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probabilities
Exploring the Prossibilities!
Probabilities Versus Possibilities
Our energy is a finite resource. Sure, we consume food and we sleep to replenish our bodies, but they too don’t last forever. The basic formula for kinetic energy requires velocity—movement. But we don’t always direct our movement in the most skillful ways.
For instance, we humans are great at focusing on low-probability events. After all, these are the events that catch headlines: “if it bleeds, it leads” the saying goes. (I mean, how do you think the world ended up with Shark Week?)
We wrote recently about bear attacks, among all things, and now we’re thinking more deeply about these ideas. What if instead of placing so much energy into unlikely (albeit scary) events, we limit our focus a little: what if we focused more instead on what’s probable?
In the markets, we hope to see at least the typical patterns of probability. Some ups and downs every year, a general trajectory of more up than down across almost any stretch of five or more years. No guarantees. But these are the general probabilities of the long-term proposition.
We don’t lock into losses by treating drops like the end of the world. Of course fatal shark attacks do happen, they are real, but we don’t stay out of the pool because one time somebody got eaten out in the open sea. That just wouldn’t make a ton of sense, huh?
The possibilities are endless, and they could consume us until our last breath. Let’s direct more energy toward what’s probable.
Clients, want to discuss what’s probable and suitable for your situation? Reach out anytime.
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Play the audio version of this post below:
Probabilities Versus Possibilities – 228Main.com Presents: The Best of Leibman Financial Services
This text is available at https://www.228Main.com/.
A Luck-Proof Mindset
Once there was a farmer. Their horse ran away, and the neighbors cried, “What bad luck!”
“Maybe,” said the farmer.
The next day, the horse returned and brought with it some wild horses. The neighbors cried, “What good luck!”
“Maybe,” said the farmer.
The next day, the farmer’s grown child was thrown from one of the wild horses and broke their leg. “How unfortunate!” the neighbors cried.
“Maybe,” said the farmer.
The next day, the army came to the village to conscript all eligible individuals. The farmer’s child was passed over for their broken leg. “How fortunate!” cried the neighbors.
“Maybe,” said the farmer.
• • •
The Taoist parable of the farmer, relayed above, may have lessons for our experience in the market. Of course we’re interested in improving your positions over the long haul, but those twists, turns, and rumbles along the way… We don’t sweat day-to-day analysis. What we call things isn’t so important at that level, and the labels only matter when we zoom out.
Let’s consider an example. A downturn may bring some immediate and seemingly negative impacts, right? But downturns also end up tilling the soil for future bargains. And a dip in one area inevitably sows the seeds of the next burst of progress.
Would we ever characterize that cycle as all good or all bad? No way. Things become more relative in the long view.
We’re certainly not suggesting that the best we hope for is a toss-up. But there’s no percentage trying to factor “good luck” or “bad luck” into our strategies and tactics.
Instead, we can make a plan that keeps the seasons, the cycles, and the nature of change in perspective. Do we think this mindset will continue to serve us well?
“Maybe.”
Investing involves risk including loss of principal.
No strategy assures success or protects against loss.
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Play the audio version of this post below:
A Luck-Proof Mindset – 228Main.com Presents: The Best of Leibman Financial Services
This text is available at https://www.228Main.com/.
Big Chance and No Chance
We’ve written before about how the stock market is not a casino, and in light of recent remarkable events, other professionals are reminding the public too.
What had been a $4 stock recently ran up to over $400. Although we heard a hundred different ideas about what the episode meant, we can almost certainly understand that no, the company did not actually become a hundred times more valuable.
We do not know the future, so I can’t tell you that buying after it made headlines is going to turn out poorly, but (in my opinion) you’d have far better odds at an actual casino.
Let’s think about that for a second. Have you ever put a little money on something that had the chance to turn out really big? A long shot at the race track, a chance on a huge lottery payout, or stock in a company that might make a lot of money if it doesn’t go broke?
Our business in here is sound investing, not gambling or speculating, though I myself have considered the odds and laid my money down a time or two.
But this recent example buzzing in the news isn’t like that. It’s one of these situations where lots of people get caught up in something that has the same practical meaning as flushing money down the toilet.
It would be better to invest wisely, spend well, and plan for the long haul. For some, chasing those big chances can be fun in moderation. But we don’t advise it become a daily activity.
Jumping into something with even worse odds than those big chances? We wouldn’t count on anything longer than a long shot.
Clients, when you have questions or concerns, please reach out.
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Long Shots and No Shots [VIDEO]
Schrödinger’s Market
Quantum physicist Erwin Schrödinger once came up with a thought experiment to illustrate a difficult conceptual problem. Suppose you have an opaque box with a cat inside. In the box is a mechanism that is designed to release a poison gas based on the random actions of subatomic particles on a quantum level.
