Successful investors and traders ignore vague terms. For starters, they don’t “worry” or “be concerned” about random things. For example, Michael Steindhardt used to say “don’t give me that bullshit about ‘XYZ is a worry’. What’s the exact probability? How likely do you think this is to happen”?
Playing the “I’m worried” game is Wall Street’s favorite game, because it’s how you get on CNBC and get media exposure. That’s why Wall Street and mainstream financial medialove to “worry” about each and everything little thing. Hey, I’m worried about the sun not coming up tomorrow. If I said that, I could probably get on CNBC, and then guys will stroke their chins on it saying “hmmmm, interesting analysis”. But what is the probability?
Ray Dalio said in his book Principles
“don’t mistake possibilities for probabilities. Anything is possible. It’s the probabilities that matter. Everything must be weighed in terms of its likelihood and prioritized. People who can accurately sort probabilities from possibilities are generally strong at “practical thinking”. They’re the opposite of the philosopher types who tend to get lost in the cloud of possibilities.”
- Your position size is way too big (meaning you should invest with smaller position sizes), or…
- You’re not using a systematic approach to thinking. The world’s best investors sleep well at night e.g. Ray Dalio and Warren Buffett. They know their process, and they know what are the normal drawdowns for their investment systems. Warren Buffett has an investment system. He doesn’t wantonly make decisions. But of course he’s not going to tell you his thinking system/process.
If you want to be a successful investor, you need to ignore vague terms like “it’s a bubble”, which is the catchall for “this market has gone up a lot, I hate it because I’m not making money on the long side, I don’t really know when it will go down, but it will ‘eventually’ go down. I’m salty, but it’s ok. It’ll eventually go down. It’ll eventually go down. It’ll eventually go down.”.
A very common phrase you hear in the stock market is “this ‘feels’ just like 1999” or this “looks like” 1999 (the year before the equity bull market topped in March 2000).
Do not make decisions based on based on “it feels like” or “it looks like”. That’s BS. Stop “feeling”. Stop “eyeballing”. Market analysis that’s based on “feelings” = non-existent analysis. The stock market always “feels like “a bubble” whenever it’s going up. Stop trying to “feel” the market. Instead, try to estimate EXACTLY when the market will top or bottom. If an investor/trader cannot make precise quantitative predictions, then his “feelings” and “it’s a bubble” warnings aren’t worth 2 cents. Anyone can “feel” that the market will go down or “feel” that the market will go up.
Here’s the really funny thing. Finance is filled with people who like to mock “snowflakes” and “dumb millennials” who use their “feelings” to make a lot of decisions. Meanwhile, people who actually work in finance sure use their own “feelings” a lot! (Some of the people in this industry are terribly snarky and crass).
All the “it looks/feels like the stock market will crash like 1929/1987” charts are BS. It always “looks like” the market is going to crash like 1929.
Using these fractals is no better than a coin toss in real time.
Analogues and fractals are mostly no better than a 50/50 coin toss in real time. For example, a lot of fractal traders will say “the stock market today ‘looks like’ it is copying the stock market in 1985”.
- For starters, the stock market never “copies” another chart. The stock market is not a living organism. It doesn’t have a brain to “copy” another chart. It is merely the sum of each person’s BUY and SELL actions.
- Perfect correlations break down all the time if there is no logical reason behind them.
Ray Dalio described this the best. Do you know why so many 99% correlations break down when you least expect them to? Because they occur for no reason other than randomness. When you overlap 1 chart onto another because it has “strong correlation”, THAT IS NOT CAUSATION. When correlation is not causation, the correlation inevitably breaks down. This is the basic point that all the “fractal traders” miss out on.
Correlation is only causation IF the 2 correlated markets/charts have the same fundamental drivers:
- E.g in 2008, the economy deteriorated, so the stock market tanked.
- If the stock market is improving today, overlapping a 2008 chart onto the stock market today makes no sense. Correlation is not causation because the fundamentals are very different. Context matters.
Focus on finding causation and not on finding correlation. Correlation is easy to find, which generally makes it ineffective. Serious market analysis is not as easy as slapping one chart ontop of another.