Thursday, May 12, 2011

Fact or Opinion?

My daughter is a special education teacher for 4th and 5th graders. One learning task was to help her charges determine the difference between fact and opinion. She created an enjoyable slide show to engage them in this important task.  She chose the recent royal wedding, something with which they were all familiar. Each slide had a statement requiring them to answer fact or opinion.

"The queen wears silly hats."  Fact.  No, uhhmmm, opinion.

As she was sharing with me this enjoyable exercise, I was reminded that in market life we must keep our wits about us and ensure that we discern between fact and fiction.  Insofar as I know, there is no one that can divine the future.  Accordingly, statements of certitude about the direction of the market or your favorite stock, are just an opinion.  It is a fact, and not my opinion, that depending on your position in the market, you will overweight opinions of others who support your position.

While the future is unknowable, it is defined by probabilities assigned to possibilities.  Nevertheless, it is a fact that only one outcome will be achieved--and it may not be the highest weighted probability. Do not mistake an emphatic embrace of an outcome as a fact.  It is comforting to follow those that are so certain that the next bear market lurks behind every bump down, or that the bull market gallop is sustainable in perpetuity.  Gold and silver and other commodities are the most recent entries into the fact box that nothing goes up forever.

Another fact about the market is that there are some very smart folks on both sides of any opinion about the market.  I learned long ago to discard the opinion of the perma B's (bulls/bears/buffoons). Worse is that when they finally get it right, they crow and chest thump. Avoid those people.  To be sure it builds camaraderie as we like to be around people who see things just as we do.  They are so smart!  Be careful of the consensus opinions.  If everyone has bought or sold, who is left?  The very smart people on the other side of your trade. The market goes through enough cycles to make even an imbecile look like a genius at one point or another.  I forget who said that the the crowd is right during most trends (up/down), but generally wrong at the turns.  It's the turns that are a bitch, and that's where most drivers become acquainted with ditches and trees in a way they would rather not.

I've had my own idiot/savant moments. My work is to tip the scales toward savant.  I managed to almost top-tick (a fool's game!) silver on a short via ZSL.  Such a beautiful trade.  It reminded me of when I was 5 or so riding my bike.  I let go of the bars to show my parents that I could ride with no hands.  I promptly crashed.  While that example seems like a more fitting story for one that BOUGHT silver at the top, it is nevertheless a poorly managed trade when it is closed too early.  I need a push broom to sweep up all of the money that I left under the table and on the lawn. Sniff!

Equanimity in the market is the most precious commodity of all. Unlike other commodities, this is one that you pay dearly for if you do not have it, and once you possess it, it will pay you. Like my exercise and diet regimens, my practice of equanimity is a spotty one. Having a balanced view of the market and your position in the market is critical.  

It is a fact that the market closed down yesterday.  It is a fact that none of us knows with certainty what the market will do today. Though there will be many opinions about today's market and the market of a 1000 tomorrows, it is a fact that you must choose among outcomes and position in accordance with your risk profile and time horizons.  Understanding your risk profile and time horizons is the first step in your practice of equanimity.