Now according to quantum theory, it is literally impossible to know what these particles will do in advance. You cannot even accurately measure what they are currently doing beyond general probabilities. In fact, until you observe them they act as though they are doing multiple mutually exclusive things—including behaving as though they are two places at once!
Hence Schrödinger’s box. Without observing the contents of the box you have no way of knowing if quantum action triggered the poison or not. Thus, until you open the box and look the cat is simultaneously alive and dead: a surprising conclusion, and a difficult paradox for physicists!
You and I can leave that problem to the scientists, but Schrödinger’s box can be a useful metaphor for other unknowable states. The actions of financial markets are theoretically not as complicated as quantum mechanics. But predicting market action is so far beyond our current mathematical understanding that they might as well be.
Like quantum particles, the value of a market cannot accurately be measured without interacting with it. This leads to a great deal of uncertainty and can sometimes make it feel like multiple conflicting realities are true at once.
Reading the financial press you will often be presented with competing headlines declaring that we are simultaneously in the midst of a great bull market and a terrible bear market.
As with the box, we prefer to leave these paradoxes to people with more time on their hands. Instead of trying to time the market, we believe in sticking to timeless principles like avoiding stampedes and finding bargains in the hopes of finding quality companies. We cannot predict what market prices will do from moment to moment, but we can guess at general probabilities.
Clients, if you would like to talk about this or anything else, please email us or call.
The High Tech Rear View Mirror
Once upon a time, we wrote that pretending present and future risk can best be measured by past volatility is akin to driving down the highway with eyes firmly planted on the rear view mirror. (Our theory is the future will not be like the past, so the windshield is a better thing on which to focus.)
The current market upset is the first one featuring the latest generation of so-called risk analytics. These high tech tools generate risk numbers for individual investments as well as entire portfolios. They are entirely based on past volatility. Incorporating frequent updates to the database of past price behavior and enabling near-instantaneous assessments expressed as an index number (say, 1 to 100), they seem quite scientific and highly analytical.
But all of this precision is predicated on the idea that past volatility is a measure of present and future investment risk. So in the latest version, it is like driving down the highway with eyes firmly fixed on an array of rear view mirrors, wide-angle and telephoto and high-definition.
The interesting thing is, when the inevitable downturn occurs, the ‘volatility equals risk’ crowd is quick to point out that their statistical methods are designed to predict what will happen, with a 95% probability. So if you run into a wall while focused on the rear view mirror, there was nothing wrong with the analytics – you just landed in the 5%.
Call us what you want, but a system designed to ferret out risk that fails exactly when you do need it to work may not be all that useful. (An elevator that does not crash to the basement 95% of the time would not be useful, either, in our opinion.)
We will continue to work with our understanding that volatility is a feature of long term investments. It necessitates a long time horizon, so the effect of temporary declines may be mitigated by time. Short term money needs to be kept out of long term investments. And we will keep our eyes focused on the future, not the past.
Clients, if you would like to talk about this or anything else, please email us or call.
And Now, the Weather
When you watch the news and the weather forecaster tells you there is an 80% chance of rain tomorrow, what exactly does that mean?
It might rain tomorrow, or it might not. It says rain is more likely than not. So if there is no rain after all, does that mean that the forecast was wrong?
Forecasting is often a fuzzy subject. No one can see the future with 100% certainty, so predictions are often spoken of in terms of probabilities. But we as humans are generally not good at thinking in terms of probability. An 80% chance is far from a sure thing, but when someone tells us something is 80% likely to happen, it can sometimes feel like one.
This is particularly true when it comes to trying to predict one-time events. If you flip a coin and it comes up tails, you can keep flipping it and see that it will still come up heads about half the time. If the weather forecast says there is an 80% chance of rain next Tuesday, there is only one next Tuesday. If Tuesday comes and goes without any rain, it sure feels like the forecaster blew it.
Economic and financial forecasting runs into the same problem. First, a forecast is only as good as its model. Economic projections may include assumptions that prove to be unfounded. But even a good forecast is limited to predicting a range of probabilities. If an analyst tells you they think there is an 80% chance that the market will go up this quarter, all they are really saying is that it might go up and it might go down. You probably did not need an analyst with a fancy model to tell you that.
We put little faith in short term market predictions. Even if they are accurate, you can probably not afford to bet the farm on them. We prefer to take a longer-term view. We cannot be sure how an investment will perform over the next month or next year, and do not believe in speculating on short term results. We feel much more comfortable in the trend over the long run.
Clients, if you have any thoughts or questions, please call or email us.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
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