“Narrative fallacies” present risks for investors.
When we believe a compelling story that turns out to be untrue, we can end up holding assets worth far less than the story suggested.
ritholtz.com/2021/06/what-i…
When we believe a compelling story that turns out to be untrue, we can end up holding assets worth far less than the story suggested.
ritholtz.com/2021/06/what-i…
I referenced some of the ideas in this last week, but I want to address a few that I did not get to then
https://twitter.com/ritholtz/status/1404488806653255681
Start with the biggest issue:
Investing is hard enough without laboring under false beliefs about markets, stocks, assets & trading.
I am partial to @RayDalio's edict: "Embrace reality & deal with it"
Investing is hard enough without laboring under false beliefs about markets, stocks, assets & trading.
I am partial to @RayDalio's edict: "Embrace reality & deal with it"
https://twitter.com/RayDalio/status/1349766055896481794
Back to Narrative: Consider any aspect of investing, from styles to specific trades, to FAANG, Crypto, Value, GARP, Quant, Passive, Meme stocks, Short selling, literally ANYTHING.
There is ALWAYS a story behind that trade, which is what gets people to put up their money.
There is ALWAYS a story behind that trade, which is what gets people to put up their money.
Narrative:
Bitcoin hodlers know Fiat currency is being debased by governments + central banks; They expect this recklessness will lead to a massive shift to digital currency; They buy Bitcoins + drive Lamborghinis rather than staying with fiat currency + owning worthless paper.
Bitcoin hodlers know Fiat currency is being debased by governments + central banks; They expect this recklessness will lead to a massive shift to digital currency; They buy Bitcoins + drive Lamborghinis rather than staying with fiat currency + owning worthless paper.
Narrative:
Combine ultra-low interest rates and big stimulus with pent-up demand as the vaccines lead more of the economy to open. This is the perfect formula for rising prices and higher inflation expectations! Buy Gold, Sell bonds!
(Unless the narrative is wrong...)
Combine ultra-low interest rates and big stimulus with pent-up demand as the vaccines lead more of the economy to open. This is the perfect formula for rising prices and higher inflation expectations! Buy Gold, Sell bonds!
(Unless the narrative is wrong...)
Narrative:
It's hard to pick winning stocks! It’s expensive to hire the people who might be able to pick winning stocks! Why not instead just buy a cheap index of the biggest stocks or the entire market?
This is the Passive Indexing storyline
It's hard to pick winning stocks! It’s expensive to hire the people who might be able to pick winning stocks! Why not instead just buy a cheap index of the biggest stocks or the entire market?
This is the Passive Indexing storyline
Narrative: Too generous unemployment benefits are keeping the lazy bums from going back to work! End UE bonus + they return
Counter-narrative: Schools still remote/childcare hard to come by. Record new biz formations + Quits rate show workers avoiding inflexible, low-paying jobs
Counter-narrative: Schools still remote/childcare hard to come by. Record new biz formations + Quits rate show workers avoiding inflexible, low-paying jobs
Narrative:
The collective power of the internet can stick it to the man! r/Wall Street Bets can identify heavily shorted stocks, and as a group buy out of the money calls, forcing a massive short-squeeze. Power to the people!
Meme stocks = $$$
The collective power of the internet can stick it to the man! r/Wall Street Bets can identify heavily shorted stocks, and as a group buy out of the money calls, forcing a massive short-squeeze. Power to the people!
Meme stocks = $$$
Narratives are half of the story -- the other half is how these stories go viral.
Nobel Laureate Bob Shiller explains why some stories become contagious:
ritholtz.com/2021/06/bbrg-m…
Nobel Laureate Bob Shiller explains why some stories become contagious:
ritholtz.com/2021/06/bbrg-m…
Narrative/Contagion reminded me of the technology debates of the late 1990s:
What was more valuable, the Content, or the Pipes to deliver that content? Which is more important, HBO, or Time-Warner Cable?
When we look around 20 years later, turned out to be both!
What was more valuable, the Content, or the Pipes to deliver that content? Which is more important, HBO, or Time-Warner Cable?
When we look around 20 years later, turned out to be both!
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