Stock Charts In Heaven

JC Parets
January 8, 2020

Humans are incredible storytellers. We've convinced ourselves of all kinds of things that biologically don't exist, like state borders and even money. States aren't like mountains or rivers that we can see and touch. They're just stories that we all agree are true, which is why it works. Money is really just a worthless piece of green paper. But we all agree that a $10 bill gets you 1000 sheets of paper to print your charts out on. While it helps society function, these things we're referring to are just stories. They are really nice stories, but they're just stories. They exist only in our minds rather than biologically.

The reason homo-sapiens have conquered the world is because of our ability to believe stories. If there were 7.5 Billion chimpanzees in the world today instead of 7.5 Billion humans, it would be complete chaos. Other animals don't have the ability to use their imagination to deal with many others of the same species. That's why other strong and smart animals are locked up in cages at zoos and laboratories, while humans rule the world.

This natural ability of ours to believe stories, however, doesn't help us when it comes to analyzing the market. It's actually a huge problem. We want to believe these stories so badly, because we're so good at believing stories, that we choose to ignore the only reality of the matter: price. Just think about all the people you see and know who approach the market in any way, through 401ks, IRAs, professionally as a Portfolio Manager or Advisor. Are they telling and believing stories, despite what price is doing? Or are they believing the only reality, price, despite all the stories? I'd argue it's really really heavily skewed towards the former, telling and believing the stories.

It's a problem that we all have to deal with as humans. I think Annie Duke said it perfectly in a recent interview we did, "there is no cure". But I believe that at least being aware of these flaws is a tremendous advantage. Even small incremental improvements can really compound over time. You don't have to be that much better than the rest to have an edge.

For me, it's really quite obvious. Nothing I'm telling you here is anything I made up or came up with on my own. This has been an important conversation for a while now and Phil and I like to talk about this stuff on the podcast as often as we can as well.

In our world of market participation, there is the reality and then there are the stories to try to explain the reality. This is not my opinion. These are just facts. The only thing that will never be restated is price. It is fact when shares change hands at a specific price, at a specific time, even to the exact decimal place. It is only then that the storytellers get to work to explain to a human audience, fiending for their next narrative, why these shares are changing hands where they are.

There is no sound, logical reason why any of us would ever expect someone to know "why" these specific shares were changing hands at that specific price and at that specific time. It's mathematically impossible to get into the minds of all those people trading these securities, or even the minds of the humans who build the robots to trade them. And it certainly can't be done in a fast enough time to be able to report these reasons. It's just not possible. So they have to tell stories. And we as humans want to believe them so badly that we just can't help ourselves.

Or can we?

There are some of you who have been reading my work for over a decade. So this is nothing new. But for those of you who are new here, first of all welcome. But more importantly, we do have solutions to these human desires for bedtime stories. Phil always talks about how behavioral finance tends to be very descriptive in nature, and lacks prescriptive models. And while he's right, in this particular heuristic, there are very clear solutions, and they work. I promise you.

Think about the amount of time you spend consuming, what amounts to, nothing more than glorified TMZ, that can be used for better purposes. I mean, that time can be used for almost anything else, and it will have a more positive impact on, not just the portfolio, but life in general.

Really, what does it matter what story someone is telling, in what is digitally equivalent to, some corner on some street in some city somewhere in the world? Why should you care what story that person is telling literally anyone willing to listen? Other than your human desire for a narrative, which is perfectly natural to the point that not having these desires would be inhuman, why would it matter to you what this person is saying, or even thinking? Also, an author's ivy league degree doesn't make it not gossip.

The solution is not to stop yourself from getting these cravings for a believable narrative. That's not possible, as far as I know. The solution is to recognize those desires when they come and prevent yourself from taking action.

This act of awareness and lack of action becomes habit over time. I can tell you this from experience, being on both sides of the plot-line addiction. I was once hooked on stories. I believe we all have to be, as humans, at some point. But then some of us can recover while most of us cannot. In fact, the majority of people don't even try because they're so unaware of their dependency.

I think it's important to decide what means more to you. Think about how old you are. Think about the things you want to do with the rest of your life. Think about the things you want to do to help others in your life or perhaps strangers you would like to help as well. In order to achieve those goals, do you think it will benefit you more to listen/read/watch stories to "get well" so you can move on with the rest of your day? Or do you think focusing on real matters, the only real matters, will suit you better?

Over here, we're going to continue to follow the one thing we know to be true: price. We know that markets trend. We know what signs to look for to identify exhaustion of trends and ultimately changes in trends. The only things we consider are price changes and derivatives of price behavior like sentiment, for example.

I'm not a little kid who needs mommy to tell him a bedtime story to be able to fall asleep.

I can live my life without having to believe stories made up by people we all know have no idea what the truth is. It's impossible for them to know. They will tell you themselves. But then they will turn around and do everything they can to make up a very believable story so as many people as possible can hear it. And you will believe it. And you will pay the price, whether it's in time wasted or in actual dollars. It's a loss no matter what, in reality. In your mind, however, you get the dopamine hit you want so badly.

Which is more important?

You have to decide that for yourself.

And one last thing. The other argument is that you're fighting this natural desire for stories, and avoiding that can do harm in other ways. Remember, it's unnatural to avoid stories and narratives. And to that, my solution is to get your dopamine hits outside of the marketplace. I personally get my fix with things like trade negotiations among sports athletes or stories about certain vineyards around the world that produce wines I love. That's just me. I'm sure many of you have your own hobbies. And I think that's not only great and fun, but also really important.

It would be inhuman to somehow force this need of ours away completely. But I don't think we have to. Just know that emotionally we revert to our evolutionary habits when our stress levels are elevated. And in today's society, our stress levels become very elevated when money is involved. So if you want to get your dopamine fix where you're most vulnerable, be my guest.

We won't do it.

JC

 

If you're interested in this sort of thing, I really enjoyed the Ted Talk: Bananas In Heaven:

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