Market Metaphysics

It's alive... Market Metaphysics is back

Following an extended hiatus, we are happy to announce that Market Metaphysics is once again active with a full editorial plan and its own new domain: www.marketmetaphysics.com.

Future content will continue to explore "the market" as applied philosophy and will go further to relate the importance of defining an underpinning philosophy (of life) to investing successfully. Investment strategies, life strategies --- no such difference in the world of Market Metaphysics.

Watch this space.

The "Last Interview"

“Traditional scientific method has always been, at the very best, 20-20 hindsight. It's good for seeing where you've been. It's good for testing the truth of what you think you know, but it can't tell you where you ought to go.”

--Robert Pirsig in his "last interview"

The best financial journalist you've never heard of

Chris Mayer is the best financial journalist you've never heard of. Editor of the investment advisory Capital & Crisis (formerly the Fleet Street Letter, which its publisher claims to be the oldest investment letter in English, since 1937), Mayer's elegant prose will make you wonder why you don't find this caliber of writing in the mainstream financial press.

Mayer's essays are sharp intellectual discoveries with a roaring 20's, bucket shops & open outcry kind of feel to them. Simpler times, simple truths. In recent letters he has quoted Puggy Pearson and even Charles Bukowski:

"Any damn fool can beg up some kind of job; it takes a wise man to make it without working."

All this and solid investment ideas too. Find out more and read some sample essays here.

Anthropology of Markets

With surprisingly little fanfare, Robert Pirsig has emerged from seclusion to increase awareness about the Metaphysics of Quality and to support a new book about his philosophy.

Here's the first interview he's granted in quite some time.

And the book he's supporting:

John Dewey, Robert Pirsig, and the Art of Living

Getting into the spirit of Pirsig revivalism, Twelve Links offers a post on the scientific basis of values. We've often thought of the market as "a house built on intellectual quicksand" as well.

Watch this space.

Latticework

"You've got to have models in your head, and you've got to array your experience - both vicarious and direct - on this latticework of models."  (Charlie Munger, 1994, in a speech at USC)

Tipping his hat (repeatedly) to Mr. Munger (and Bill Miller), Robert Hagstrom makes the ambitious but nonetheless compelling case for a unified perspective:

"Investment decisions are more likely to be correct when ideas from other disciplines lead to the same conclusion. Those who strive to understand these connections are well on the way to worldly wisdom. This makes us not only better investors but better leaders, better citizens, better parents, spouses and friends."

From Latticework : The New Investing. 

"Myriad Markets"

"The path to earning excess returns ... is not to obtain superior information, but rather to use the available information in a superior manner."

This is #5 of Marty Whitman's supposed investment rules. Another includes the idea that "in most markets the tendency towards efficiency is quite weak."

Find them all here.

Inefficiency

We are inclined to argue -- and do so frequently -- that life is a vague experience of time and ideas. In different settings and stages of provocation, this simple statement has come to imply one or some of the following:

• that we know (considerably) less than we think or say we do
• 'things' --- our values namely --- are not clear cut, not systematic, not 'red' or 'blue' (or 'bull' or 'bear'!)
• we are creatures of confounding contradiction

But whether it's vagueness or a lack of precision or fluctuating beliefs, one thing is for sure: there's inefficiency in our nature.

Based on this observation, making a profit in the market – like achieving insight in an argument, consensus in debate, or truth in art – is a matter of resolving inefficiency. A leader takes the inefficiency of ideas (uncertainty) and creates vision. A poet operates in the inefficient gap between emotion and expression to produce meaning. However it manifests, inefficiency always requires a ‘qualitative’ component as much as ‘quantitative.’ If we say that we are living in a world that is slowly losing its sense of context, we really mean that in terms of a clear, quantitative framework of meaning. 1 + 1 is no longer 2. In the age of the long tail, 1 + 1 + an infinite number of small numbers = 3. Our familiar mathematical constructs are collapsing under their inherent paradoxes.

