More importantly than not, it is vital to focus upon a bigger broader landscape when evaluating the condition of one’s portfolio, than to focus upon tinier exogenous noise as those factors which indicate the probability of outperformance. Too often, and with more frequency, I have seen micro-analysis paralyze investor’s decision-making, rendering them incapable of reasonable response. What to do, after all, with presidential politics, government stalemates, tax issues, unemployment, European sovereignty issues, gold’s ever expanding role in portfolio allocation, the housing crisis, talk-radio biases, college tuition, and milk prices?
Ignore
them.
Not
in a sense that each isn’t a significant, or relevant, factor in geopolitical
economics. But more because, as stand-alones,
each has minimal impact upon the trajectory or duration of secular market
trends.
We
know, as “quantitative” scientists, that the weight of market cycles has an
evolutionary bias, irrespective of the latest commentary on business
television. (The networks have air time
to fill; markets have no hourly agenda.)
And yet, we wake up to the “futures” report, stop to look at gas prices,
and await Friday’s jobs numbers.
I am
not suggesting that these data are insignificant. In fact, quite the opposite. Each has a quantifiable relevance to the
“whole.” And yet, it is not the whole we
focus upon, is it? Instead, we
become mesmerized, polarized, and confounded by the effect of each, to
the exclusion of the big picture. Portfolio activity, as a
result, becomes disjointed and panic-driven.
It’s
as if we forget that every adult was once a teenager, every teen once a
toddler. Similarly, market progressions
have a timeline, a life-span. The laws
of science are immutable.
Science.
Now,
do they always unfold exactly the same way each time? Of course not. Toddlers fall off chairs, teens make bad
decisions, sometimes. Markets make
chaotic adjustments. The dot.com crisis,
the credit crisis, terrorism, assassinations, weather catastrophes are all
examples of exogenous noise, sometimes man-made, sometimes man-made
averted. Each is a factor in the
timeline of statistical phenomena.
We
count on being able to navigate through those events, sometimes scientifically
and sometimes intuitively. But we hold
fast to certain tools, certain skill sets, that we know to be true in order to
mitigate the effects of crisis or to maximize the leverage of benevolent
events. Like gravity, for example. Without it we float away. Why?
I’m not smart enough to explain gravity for you. But without it, and its implications, we lose
a foundation (literally) of society.
In
financial markets, there is also a gravitational equivalency. Trends, the amalgamation of factors, are also
scientifically quantifiable. If we isolate
duration and magnitude of those trends we can better explain the long-term
probabilities of market behavior.
We
are in a period of flux, no doubt. As
earnings acceleration patterns recede worldwide, we would expect equity capital
gains probabilities to recede, as well.
Some companies do “better” than others; others do worse.
What
is less easy to quantify is the panic-driven, 24 hour news cycle response to
market events. Without confidence that
our immutable laws are, in fact, immutable, the financial landscape loses some
of its gravity, and in the ensuing panic, a bit of its gravitas, as well.
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