How Do You Beat The Randomness Of A Billion Outcomes?

There are many people that claim they have some kind of insight into the markets. Of course, insight is one thing and objective information is another.

Absent any information that is an objective fact, If someone says to you that the markets will take an existential dive at some point in the future– they would be absolutely correct. The Messiah of hindsight bias also would be correct in assuming that the markets will have a rosy future over the long term and that the markets will rise to give equitable returns for all.

In the long term, this all starts to break down when investment advisors can not tell you the time and date of the collapsing market or how far it will fall. Or when it will recover and at what point to buy or sell. This becomes a real problem for people in their late 70s. Especially when a financial advisor is selling shit products to seniors that are not hedged against downside risk– like a 401(k).

Now comes my number one investing rule— You can not use the objective past to predict a subjective future.

In fact, I have never met anyone individual that can use intuition with any level of certainty that can be correct 51% of the time over 20 years. If you use fundamental and quantitative analysis and form an opinion from the objective past this percentage would need to be your baseline for success. Of course, fundamental and quantitative analysis will most certainly break down and fail using data from past events.

What makes hindsight bias so confusing with investment advisers, anyway?

To start with, the psychological phenomenon in which people convince themselves they have accurately predicted an event before it has happened– is, in fact, hindsight bias. This can lead people to draw the wrong conclusion that they can predict other financial events before they occur. In investing, hindsight bias will manifest itself as a sense of frustration or regret at not having acted in advance of an event that moves the market. When in reality, frustration over any decision process when predicting the future is meaningless.

Of course, if someone has the ability to travel forward in time. I highly doubt they’ll come back to invest in some ridiculous financial product in the 2020s. Now that we know that we don’t have any time travelers in our midst. We can now cast the Messiah’s into the gladiatorial pits.

​Also, hindsight bias can induce someone to reflect back on the event and believe they could have predicted an outcome. This would indicate their judgment is better than it is. The logic flow is, once we know the outcome, we can construct a winning event. With this, we become less critical of our decisions, leading to poor decision-making.

Additionally, looking at the hindsight bias and revising the probability of the outcome is another kind of human failing. After knowing the outcome, a person will tend to exaggerate their ability to predict the end result. These biases can be found in everyday situations. Especially the human need to predict the weather.

Within human evolution, the need to give hindsight has been a basic survival mechanism that has benefited our species for 200 thousand years. For example, if your offspring exhibits behavior that is easy to predict it will not apply to events that have a billion different outcomes. The human need to protect children from their own failings is straightforward and easy.

Especially compared to the randomness of a billion outcomes. Imagine an investor in Singapore that has a small fly land on his Cola. The investor flicks the fly off the bottle. The bottle then falls on the keyboard and inadvertently buys 50 thousand shares of BP. Or, if a cat jumps on a keyboard in Chicago and shorts 10 million in cattle futures. Quantitative analysis and hindsight will break down every time and these events happen every day.

Any one of these events will have a cascading effect. Once the cat jumps on the keyboard that will trigger an algorithm that liquidates a position to cover a funds risk. From there, a human will need to liquidate equity to cover the hedging activity. As the cascading effect goes on, there will be an investment adviser that will lay out a chart with a complex analysis that will tell you that he or she foresaw this random event.

The truth is, hindsight advisers can give overconfidence to millions of people in their late 70s. These people should not be exposed to extreme market reversals. In the end, these reversals can accumulate losses of over 2/3 of aggregate wealth. They may be driven into poverty or even homelessness. Obviously, it becomes a question of the lawmaker’s will to change the laws to protect their most vulnerable citizens..

Unfortunately, you are better off waiting for the next ice age. As we all know, lawmakers in the United States receive massive contributions of every conceivable kind. From homes on Lake Tahoe to contributions to the endless number of foundations. From there, the money is funneled around to the different political interests. The hypocritical moral pose and heartlessness of these people are breathtaking. The question then becomes, how does this affect your sweet grandmother in Switzerland or Norway?

Not if. But, when: The market reverses itself with a sudden and instant collapse. That is when the hedge fund managers and their lesser rivals within the investment banks simply flattened their positions. At that moment, like magic, your grandmother’s retirement savings will vanish from her accounts and into the fund manager’s pocket. The fund manager did not even have to ask for a money transfer– adding to the ultimate slap in the face.

Now you might be thinking: ” I live in Switzerland and American financial problems do not affect me “. This thinking is dead wrong. For example, large Swiss companies like Nestlé and Roche are positively correlated (to) the S&P 500. Meaning, that when the American equities indexes collapse– Nestlé’s value will fall with the S&P. That, In turn, impacts your dividends and purchasing power. That is why the Swiss markets are fundamentally correlated with US markets. And sadly, with American political whims.

Of course, at the end of the day, the army of investment advisors will roll out their charts and tell you they saw it coming all along.

--Roman


Understanding the nuances of the offshore financial centers can be challenging to say the least. In this newsletter, I talk about aspects of our industry that you may never read about otherwise. Some of my most informative articles are only at Substack. This being the case, my goal is to help you preserve your wealth by sharing my experiences.

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