Bias Will Cost You
One of the most persistent traits we have seen many traders/investors cling to over the years is bias.
Bias can take many forms but we'll confine this discussion to the perma bull/perma bear variety of bias.
The basics:
Whether one believes in conspiracy theory, divine intervention, or "they are out to get me", the market is it's own reality. The market does what it's going to do.
No matter anyone's opinion, price action is going to happen in a certain way no matter if anyone thinks it's justified or not.
The closer a trader can come to knowing and accepting that reality, the better a trader or investor is going to do.
Whether it is manipulated or not is irrelevant. The only question is...Is the market "gameable" or is it's movement totally random?
We believe the market's movement is gameable. It is gameable because a good part of it's movement is caused by mass human emotion and psychology which swings from greed to fear back and forth in never ending cycles.
From a technical perspective, there are certain chart patterns that lead to higher than coin flip outcomes in the future.
From a fundamental standpoint, companies that grow their sales and earnings 3 fold over 6 years are probably going to sell for a higher price than they sell for today providing today's price is not vastly overvalued and there are tried and true measures for determining whether it is.
Getting back to BIAS.
By definition, the closer one can come to determining what the current market reality is and investing or trading based on that reality, the better an investor or trader will do.
If one has say a perma bull bias, they will tend to filter information received through rose colored glasses to justify that bullish bias and what will happen is that decisions will be made that are not lined up with reality...especially during bear phases in the market.
Similarly, perma bears will filter information received to support their bear views and take action accordingly which will be at odds with market action especially during bull phases. Symptoms of this will be a continuing effort to "fight the trend" as the trend up is seen as "unjustified" because the market is seen as "wrong".
For many perma bears, this almost takes on the tone of a moral crusade. They act indignant that the market is getting it so "wrong" and it is there duty to not only not participate [sit in cash], it is also their duty to take up arms against it and fight the market. A sort of sick martyrdom.
"I may go down in flames financially but at least I have honor that I tried to fight the market which is stupid and wrong".
Of course, the market could give two hoots and a gay goat about what you think and do...it will simply do it's own reality and it eats for breakfast and spits out the bones of those who bet against it.
All you have to do is look back at the bull phase of March-June. There was almost no blog you could visit that you did not see a persistent crusade of martyrs trying to fight the market by buying vehicles of self immolation to short the trend, often with 2 or 3 X leverage.
There was even a sort of macho quality attached to it.
"I dare you Mr. Market to hit me again, I will only buy another vehicle that predicts your demise or reversal".
Of course the market just laughs and mows down another row of silly soldiers, then goes about it's business, and if that business is up, no amount of fighting it, brass balz, or macho makes a bit of difference.
While almost everyone who is involved in markets would say their #1 goal is to make money and limit risk while doing so, actions and words belie stated goals.
You see bloggers or traders that almost never say a "good word" about the market or invest bullishly. Perma bears.
You see bloggers and traders who almost never say a "bad word" about the market. Everything is a "ya but" rebuttal to the previling market reality and action.
We've seen this streak go on for years.
Obviously by actions and words, the true priority of many traders and investors is not to maximize profits.
The true goal [even if they are not consciously aware of it] is to defend and support their perma beliefs at all costs and in defiance of overwhelming evidence their perma bias is wrong during the phase of the cycle that is not what they want to believe.
What we have observed is that even if you present them with overwhelming compelling facts, reason, logic that a different and opposite view has a high probability of being correct, they will not change their view one iota.
Yes, they do want to make money in markets...BUT, ONLY IF IT IS ON THEIR TERMS.
The market does not care about your terms. The market just IS. The closer you can align your views to that IS, the better will your results be.
Few things can be guaranteed in markets.
One thing that can is that their will be bull phases and they will in due time be followed by bear phases to be followed by bullish phases and so on for the rest of your lives.
If one is a perma bull, one will do fine during a bullish phase but then vastly under perform during bear phases as positions will be set up very out of phase with reality.
If one is a perma bear, one will do fine during a bear phase but will vastly under perform during the bullish phase.
If you have NO BIAS, you at least have the opportunity to do well during all phases of the market.
This is so simple, it is self obvious and yet we see a widespread cling to bias year after year and resulting under performance over complete market cycles.
Even trying to be in tune with reality at all times with no bias, dealing with and outperforming markets is a difficult endeavor.
There is no use trying to do it with a large handicap which is bias.
We suspect those who cling to a perma bias have an outside source of income and the market is more of a fun game so the luxury of having a bias can be tolerated without it affecting their lifestyle even though they under perform over the long term.
If one is doing markets full time for a living and for their and their kids financial future, failure to perform has real and potentially severe consequences.
Bias then becomes a very unaffordable luxury.
Fabian
PS. We put this in black and white terms of BIAS or NO BIAS. The reality when it comes to most of us is we have bias, the only question is how much and what it is applied to. Bias comes shades of gray and for those who want to maximize returns, it should be a constant effort to determine whether an opinion we have is colored by even a slight amount of bias that could put one's views at variance with reality.
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