Thread by @ritholtz

In the short run, the market is a narrative machine, but in the long run, it is a narrative-debunking machine.

What else is a crash if not a price-based debunking of the prior narrative?

My observation is (obviously) based on Benjamin Graham's famous line:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

The reason I went with Narrative over voting is that the voting is the result of 1. the narrative, and 2. the virality of that Narrative.

What is the Bitcoin narrative?

It's that fiat currency has been debased by government + central bank interventions. (“Printers go brrrr.”) This will lead to a shift to digital currency.

Buy Bitcoin and drive Lambos, or stay with fiat currency and own worthless paper.

Or the Inflation narrative:

Combine ultra-low rates and a big stimulus with pent-up demand as the vaccines lead the post-pandemic economy to re-open. This story is the perfect formula for rising prices and higher inflation expectations!

Passive Indexing narative: Its hard to pick winning stocks! Its expensive to hire the people who might be able to pick winning stocks, too! And you don’t know who they are until its too late.

Why not instead just by a cheap index of the biggest stocks, or the entire market?

I am beginning to suspect EVERYTHING is Narrative

I can find a narrative for the Worker Shortage, why Valuation has underperformed, why Meme stocks got so hot, why Robinhood may not have staying power.

There are narratives and counter-narratives for almost any market, economic, or investing topic you can think of.

Voting versus Weighing

Trading versus Investing

Sentiment versus Intrinsic Worth

Short-term versus Long-Term

The “Narrative paradigm” is a communication theory conceptualized by Walter Fisher of USC. He observed that meaningful communication occurs via storytelling because “stories are more persuasive than logical arguments.”

arnevanbatenburg.com/filmmaking/sto…

2 problems with investing narratives:

1. Survivorship bias creates an unrealistic picture of the world, w/lots of easy winners in evidence. We construct a storyline based on this incomplete data set.

2. Hindsight bias makes us believe we knew things prior (when we did not)