The Common Path
“For things at a common destination there is a common path. Not always easy to see. But there.” – Cormac McCarthy, No Country For Old Men
If you listen to experts1 discussing and analyzing the current economic environment, you’ll notice the coining, calling and prophisizing of a “historical turning point.” Meaning, we’re at a point, right now, where everything that’s played out in the past, in the markets and otherwise, simply has no effect on the future outcome of the economy.
In academia, derived from mostly mathematics and physics, this is known as a “random walk.” Applied to financial markets, it’s typically referred to as the “random walk hypothesis.” Basically, the hypothesis says that each individual move of a stock is random in the short-term, and that the future ticks upward and downward are unrelated to how the stock performed previously.
Although I tend to be skeptical of a large proportion of modern financial theory2, especially those that have origins in purely the research setting (without real application), the strategic takeaway from the hypothesis as applied to our current economic situation is that investor rationality is questionable, especially in times of crisis. Just because they are running away (or selling), doesn’t mean they are running away with merit.
The contradiction of the hypothesis, specifically when it’s paired up against the supposed investor rationality, is exactly what makes it an appealing guidance for decision making, both in business and life, in times of turmoil. If you take a look at all of the financial crises the world has experienced in the past 100 years, there is a common theme with most of the successful investors: they were buying aggressively.
Why were they buying if everyone else was selling? What did they know, that no one else did?
It’s sort of like the “be greedy when others are fearful” quote from Buffett. Just because everyone is running away in one direction, it doesn’t mean they are doing so with qualified merit, or more importantly, with rationality. But, it does give you a reason to start running the opposite way before everyone else turns around or has a chance to catch up. That’s why I’m generally optimistic in this, or any, period of sustained fright. This may be a golden opportunity, especially for those my age, to establish themselves on the ground floor of anything, with confidence that things will improve, or at least evolve.
Generally, if your conviction is loose enough to drag you down when everyone else is falling, then the decision was a mistake in the first place. However, the seldom “golden” decisions are often when everyone else is looking the other way. Because, profitable opportunities have a common destination and common path, even if the historical patterns are irrelevant. Remember they are there, but not always easy to see.
- Real experts. Those have been in the game for 20 – 30 + years. Not the idiots on CNBC [↩]
- Ironically, because the random walk is generally thought of as being skeptical [↩]