The truth is, a world of abundant, networked information has extremely small margins – meaning very little quantitative inefficiency – and the size of that tiny margin at any one time is directly proportional to the rate at which it disappears. Some argue that we need newer, more intricate ways of ‘seeing’ that tiny margin (chaos, power laws, et al). But a better (or at least alternative) answer may be that in order to find substantial degrees of inefficiency, we will need increasingly sophisticated qualitative methods. Not ‘thin-slicing’ or hunches or vague intuition, but sharpened qualitative processes that place our very real intuitive perception into a clear context within the overall decision-making process.

Therefore, advantage in a marketplace (whether of ideas or prices) belongs to those who can most effectively employ qualitative measures to identify inefficiency. How does an investor factor in assessments of talent, management, innovation, vision, strategy -- those admittedly critical factors so frequently assigned to “gut instincts”? Is there any doubt as to the potential inefficiency involved in the valuations of these qualities?

New Age First Responders

Although we agree with Nassim Taleb that we cannot predict the future, we still cannot ignore the strong chance that NYFD firemen might not appreciate Taleb's suggestion that they spend their time between emergency responses in some kind of hippy Zen repose:

"We are made to live like firemen, with downtime for lounging and meditating between calls, under the protection of protective uncertainty."

This single piece of comic imagery would be enough, were it not for the greater comedy that is the rest of the essay, which dedicates an entire page of artful prose to the conclusion that living on a tight schedule can be stressful ... even unnatural. If this is a work of parody, then it's extremely well done.

Stasis

Anatole Kaletsky (GaveKal Research) says:

"In other words, even if we assumed that the US deficit, instead of stabilizing or contracting sometime in the future, continued to grow forever at a rate of 6%, there would still be easily enough global wealth to finance this deficit without any problems. The cumulative assets which America would have to sell or mortgage to finance such an ever-expanding deficit would still represent no more than a modest proportion of the country's total net worth."

Stephen Roach (Morgan Stanley) says:

"... it is only a matter of time before something pops -- and the sustainable disequilibrium quickly becomes unsustainable. Given the overhang of excess dollar holdings by poor countries, the flight out of dollars could be fast and furious. That could trigger the dreaded dollar-crash scenario and a related spike in real long term US interest rates. Given the excess consumption and debt overhang in the US, a sharp pullback by the American consumer seems highly likely in such a scenario. "

Which is correct?

Does it matter?

(dueling essays courtesy of Mr. Mauldin and Investors Insight)

Warning: The Following Post May Contain Breathless Hyperbole

If there is truly such a thing as "financial literature" (not the kind you get from the investor relations department), certainly the very best of it is on display at the intensely compelling Going Private.

Recommending the site to a friend earlier today, we referred to it as "fucking brilliant." We stand by that assessment still.

Specifically, we first enjoyed the stunning prose employed for the multi-post novella under the category "Getting In." Later we found ourselves nodding in agreement to Equity Private's philosophical conclusion that "Man is basically lazy."

We could go on. But we're too wrapped up right now in "Project Sinister" to spend any more time composing this post.

Metaphor(s) for Life (?)

Is the market a metaphor for life? We don't know.

What about golf?

Maybe. Maybe not. 

Overdoing the cocaine a little

If someone says something is “like cocaine” and you agree, what does that say about you as a person?

We wouldn’t normally be worried about this, had we not encountered this very metaphor twice in the course of a single day.

First, Marc Shivers at QuantLogic turned us on to a Bloomberg Markets report which reveals: “the pleasure of orgasm, the high from cocaine, the rush of buying Google Inc. at $450 a share — the same neural network governs all three…”

Get the entire report, including petty moaning from killjoy Gary Ruskin, through Shivers here.

Secondly, the BBC calls Edge.org’s World Question Center “the crack cocaine of the thinking world…”

If you tend to place all ideas within the context of the market – like we do – you might conclude one or none of the following points about investing from the mini-essays on the 2006 question, “What is your dangerous idea?”

• There’s no such thing as objective value, and emotions may be more important than value anyway.
• Your choice of investments is pointless. In fact, choice itself is a "chimera."
• The most powerful "rules" of the market may be both perpetually ineffable as well as knowable.
• The price, the fundamentals --- that's really all there is.
• The market is a panpsychic, universally distributed quality.
• We have absolute free will in the market, but only unconsciously.

See all 12 pages of star-studded ideas for your own indirect conclusions.

