A Canadian on Wall Street

It’s very difficult to write a site focusing on financial and investing related topics without veering too close to the realm of the “analyst”. I’ll be honest, it does seem utterly amazing that we have such a plethora of people who are dedicated to coming up with reasons, some rational, some not so much, to invest our money in a particular stock or sector. Although sales and analysis are often considered separate arms of the finance industry, it strikes me that analysis is essentially a form of marketing. Whether it’s the analysts of the big banks’ investment arms or the analysis of blogs and newsletters and various independent investors, there’s never anything completely impartial in the views and opinions that are put forth. We listen, because there’s a veneer of empiricism to it, but compared to science (which, too, can be co-opted by marketing — see the pharmaceutical industry for a good example of this), financial analysis, such as it is, can often be a pretty depressing landscape to survey. As anyone schooled in doubt and skepticism might ask, what has been truly verified? Except for behavioural finance and economics, there’s very little that’s made sense to me of current financial thinking. People are still smitten with pseudo-scientific methodologies based on arbitrarily chosen statistics, developing applications and algorithms that act without awareness of psychological events, when it seems to me the only thing in investing that really matters is to be conscious of the mass psychology and to take advantage of it, whether that’s done through “value” (usually implying that a stock is not well liked and hence has not been pushed up in price) or “momentum” (taking advantage of the herd mentality).

Here’s a question: what’s a value stock that never goes up in price? Was it still valuable if it remained unloved? The value investors have convinced themselves that, yes, there is some intrinsic value that was always there. But the fact is, price (and value — even though some people like to imply these are separate) is a psychological construct (gold is a case in point) that can’t be tied to specific attributes of a company in the abstraction of the market. If people were able to sustain a mania indefinitely, then prices would never fall, even if a company was actually doing poorly. But when a company does poorly, or for a variety of other reasons, that mania becomes harder and harder to maintain. Reality intrudes. But is reality really a “return to value” or just the pendulum swing, a reflection of cyclicality that is present in so many natural forms? And is the market chaotic in a way that is predictable or not? How can individuals really understand the interaction of so many competing forces?

I think we stick to our seemingly rational analysis of stocks, P/E ratios and earnings reports because otherwise it would be a fool’s errand to try to synthesize all that information. It’s easier to focus on a few numbers and try to make it represent the whole. When an analyst is right, we ascribe skill to them, as if they were a scientist who had hypothesized something and had their hypothesis confirmed, because if we were to think otherwise, it would really undermine a whole industry. What? I think people look at finance and investing, and see numbers, and think that because there are numbers that it’s completely quantifiable — ultimately though, I think we’re in a casino where there is no house and no odds, because by its very nature the market’s rules are constantly changing.

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I wrote the above last night as I was going to bed, and didn’t post it, thinking it sounded a little kooky and speculative and not particularly cogent, but in light of today’s bloodbath (all red) in the markets, I figured it was strangely appropriate and dare I say… prescient? Let’s see how the “analysts” attempt to rationalize what was probably only moderately rational and mostly a lot of stampeding for the exits — the psychology of herds.