The Peril of Comforting Narratives

Louis Sykes
January 12, 2023

From the Desk of Louis Sykes

Every child loves a bedtime story.

These stories allow their mind to wander from busy thoughts into an adventure. It provides a comforting reality and a narrative they can consciously control.

Comically, in this sense, children and investors are more similar than we let on.

It's just that one obtains comfort from an adventurous tale while the other derives solace in news headlines.

Don't get me wrong, I'm not saying this is bad or wrong. I'm just noting its existence.

The vast majority of investors need to understand why a stock is moving rather than solely following technicals and money flow.

I totally get it.

But, often, this natural curiosity can lead investors down a rabbit hole that clouds their objective judgment of market trends.

Just think back to when the folks claimed that Bitcoin was an inflation hedge.

Then, when that theory was busted, they spouted it was a currency debasement hedge. Which, truth be told, virtually everything is a hedge against monetary debasement.

You can buy a diversified equity index fund and be diversified against monetary debasement.

The point is that those who drank the Kool-Aid got stung by ignoring inconvenient truths in lieu of a comforting narrative.

The reality is that Bitcoin has yet to live up to many of its optimistic claims.

It's just a short-vol and high-beta vehicle.

Do you think it's a coincidence that both the high-beta/low-volatility ratio bottomed the same day as Bitcoin?

It's just math.

There is a reasonable argument to be made that, as time goes on, Bitcoin will eventually exhibit gold-like returns, diminishing the co-movement with high-beta.

That's just my opinion.

The market doesn't give a shit about what I think, and neither should you.

Money flow is the only factor that drives markets, and it should be the primary input to any trading system.

Opinions and headlines, by definition, will never move markets.

So why give them so much weight?

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