Connecting Dots

There are thousands … millions … gazillions of dots in the universe. Today, we connect two of them.

First, let us note that so Zen-like and calm are investors that the worries of Thursday – triggered by the downing of Malaysia Airlines Flight MH17 over eastern Ukraine – were forgotten by Friday.

The Dow closed up 123 points on the last day of the week. Gold sold off. So, let’s return to our dots. The first one is epistemological. The second is an important observation about investing.

 

black-swan-122983_640

Hi! I'm from Australia and I do exist …

(Photo via Fotoagentur Holgi)

 

connecting_dots

Not as easy as it sounds …

(Cartoon by Bennett)

 

Beware Black Swans

If you remember from a week or so ago, we concluded that humans can never know – with certainty – anything. That’s just the way it is. We believe things are one way or another… but only until it turns out not to be so.

Since anything may turn out to be untrue, sometime during the life of the universe, everything we think we know must be regarded as a hypothesis. That’s the problem with man’s knowledge. It is subject to contradiction, nuance and further development.

Especially his knowledge of the future. And since all investing is a bet on the future, it often tends to go wrong. But although we can’t know what is true, we can know what is not true. Positively. Definitely. Without a doubt.

This was a point made by Nassim Taleb in his book The Black Swan. “All swans are white,” sounded like a true statement to Europeans, where all swans are white and therefore the inductive logic made sense. Then Europeans discovered there were black swans in Australia. At that moment, Europeans knew beyond a shadow of a doubt that all swans were not white.

You could never prove that “all swans are white.” Because you could never get all the world’s swans together in one place to check them. And even then, you couldn’t be sure if one of them hadn’t been painted white, temporarily, so he wouldn’t feel out of place. Now, “all swans are either black or white” sounds correct. But who knows?

 

pink swan

Who knows, indeed?

(Photo credit: challenge58, via fotothing.com)

 

Pulling Levers

A wise economist is one who thinks a damned pink swan will show up at any moment. His modesty overwhelms his other instincts. He may want to try to increase GDP or raise employment. But he knows he can never really understand all the billions of transactions that make up an economy. As for improving it, fugetaboutit.

The foolish economist, on the other hand, lives with the illusion that he is master of his world and captain of its fate. He thinks he knows what policy choice will produce which response. Management of the economy is easy; it is just a matter of figuring out which lever to pull.

We will let you decide to which group Janet Yellen belongs …

At a recent IMF meeting she recognized that there had been an uptick in risk taking. She took no responsibility for it. (Even though the evidence pointed toward it being a consequence of Fed policy decisions.) But she had a solution. This problem could be addressed, she explained, by more policy decisions. Not by undoing the policy that caused the distortion, but by putting in place more programs… more regulations… more central planning.

One of these new policies was disclosed even before Yellen spoke. On June 16, the Financial Times revealed that “Feds look at exit fees on bond funds.” That is supposed to prevent the obvious risk that, when the bubble pops, investors will want to get out – fast.

 

exit fees

A fistful of exit fees …

(Image via gafin.vn / Author unknown)

 

The Loser’s Game

Maybe Yellen can do the same thing for the stock market. When the crash comes, perhaps investors could be forced to wait. There could be a 15-day cooling off period … which could be extended by the Fed, in the interest of market stability.

Economists don’t know what will work because no one can know what the future will bring. But we all know what won’t work: central financial planning. It can’t improve an economy; it can only make it worse.

Likewise, investors can’t consistently choose good investments; because they don’t really know the future. All they can know is what isn’t true and, knowing that, avoid bad investments.

That’s why investing is often called a “loser’s game.” You don’t win by choosing winning investments; you win by not losing. You don’t win by pretending to know what is true; you win by knowing what is false.

 

Stock Exchange

Stuff happens

(Photo credit Jason Bauer / photothek.net)

 

The above article is from Diary of a Rogue Economist originally written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 

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Dear Readers!

You may have noticed that our header carries ab black flag. This is due to the recent passing of the main author of the Acting Man blog, Heinz Blasnik, under his nom de plume 'Pater Tenebrarum'. We want to thank you for following his blog for meanwhile 11 years and refer you to the 'Acting Man Classics' on the sidebar to get an introduction to his way of seeing economics. In the future, we will keep the blog running with regular uptates from our well known Co-Authors. For that, some financial help would be greatly appreciated. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

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One Response to “The Dumbest Investment Mistake You Can Make”

  • wrldtrst:

    “A wise economist is one who thinks a damned pink swan will show up at any moment.”

    Ah, that’s half the difference between an economist and a trader…. the other half would be seeing possible outcomes as a surface.

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