A GAME OF GOTCHA! Past performance does not guarantee future results
DIS and DAT-A GAME OF GOTCHA! Past performance does not guarantee future results-January 2013
Our periodic communication that reminds you to ask, “Should I react to those headlines?”
In our previous communication we described a 10-item checklist for investment preparation. Though many of you may not have noticed, we purposely omitted the tenth item from that checklist. Can anyone guess what it is? Our tenth tip is to READ FINANCIAL COMMUNICATION CRITICALLY AND CAREFULLY. We believe in order to be prepared for investment uncertainty, one needs to understand that not all financial communication benefits the receiver. The reality that some investment information may not benefit the recipient and can turn investment management into a game of “Gotcha!” As the famous economist, John Maynard Keynes, once wrote about the investment markets, “For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs - a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbor before the game is over, who secures a seat for himself when the music stops.”
On the surface, price movements appear to be a gamble on the next tick of prices, the next quarter’s earnings, the next big thing, etc., and many people come away from this “game” believing it is rigged or stacked against them. It can seem that soon after they buy an investment it quickly drops in price. Then again after deciding to sell, the price mystically rises.
Our goal here is to describe this game of “Gotcha!” and why we do not like to participate. In order to dive into this concept, we have broken the topic into two parts: 1) Why does it seem investing behaves like a game? and 2) Does one have to play the game in order to participate in investing? For the sake of being brief, we will cover only the first of these parts in today’s communication and save the second for our next DIS and DAT.
So let’s begin by attempting to explain why short term investing tends to behave as a game. To introduce this concept of investing as a game of “Gotcha!”, we will share a quote from Robert Bacon’s book, Secrets of Professional Turf Betting which is reportedly a required reading for well-known hedge fund manager, Victor Neiderhoffer’s, staff. Bacon writes, “There is no danger of the public ever finding any key to the secret of winning. The crazy gambling urge and speculative hysteria that overcomes most players at the track makes that fact a certainty. But, if the public play ever did get wise to the facts of life, the principle of ever-changing cycles of results would move the form away from the public immediately.”
The public play in this case could be considered the “amateurs”, or followers. In the long run, the markets exist as a method to finance economic development. So the markets are ever changing in order to take funds from the public and use them to finance the continuation of the market. The continuation of the markets requires middlemen who must be paid to keep the markets allocating capital that will finance economic growth. The advisors like us, the custodians like Schwab, the regulators like the Securities and Exchange Commission, the investment bankers like Goldman Sachs, the authors that write investment articles, newsletters, and books may all be considered part of this group. This group of middle men must provide value in order to stay in business themselves. Some of you may find it shocking, and others refreshing, to hear that we realize we are an “expense” of our clients. We take that responsibility seriously and try to add more value than the expense our clients pay.
There is another group that must benefit in order for markets to continue functioning. This group maybe called the creators/inventors. As an example, this “Gotcha!” feeling has been felt recently by the purchasers of the Facebook IPO – yes the creators won in this instance. This reminds one of Michael Douglas’ character, Gordon Gekko, in Oliver Stone’s film Wall Street, when he said, “Wake up, will ya, pal? If you're not inside, you're outside, okay?” To consider it another way, if the markets supplied all doom and no winners, it would quickly end.
Bacon explains the purpose of the changing markets this way: “The principle of ever-changing trends works to force quick and drastic changes of results sequences when the public happens to get wise to a winning idea. The public can never catch up to the form or the game ceases.” In this view, investment markets can be thought of as “systems” that need attention, or more correctly need participation, in order to accomplish the intended task. Some of these participants realize that the general public’s attention is difficult to grab and subsequently have resorted to implying that not listening to their advice will lead to impending doom, or that following their information will result in great riches. As for us, we don’t believe either scenario will occur by reading or not reading our communications. We hope this does not cause you to quit reading here, though.
So back to Bacon, we can infer from his quote above that deception does exist as part of the game and, if great riches or dreadful doom weren’t possible outcomes, then investment would cease. As the market would have it, some participants have to hit it big every once in a while in order to keep participation rates high enough to encourage people to willingly allocate capital. We believe that it may be helpful to realize that this is how the markets function. So, while some people do indeed have spectacular results, it is not an outcome that would be easily repeated. Bacon further explains, “The collective mind of the public imagines that if it could only once find the combination for beating the races, it would be all set for life. The public wants to hit on some simple key, shown by numbers in the past performances, and use this key to get richer and richer as racing goes on. The public believes that if it could only once find that past performance key, its troubles would be over.”
In this game, many of the public rely on numbers of past performances in order to find the “key” to get richer and richer and this is where they can get tripped up. Yet performance expectations are a main tool many middlemen use to grab the attention of the public. Boy, is that a set up for a game of “Gotcha!”
For the next edition we will look at what some other investors have to say about investing games and how they have decided to participate in the investment markets. Until then, please don’t forget that past performance does not guarantee future results.
See you next time.
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Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Diversified Investment Strategies, LLC dba Advisor.Investments), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Diversified Investment Strategies, LLC dba Advisor.Investments. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Diversified Investment Strategies, LLC DBA Advisor.Investments is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. If you are a Diversified Investment Strategies, LLC dba Advisor. Investments client, please remember to contact Diversified Investment Strategies, LLC dba Advisor.Investments, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Diversified Investment Strategies, LLC dba Advisor.Investments current written disclosure statement discussing our advisory services and fees is available upon request.
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