Volatility

Over a bottle of decent wine we might admit our belief that life follows a perverse Pareto's Principle of energy. Long periods of paralyzed malaise fade into a forgotten past when punctuated finally by intense flashes of insight and madness. During these tantrums of discovery we allow ourselves an excess of adrenalized energy in exchange for new meaning, for dynamism and a nuanced lust for ideas.

It's not the direction of this passion that matters. Whether up or down is a matter of course, not of truth. What really drives us, then, is volatility.

This week in his often superb "Outside the Box" dispatch, John Mauldin features Ed Easterling of Crestmont Research in an essay called "The Calm Before the Storm." We see a case here for interpreting volatility alone, or perhaps coupled with only a broad measure of long-term market direction.

To that effect we'll quote the same summary as Mauldin does:

"The current state of volatility is an indicator of a potentially sharp stock market decline based upon (i) the currently low level of volatility, (ii) the tendency for upward spikes to follow extreme low volatility, (iii) the relationship of market direction to volatility trends, and (iv) the propensity for downside volatility during secular bear markets."

Once more, one may find Easterling's full essay here.

Bergson's Critique of Technical Analysis (part deux)

“The demonstrations which have been given of the relativity of our knowledge are therefore tainted with an original vice; they assume ... that all knowledge must necessarily start from rigidly defined concepts in order to grasp by their means the flowing reality.”

“But the truth is that our mind is able to follow the reverse procedure. It can be installed in the mobile reality, adopt its ceaselessly changing direction, in short, grasp it intuitively. But to do that, it must do itself violence, reverse the direction by which it ordinarily thinks, continually upsetting its categories, or rather, recasting them." 

“This reversal has never been practiced in a methodical manner … but a careful study of the history of human thought would show that to it we owe the greatest accomplishments in the sciences …”  “Modern mathematics is precisely an effort to substitute for the ready-made what is in the process of becoming, to follow the growth of magnitudes …”  “[But] if mathematics is only the science of magnitudes, if mathematical procedures only apply to quantities, it must not be forgotten that quantity is always nascent quality.”

(Empasis added. All quotes come from The Creative Mind: An Introduction to Metaphysics, by Henri Bergson.)

"Existentialist Investing"

Seth Klarman (and Scott Nathan!), of Baupost Group eminence, “looks beyond” the market for opportunities others will ignore. His commitment to deep value shows up in Aristotelian* assessments of his competition:

"I think growth investing is a stupid style."

* “… he talks and acts frankly, because of his contempt for men and things…” (Ethics, Aristotle). 

Certain Uncertainty

If we were to have central tenets or unified beliefs, we might count among our strongest held the idea that claims to precise knowledge are inherently dubious.

That is to say, we are thankful to Mr LeBaron for drawing a link from market knowledge to Herr Heisenberg’s wily uncertainty principle. In a physics experiment, the observer actually modifies reality through his observation. As a fact of nature we can never be sure of a distinct reality, only of systems of inter-relationships forever modified by their insistent being.

Do we also influence the market by "observing" it? More specifically, can our perceptions alone alter our results? Soros described his ‘reflexism’ in The Alchemy of Finance, and he meant that participants in the market actually modify the reality of value with their collective perceptions, equally so whether those perceptions are ‘efficient’ or brazenly wrong-headed. Reality (read: success, truth, objectivity) would then be the ability to see through this filter, to see the ‘untenable’ trend.

"Something is wrong, very wrong."

In "Using Complexity in Investment Management" (Oct 1996), the venerable Dean LeBaron reminds us that "Something is wrong, very wrong" about the way asset managers attempt to serve their clients.

There are two reasons, he tells us.

"The first looks back ... We assume that the real world is linear ... Not so. The real world is distinctly non- linear, like almost everything else in the social sciences. We believe in synthesis, and we study smaller and smaller bits-bytes of data expecting they will retain their characteristics when put back together into a total system. Never."

And

"And second (but there are more), market study, more than most, suffers from the Heisenberg effect-the results we get are subject to the identity of the researcher more than the phenomenon being studied."

At the end of a list of subsequent observations in this same essay is the following conclusive, compelling remark:

"Markets are inductive, deductive, and random, all at the same time. Many worlds."

