yours.

Man in Black, Vizzini: [Vizzini and the Man in Black drink ]

Man in Black: You guessed wrong.

Vizzini: You only think I guessed wrong! That's what's so funny! I switched glasses when your back was turned! Ha ha! You fool! You fell victim to one of the classic blunders - The most famous of which is "never get involved in a land war in Asia" - but only slightly less well-known is this: "Never go against a Sicilian when death is on the line"! Ha ha ha ha ha ha ha! Ha ha ha ha ha ha ha! Ha ha ha...

Vizzini: [Vizzini stops suddenly,his smile frozen on his face and falls to the right out of camera dead]

Buttercup: And to think, all that time it was your cup that was poisoned.

Man in Black: They were both poisoned. I spent the last few years building up an immunity to iocane powder.

Profound post, Tex. Thanks. One, of many faults in my own repertoire with the narrative bias is the confirmation bias. I have wondered if my attraction to the PP is in part related to this, but in reality I am getting confirmation that I can't predict the future, and relish in the fact that I can invest accordingly.