As you read any asset management reports these days you will find this short sentence: Past performances are not indicative of future results. This simple phrase is just a reminder by the financial regulator of the coincidental nature of any speculative activity. In other words, luck can be a bigger driver of trading performance than skills. In fact, I believe this is the case for business in general, where the recipe is most likely some talent with a healthy dose of good fortune i.e. a be-in-the-right-place-at-the-right-time kind of thing. But who wants to hear this? this is not a particularly inspiring thought as we mostly want to feel in total control of our chances for success. We all could learn to live at the mercy of randomness, but in this day and age, it is a bad political and business message, so are some profiting from the confusion?
The business of misguidance
Let’s start with this question: why do people read the Wall Street journal or watch CNBC? I would assume it is to gather some precious information that could improve their odds of generating a speculative profit or avoiding a loss. Now, if we were all convinced that the information they presented did not improve in any way our predictive power over the market, would these media still be popular? Probably not, as their pure entertainment value does not rate very high compared to others. My point is that financial media are clearly incentivised to make their audience believe that financial speculation is mostly a game of skills. And so are financial course providers, market researchers, trading system developers and even brokers. In the business sector, this misconception on the absence of luck as a factor in success is the fuel behind the commercial success of many “self-help” gurus, motivators and business advisors. I am not saying that all these business activities are illegitimate, I am just saying that they strive more, as more and more people believe success is totally self determined.
Now let’s see how these misconceptions get presented to the public. First, notice how the financial media promotes wealth as a measure of credibility for market expertise. Guest contributors are described by how much money they manage or have earned e.g. ‘Billionaire investor’, ‘25-year-old crypto investor’, ‘Multi-billion portfolio manager’. In other words, they clearly imply that ‘past financial success is indicative of insightful market predictions’. Also, news coverage constantly tries to justify every single market move with headlines. They basically imply that ‘price motion can be predicted by following news closely’. A simple qualitative break down catches more attention than an in-depth quantitative analysis. Unfortunately, most market moves originate from very complex interactions making their analysis quickly out-of-date. Lastly, market reports extensively analyse price moves ex-post. This after-the-facts analysis gives the reader the impression that logic prevailed all along, and gets him/her prone to the well known ‘hindsight bias’. This last trick is very common in trading education contents when presenting trade setups: They handpick a couple of historical instances where a specific trade setup ended up profitable and advertise it as a tried-and-tested trading strategy.
The politics of misguidance
Political figures also benefit from advertising to their people that their financial success relies exclusively on their hard work and determination. But as a free market economy can not by design guarantee prosperity to any single individual or company, governments often try through their action to artificially prevent the system from rebalancing naturally. Quantitative easing is a great example of a state-lead gross intervention on the economy. In 2008, the US Fed orchestrated an aggressive rise in money supply to offer US banks an unvetted access to cheap cash, which in turn prevented a natural rebalancing of the debt (bankruptcies in some cases) in the financial system. As beneficial as it sounds for the economy, we need to remember that nothing comes for free, so this extra money flooding into the US banking system is extra debt piling onto the state balance sheet. So in the end, the system is not really rebalanced, the debt burdens have just moved from the private sector to the state.
The reality is that the free market system is extremely stable as a whole, by continually allowing capital to flow from excess capital holders to promising capital seekers. The wheel turns, the losers and winners change, and the economy moves on. But this concept does not reassure any potential voter who wants to know that he/she will be highly rewarded if he/she puts in the work. Who wants to hear about the influence of product trends or debt cycles? So the politicians respond by putting safe guards into place e.g. social insurance, subsidies, asset purchasing programs. These plans distort the inner workings of the free market system, and if all those guarantees become too large, the free market system eventually stops applying and the economy as a whole could end up in a dangerous place.
The free market system is the go-to economic setup that has been powering western democracies for centuries. We should all embrace the fact that the random nature of our own economic journey is the basis for the stability of the system as a whole. Continuing to pretend that success in business or speculation can be guaranteed by following a to-do list, it is living in denial of the free market system itself. The Greek Philosopher Epictetus said ‘we should only worry about what depends on us’, which is very relevant in this context. My plan is to ignore the worthless noise, strive to be the best version of myself, and live by these lyrics of the song Ace of Spades by Motorhead ‘you win some, you lose some, it is all the same to me’. What’s yours?