A loser’s game

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 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.

If you remember from a week or so ago, we 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.

The only exception to this that we can think of is something that is true by definition, a tautology.

You say: red is a nice colour. The dress is red. Therefore, the dress is a nice colour.

It only holds up if you accept the initial premise, which is not necessarily true. It could turn out that red is not a nice colour.

That’s the problem with man’s knowledge. It is all 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.

However, while we can’t know what is true, we can know what isn’t. Positively. Definitely. Without a doubt.

This was the point of Nassim Taleb’s The Black Swan.

“All swans are white”, sounded like a true statement. Until the black swan appeared. At that moment, we 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?


Bill Bonner on markets, economics & the madness of crowds

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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, fugittaboutit.

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 in which group Janet Yellen belongs. Recently, at an IMF meeting, she recognised that there had been an up-tick in risk taking.

She took no responsibility for it (even though it was clearly a consequence of her policy own 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 programmes, more regulations, more central planning.

One of these new polices was disclosed even before Ms 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.

Maybe she 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; 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 really choose good investments; because they don’t really know the future, or even what is true in the present. All they can know is what isn’t true; all they can do is avoid bad investments. They can only know what is false.

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.

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2 Responses

  1. 21/07/2014, John Pickup wrote

    Bill, I do enjoy your penetrating, if at times uncomfortable, analysis, and acerbic wit. Allow me then to point out a logical error in your recent piece.

    “‘All swans are white,’ sounded like a true statement. Until the black swan appeared. At that moment, we knew beyond a shadow of a doubt, that all swans were not white. ”

    No we don’t know “that all swans were not white”.

    Some definitely are white.

    What we do know is that not all swans are white.

    OK?

  2. 21/07/2014, MPS wrote

    “Since Plato, Western thought and the theory of knowledge have focused on notions of True-False; as commendable as it was, it is high time to shift the concern to Robust-Fragile, and social epistemology to the more serious problem of Sucker-Nonsucker.” Nassim Nicholas Taleb: The Bed of Procrustes.

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