Citation for Most Ambitious Nonfiction Title Likely to Disappoint with Minutiae

Computer scientist Rudy Rucker has produced a book on the "lifebox, the seashell, and the soul ... ultimate reality, the meaning of life, and how to be happy."

It's called The Lifebox, the Seashell, and the Soul: What Gnarly Computation Taught Me about Ultimate Reality, the Meaning of Life, and How to Be Happy.

A review in American Scientist describes how Rucker takes his "computation-centric philosophical theses" into the fields of "physics, psychology, economics and practical philosophy."

Publishers Weekly calls it "facile pop psychology," which we strongly prefer over the topics above.

Bergson's Critique of Technical Analysis (part one)

“There is an external reality which is given immediately to our mind.”

“This reality is mobility. There do not exist things made, but only things in the making, not states that remain fixed, but only states in process of change.”

“Our mind, which seeks solid bases of operation, has as its principal function, in the ordinary course of life, to imagine states and things … It thus obtains sensations and ideas. By that means it substitutes for the continuous the discontinuous, for mobility stability, for the tendency in process of change it substitutes fixed points which mark a direction of change and tendency.”

“The difficulties inherent in metaphysics … are due in large part to the fact that we apply to the disinterested knowledge of the real the procedures we use currently with practical utility as the aim. They are due principally to the fact that we place ourselves in the immobile to watch for the moving reality as it passes instead of putting ourselves back into the moving reality to traverse with it the immobile positions.”

(Empasis added. All quotes come from The Creative Mind: An Introduction to Metaphysics, by Henri Bergson.)

Randomness

It’s surprising that there hasn’t been more vehement public reaction to Nassim Taleb’s rather scandalous challenge to the asset management industry, recently posed along with partner-in-paradox Benoit Mandelbrot in a July 11, 2005 Fortune article entitled “How the Financial Gurus Get Risk All Wrong.” (or get it pdf here). Referring to the “pseudoscience of finance” he continues the thread first established in his 2001 Fooled By Randomness, wherein he argues that success in the market is more a matter of luck than a deliberate, unique application of knowledge or advantage.

In the Fortune article, though, he takes his argument (is it a bona fide theory yet?) one small step further (under pragmatic Mandelbrot’s influence, no doubt) by actually suggesting the need for a new system.

“To blow up an academic dogma, empirical observations do not suffice. A better theory is needed, and one exists: the fractal theory of risk, ruin, and return.”

Since July, only Joseph Nocera has prominently come forward --- rather feebly, we believe – to challenge Taleb. Nocera seems little more than befuddled by the implications of randomness (and by Taleb’s snooty intellectualism) in his Oct 2005 “The Skeptic Who Merits Skepticism” (Oct 1, 2005; NY Times).

“For me, the issue isn't so much that Mr. Taleb is wrong in his analysis. The problem is his fundamental nihilism. Taken to its logical extreme - something Mr. Taleb is happy to do - his stance strongly implies that it's pointless to even try to forecast things like stock prices or economic trends. Nor, he seems to be saying, should we even bother attempting risk management, since we always miss the big thing that winds up really mattering. And on both points, I think he's dead wrong.”

Nocera’s objections, though, seem poorly formed and even un-intellectual. The truth is that Nocera simply cannot accept a world of limited knowledge and randomness because it kills the heroes of his journalism. There is no story in a random, powerless life. So we wait for a more capable critic of randomness.

But to be fair – or just critical – perhaps the real reason that no one is paying much attention (outside of adoring philoso-philes) to Taleb’s ideas is that to date there’s no evidence that he’s making any money with it. In fact, the notion of “power laws” in markets seems a lot like Gil Blake’s “persistency” in a crunchy, markets-as-ecosystems kind of way, and his suggestion that we “diversify as broadly as you can – far more than the supposed experts tell you now” may strike readers as incredulously simple. Furthermore, as much as he may object to it constituting any kind of public legacy, Taleb will probably forever be shadowed by Malcolm Gladwell’s 2002 article (or parody?) featuring the hapless team-Taleb blindly (but happily) burning through investment capital on worthless options in the name of the elusive ‘black swan.’