Let’s be honest: the market is very ironic.
Just when you think it will never decline and the bull is charging with full force, the market goes lower; just when you are 100% pessimistic and think tomorrow is dark and gloomy, the market has its first tick up.
The public is always wrong.
I had the honor of attending the Asian Financial Forum in January 2017 and 2018. The Asian Financial Forum is very successful in its kind. It originally became popular because Hong Kong bridges between the West and the East. As a result, investors from all over the world are attracted to this event every year. The people attending this event all have something to do with finance. However, few are investors in the public equity sphere. Most attendees that one would expect to meet at the AFF are M&A lawyers, investment bankers, family office bankers, accountants, etc.
The tradition of AFF includes polling its 3000+ attendees on a series of questions related to the market on the first morning. Questions include:
- what is your outlook on the market in the next 12 months?
- What sector do you think will experience the largest development in the next 12 months?
I have come to the realization that the results from these polls, magically, somehow, give accurate indications of how the market will behave. At least it has been incredibly accurate in the two years that I have attended. I do not believe that it was sheer coincidence. I believe that this is the working of an ironic, yet intricate mechanism that will repeatedly be successful at producing usable buy-sell signals. Let me explain in details.
In January 2017, the poll yielded the result: 60% Negative, 30% Neutral, 10% Positive.
In the 12 months that followed, the Dow returned about 20% and all the markets around the world have made new all-time-highs. Needless to say, the AFF was DEAD WRONG.
In January 2018, the poll suggested the polar opposite: fewer than 10% of the AFF participants were negative while the overwhelming majority was expecting the market to perform positively.
The market has given back all its gains in 2018 and then some. This might just be the start of a much greater wave of decline. Once again, the AFF was DEAD WRONG.
If before you read the results, you thought that the AFF participants would accurately predict the market, I don’t blame you. After all, these participants are graduates of the top institutions in the world, such as Harvard, LBS, Peking University, and LSE. They are experienced in finance, banking, and economics. They are the “trust-worthy” figures when it comes to the capital market, right?
It is not wrong that they are professional and knowledgeable about finance. However, due to some inexplicable forces, when you put a large amount of these supposedly “finance professionals” in a room and ask them what they think about the market, they will get it wrong, over and over again.
Why is this the case? The reasons will seem clear to you once I explain below:
There are many professionals in the field of finance. However, simply because someone is in finance, it does not mean that this individual is knowledgeable about the stock market. You could make a comfortable living in finance without ever understanding what the stock market is or how it works. From my experience, very very few people in the world of finance are interested in the public equity market in a meaningful fashion. Most people in finance who are not dealing with the stock market on a daily basis read the newspaper and possess only surface-level knowledge about the stock market. However, their education and their knowledge in finance (that is not stock market related) do provide them with not only a systematic understanding of the stock market, but also the confidence to speak about the stock market. These people when asked about the stock market, will produce the most generic, predictable, and textbook-like answers. This explains that every year in the AFF poll, there was an overwhelming majority. This is because our education system bestows upon people an amateur level of understanding of finance. Furthermore, this understanding is universal, which makes it extremely predictable. When 100 people use the same method of analysis, 90 of them will likely reach the same conclusion.
Hedge fund managers and sophisticated traders understand this perfectly. But, they don’t tell the regular finance Joe Schmoe that they are wrong, just like you never tell a bad poker player that he is a bad poker player. At the realization that he is a bad poker player, he would either become a better one or quit playing. Neither is beneficial to you. The hedge fund managers’ lunch money does not come from someone who does not understand the stock market and hence does not invest at all. It comes from the finance Joe Schmoe who thinks he understands the stock market, and yet, always finds himself siding with the majority in any market poll, choosing the most generically derived answer.
For the reasons that I have explained, it is quite ironic, yet beautiful, that the majority of people in finance will get it wrong about the stock market, consistently. In this sense, a room full of new born babies clicking buttons would actually do better in a market poll, as their answers would mostly likely be random, instead of predictable, generic, and most importantly, wrong.
However, I feel the need to clarify that when I say finance Joe Schmoe, I do not mean someone who is not in high ranks. I simply mean someone who has not developed his/her own ability to understand the stock market and only relies on what our education system has taught him/her. I have seen many high level traders and portfolio managers who are Joe Schmoe’s, and similarly, I have seen many university students and even people who are not working in the stock market who are knowledgeable and possess abilities of contrarian thinking.
Moral of the story #1:
I have been told, “sell your stocks if the cab driver on the way to the airport tells you to buy stocks.” However, I believe, it is a much greater warning when a whole room of financial professionals tell you to buy…
Moral of the story #2:
Don’t feel bad the next time you disagree with the majority when it comes to the stock market. It only means you are more likely to be right. I am proud of the fact that I have chosen in the minority both times at AFF. In 2018, someone asked me why I thought that market would be negative in the year of 2018. It didn’t make sense to him. He also took pride in being agreed by the majority. I believe, as always, that it is much better when everything works out in your bank account than on a poll.