"'When certainty overwhelms uncertainty -- the herd tends to be wrong"-Barry Ritholtz
Contrarian, you say?
or
another example of "everything's opposite" to the commonly-held view?
Kiss Your Assets Goodbye When Certainty Reigns: Barry Ritholtz
Nov. 10 (Bloomberg) -- “The markets hate uncertainty.”
If you wandered anywhere near a television in advance of the midterm elections, the Federal Open Market Committee meeting or October’s employment report, that cliche was unavoidable. It was the pundits’ preferred proverb.
Wall Street has a sweet tooth for such investing maxims. They infect the trading community like influenza in December. Repeat mindless dictums ad nauseum, and they soon become the accepted wisdom.
The problem with these supposed truisms is they are no more accurate than the flip of a coin. A closer look at this uncertainty meme reveals it to be a false-ism -- one of those emotionally appealing phrases that ping around trading desks. The lack of evidence supporting their premise seems to matter very little.
To recognize how meaningless these statements are, consider the opposite: Could markets function without uncertainty? It takes only a little thought to realize that markets actually thrive on doubt, imperfect information and a lack of consensus.
Uncertainty drives the market’s price-discovery mechanism. Investing requires there to be differences of opinion. When there is broad agreement as to an asset’s fair value, trading volume falls. Without any uncertainty, who would take the opposite side of your trade?
History teaches that whenever the opposite occurs -- when certainty overwhelms uncertainty -- the herd tends to be wrong. In rare instances, when there is a near-total lack of uncertainty in the market, the outcome is usually a spectacular disaster.
When Certainty Rules
Recall the dot-com era, when everyone knew that profits no longer mattered. Uncertainty seemed to be banished. An epic crash followed.
After the Internet implosion, the opposite extreme was operational: Profitable, debt-free tech companies were being traded for less than book value. In a few rare instances, they were being sold for less than cash on hand. Investors had become certain that a dollar was worth only 75 cents.
There was little uncertainty heading into the March 2009 stock-market lows. Almost everyone was sure the world was falling into the abyss. In that massive and indiscriminate selling, it seemed almost certain that no one was ever going to buy another house or car, or send their kids to school, or for that matter, clothe or feed them. How did the consensus work out in that instance?
Read the whole thing
or
another example of "everything's opposite" to the commonly-held view?
Kiss Your Assets Goodbye When Certainty Reigns: Barry Ritholtz
Nov. 10 (Bloomberg) -- “The markets hate uncertainty.”
If you wandered anywhere near a television in advance of the midterm elections, the Federal Open Market Committee meeting or October’s employment report, that cliche was unavoidable. It was the pundits’ preferred proverb.
Wall Street has a sweet tooth for such investing maxims. They infect the trading community like influenza in December. Repeat mindless dictums ad nauseum, and they soon become the accepted wisdom.
The problem with these supposed truisms is they are no more accurate than the flip of a coin. A closer look at this uncertainty meme reveals it to be a false-ism -- one of those emotionally appealing phrases that ping around trading desks. The lack of evidence supporting their premise seems to matter very little.
To recognize how meaningless these statements are, consider the opposite: Could markets function without uncertainty? It takes only a little thought to realize that markets actually thrive on doubt, imperfect information and a lack of consensus.
Uncertainty drives the market’s price-discovery mechanism. Investing requires there to be differences of opinion. When there is broad agreement as to an asset’s fair value, trading volume falls. Without any uncertainty, who would take the opposite side of your trade?
History teaches that whenever the opposite occurs -- when certainty overwhelms uncertainty -- the herd tends to be wrong. In rare instances, when there is a near-total lack of uncertainty in the market, the outcome is usually a spectacular disaster.
When Certainty Rules
Recall the dot-com era, when everyone knew that profits no longer mattered. Uncertainty seemed to be banished. An epic crash followed.
After the Internet implosion, the opposite extreme was operational: Profitable, debt-free tech companies were being traded for less than book value. In a few rare instances, they were being sold for less than cash on hand. Investors had become certain that a dollar was worth only 75 cents.
There was little uncertainty heading into the March 2009 stock-market lows. Almost everyone was sure the world was falling into the abyss. In that massive and indiscriminate selling, it seemed almost certain that no one was ever going to buy another house or car, or send their kids to school, or for that matter, clothe or feed them. How did the consensus work out in that instance?
Read the whole thing
posted by Ed E. Trebor at
9:43 a.m.
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