More Not So Deep Thoughts

Yesterday right before the close Maria asked a guest why the market was up yesterday. Based on his answer I don't think he was expecting the question. This lead me to a new thought on a Talebesque concept brought up in past posts. Taleb has noted that people like there to be explanations for things that happen. This is called fallacies of explanation. I'm sure that this is not new ground for you but we feel better if an event or occurrence can be explained.

The idea behind the fallacy of explanation is that for many things that happen there really is no explanation. This is very true for day to day movements of the stock market. If you look at articles before the open you might see something like futures are down due to growth concerns in Europe. If you look at articles recapping the day from after the close you might see something like equities rose over optimism for earnings.

I buy into the idea about explanations being mostly a psychological thing but the new thought is that one determining factor for success is being able to tell when the explanation actually is important versus the majority of the time when it isn't; more specifically having a good internal filter for sorting out news from noise. Even if most explanations/news doesn't matter some does and being able to understand this could be huge, I think it is anyway.

The best example of this I can come up with might be my experience with Bank Of America (BAC). I bought it years ago with the expectation of holding it forever. Being one of the largest American companies (by market cap) there is a lot of news on it every day most of which is meaningless. For the last few years the market has cared less about analysts raising or lowering estimates or changing ratings than it used to. Sometimes the market does care but in general I believe there is less regard for this sort of news. If you are a long term holder of a stock like Bank Of America it is unlikely that some analyst moving a full year earnings target by ten or 20 cents in either direction would serve as much of a catalyst for action. But the stock is covered by everyone (intentionally vague hyperbole) and it is their job (presumably) to call 'em as they see 'em which creates a lot of noise as opposed to news.

Occasionally news is very important; a ringing bell so to speak as was the case with BAC's announced takeover of Merrill Lynch after Lehman Brothers died but before the market opened and stocks could react (here there was a real explanation). I sold right away at about $29, the stock went to $37 a week or two later and then imploded along with the rest of the sector, well the ones that didn't literally go to zero. This news is as close to a bell ringing as I have ever experienced as an investment manager and candidly I'm not sure I would have known to sell had they waited a few hours and announced they were buying for a third of what they ended up paying so understanding this news for what it was--important and a catalyst for action was about two things; luck and being aware enough to understand that in the noise there is real news now and then.

I would be very surprised if something is ever that obvious to me again; that strikes me as a once in a career type blunder to capitalize on.

Another not so deep thought came to me yesterday afternoon. As some readers may know I go to the gym when the stock market closes for the day (commit yourself to fitness, don't drink soda LOL). The first thing I do at the gym most of the time is a turn on the StairMaster machine. Our gym has two StairMasters and the vast, vast majority of the time one of them is available for me to use. Yesterday I got to the gym and saw only four vehicles in the parking lot. Sweet, the StairMaster won't be an issue! Sure enough both of them were occupied and I felt sort of silly, on the inside, for the assumption I made and immediately tied the behavior in with the complacency that investors often have like forgetting after several up years that markets can go down a lot. That both StairMasters were being used was almost a personal black swan.