During the PyeongChang Olympic Games, my four year-old daughter and I were watching skeleton (like luge, but headfirst and a sport I didn’t even know existed, previously). The athletes take turns going one at a time on a track, similar to the luge and bobsled events. It is impossible for an amateur like me to tell whether someone is fast or slow, except for the on-screen stopwatch that compares the current run to the fastest time. In the midst of one run, I commented “She is so slow!”
My daughter asked, “Why does it look like she’s going really fast?”
“Well, you’re right, she is going really fast. Really, really fast. She’s just like the seventh-fastest in the world instead of the fastest in the world,” I replied.
It was a simple reminder that context matters and that consumers of financial media (or even this blog) should assign very little weight to what is said and written about a great many things.
A financial analog to the above skeleton story are people saying they want to invest in stocks because they heard bonds are risky or crytocurrencies because “fiat” currencies are not a reliable store of value. Obviously, I’m not against investing in stocks or cryptocurrencies or anything else, but the preceding statements are ridiculous. Otherwise reasonable people say these things because they did not understand the context of something or do not appreciate magnitude of risks being described.
As Nassim Nicholas Taleb writes in his newest book “Skin In The Game”:
Don’t tell me what you “think,” just tell me what’s in your portfolio.
Most investors would probably be well-served to adopt Taleb’s approach. Having listened to a zillion sales pitches and investor calls, I can confidently say that what people say and do can be very different.
Consider a portfolio manager (PM) who is bearish, which is typical of fixed-income PMs. The PM may hop on an investor call and share some doom-and-gloom economic data, opine about the ineptitude of fiscal and monetary policymakers, comment on market risks, and so on. Yet, all of the preceding is likely general in nature and may have nothing to do with the portfolio holdings, not to mention vehicles used to gain exposures or positioning/views within capital structures. Additionally, PMs tend to think and act probabilistically, so position sizes, correlations, and expected return scenarios matter too. Lastly, opinions can change on a dime and investors can act in a way that seems opposed to their beliefs.
As an example, someone can be both very bearish and still invest:
- because they accept that they can be wrong, don’t believe that the market can be timed, or are averaging down.
- less aggressively than maybe they otherwise would (the same reason banned-from-baseball Pete Rose cannot be excused for only betting on his own team).
- with a different risk/reward profile by managing their risk exposures, greeks (in options-speak), and so on.
Oftentimes, I recognize and respect some particular risk, but will invest and expose a portfolio to it if returns more than compensate for the risk, favorable convexity can be obtained, or a number of other considerations. Risk is hard to understand without an idea of probability, possible scenarios and consequences.
All of this is to say that when listening to an opinion, investors better understand precisely what is being communicated and what is not being communicated. General prognostications and/or commentary on specific risks are meaningless without an understanding of context, positioning, as well as expected probabilities and payoffs.