Your Market View Is Not As Important As You Think

8 min readOct 21, 2018

What am I even talking about? Isn’t investing all about being right on where the market is going? And those with the right views make money, while those with the wrong views pay the price? Note that I am not referring to “no-brainer” views like the stock market will be up from where it is today in a hundred years time. But, rather, more specific “predictions” that address questions such as: (1) Which market? (2) Where is it headed? (3) What level will it reach? (4) When will it reach there? (5) Why do think this will happen?

For those who are into investing for the long haul, the chance of getting your views right may actually be much closer to 50–50 than you think. With the exception of a few select individuals or groups that holds the power to make decisions that can materially influence the market at times, for the rest of us that are considered mere mortals, our individual views hardly matters.

Why Is The Market So Obsessed With Views?

People are always keen to hear a good story. In our line of business, you can never avoid questions like “Where do you think the market is headed?”, “What are your thoughts on the US-China trade war? How will it impact the market?”, “How much do you think the emerging market will fall?”, “Which level do you think is the bottom and when will do think the market will bottom out?”, “Has S&P 500 reached the top and is a bear market coming our way?”

Getting your views right can bring you a lot of fame and publicity, especially when it is a contrarian call against the crowd on big events such as the crash of the dot com or collapse of the subprime. You will literally be worshipped for having the foresight and guts to go against the mass and be right.

The industry and media tends to glorify calls that turn out to be right, but are virtually silent when it comes to the many more that are wrong. This is in line with human nature and marketing principles. People like to talk about and be associated with success and positivity. Such news always garner more audience. So, every now and then, you will find people shot into the limelight after hitting the jackpot with a major call. But thereafter, they fail to deliver, and gradually fade away while the world turns their attention on the next “prophet”.

If the entire world seems to be craving for predictions all the time, then our market views must be what matter most, or is it not? No, not yours, not others and not mine as well.

1. No one can predict the future

This is probably the most commonsensical and popular argument. Everyone can have their views, but it is important to recognize that they are ultimately just views. And like everything else in life, no one holds a crystal ball that allows them to peer into the future and watch how things unfold. If someone really has one, he or she would have already displaced Amazon CEO Jeff Bezos as the world’s richest person today. And I am very sure he or she will not be sharing that crystal ball with anyone else.

“I always avoid prophesying beforehand because it is much better to prophesy after the event has already taken place.” –Winston Churchill

2. We are just a drop in the ocean

The market is way more enormous than what many thought. The entire market cap of global stocks was estimated by PIMCO to be about USD 69 trillion as at Dec 2017. Goldman Sachs, on the other hand, claimed it is near to USD 100 trillion. But either way, both are astronomical numbers. The size of the global bond market, according to PIMCO, also stands at around USD 100 trillion. And we have not yet talked about commodities or the currency markets. The latter is the largest market among all asset classes. Just its value of daily trading alone chalks up an insane average of USD 5 trillion based on a 2016 survey results. In case you have no idea what a trillion is, it is a million million, or 1 followed by 12 zeroes.

And how about the number of market participants (both professional and retail) in the world? There is no official count, but I would not be surprised if it extends into the tens or hundreds of millions. Each of them can come with a different approach and view. They can vary in their strategies: value, growth, macro, statistical arbitrage, relative value, events, technical etc. They can also be looking at different time-frames, from ultra-high frequency traders who looks at a fraction of a second to long term investors whose horizon stretch into the years. Each individual is also unique in their background, knowledge, temperament, objectives and are fully capable of taking different decisions from others.

So every single day, you have potentially hundreds of millions of unique individuals interacting, analyzing new information and making buy-sell decisions, resulting in trillions of dollars’ worth of securities crossing hands. This is what the market really is — a collective output of decisions and actions taken by all its market participants. For sure, your view and action is taken into account, but only as a single drop in the ocean. And whether this drop thrives will depend on where the current takes it.

“The ocean is not going turn red just because your drop is red”

3. You can be right but still lose money

My earlier points basically drives home 2 things — (1) No one can predict market outcomes, (2) what you think and do as an individual has little impact to the market. At this point, you might be thinking, what if I get my views right more than 50% of the time? Then I will definitely be profitable right? Not necessarily. Because you can be right and still lose money.

It is myopic to think that just having the right view alone is all there is to investing. To wring any value out of your view even if it is right, will depend on your plan and action. Let’s assume a simple case of you having a bullish view about the S&P 500. And for whatever reasons you might have, you think it will rally 10% over the next 6 months. But these are just scratching the surface. There are many more questions that you have to address:

What is the fundamental premise of your view?
How do you determine if the premise still holds and what happens if it falls apart?
Which instruments will you use to execute your view?
Buy S&P 500 Futures / SPDR S&P 500 ETF / call options? Short put options for premiums? Replicate the index by buying your own basket of S&P 500 stocks?
What is your price target?
What if we never reach this price?
When do you think your view will pan out?
And if your view is not materializing after the time runs out, what will you do?
What is your entry strategy?
Is there a specific entry price or a condition you are looking at to trigger the trade?
How are you going to size in your trades? All in one shot? Or are you going spread it out over multiple trades?
What if the entry prices or condition never materialize?
What is your exit strategy?
Considerations are very much similar to the entry strategy.
How are you going to manage the risks during the trade? Just hold? Averaging? Short term tactical trading? Stops? Hedge?

These questions are by no means exhaustive. But it shows that there are a lot more considerations than just a view. Any poor execution or risk management on your part can lead to low profits or a loss even when your take on the market is right. On the contrary, an investor who has a well-thought out plan and managed his risks well, can mitigate losses or turn up a small profit even when his/her view is wrong. And if you intend to stay in this game over the long term, you will be making many more trades over your entire life. This makes planning and execution ever more critical. If you end up making little on “views” that are right, and losing big on “views” that are wrong, you will see your account depleting fast.

“Ideas don’t make you rich. The correct execution of ideas does.” — Felix Dennis

4. You can make money without a view

There are funds or people that make money without taking market views. For example, market movements hardly have any bearings on long term stock investors that concentrate solely on a company’s fundamentals. Risk parity funds that dynamically allocate its capital among different asset classes according to volatility measures also have no views to speak of. The same goes for trend followers. They basically ride on the momentum of a market and do not hold any sophisticated views either.

I co-run a systematic multi-strategy fund where investment decisions are left to computer models. Each model focus on a specific type of strategy. They run independently and are fully capable of producing conflicting trades. For example, a longer term trend strategy may go long on S&P 500, while a shorter term mean reversion strategy is short. The net effect is a reduced long, flat or even net short position. You can imagine each strategy as an investor who is unique, and doing things independently from the rest. This approach reduces the overall volatility of the fund, and mitigates tail risks that can arise from any single strategy. And as long as they are all profitable in the long run, the fund will make money. So from my stand, at the portfolio level, I have no views to talk about as well.

Final Thoughts

This post sums up a key principle I hold on investing. Whether you invest with or without a view is not that important. What is more crucial is your strategy, plan and execution — how the overall strategy works to make money, how risks are managed, what do you do when you are right, and what do you do when you are wrong. These determine if you win over the long run.

You may or may not agree with it. Diversity is what makes the market what it is and no one has the holy grail approach to investing. Everyone learns and adapt according to their own experience.

So do you want to make a guess where S&P 500 will end up at the end of the year?

Originally published at investmentcache.com on October 21, 2018.