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Issue 4
November 25, 2018
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"An investment in knowledge pays the best interest" - Benjamin Franklin

“Time” is a limited resource that has alternative uses. As such, it should be allocated to where the expected returns are highest. “Experts” opining as to why the stock market is moving in one direction or another on a day to day basis represent one of the biggest wastes of human capital. Few endeavors have consumed more energy and money, that’s been empirically proven to be impossible to prove: consistently predicting short term moves in the stock market and explaining why those moves happened.

People tend to feel vulnerable when they can’t draw definitive conclusions as to why something happened. Why did “X” cause “Y” to do this or that? How did “X” and “Y” affect “Z”? The market and its plethora of “experts” serve as a defense mechanism for the human mind. Because there is so much information and events continuously happening, an “expert” can easily "justify" the rationale behind these events. The truth is that absent a major binary event like a terrorist attack or a viral outbreak, nobody can ever have a high or even a reasonable degree of certainty as to the short-term directional movements in the stock market. Usually, “no idea” is the most specific and accurate answer one can offer regarding many market moves.

If an unexpected military conflict breaks out and the market drops 3%, a conclusion can be convincingly drawn that a market downturn was precipitated by war. That is a material event. Typically, it is all but impossible to properly identify the catalysts for the smaller and or intra-day moves in the market. They are most likely the result of positive (market up) or negative (market down) feedback loops, which are comprised of reactions to the billions of data points that affect us daily. We aren’t consciously aware of most of these inputs.

Computer generated and/or algorithmic trading strategies tend to exacerbate these market moves. For a myriad of reasons beyond the scope of this article, traditional dealers like banks and brokers are not providing the type of market stabilizing liquidity that they could in the past. Moreover, stock exchange specialists - that once helped tame market volatility - have been largely arbitraged away by technology. The irony is that, Dodd Frank, the very legislation that was enacted in part to keep markets safer, has triggered a new problem by effectively rendering the market less liquid.

Commentators jobs primarily consist of and depend on, explaining daily market movements. As a result, they spend far too much time “explaining” things that are difficult to ascertain in limited segments of time. Financial news, like other forms of media, runs on a 24 hour repetitive cycle. When constantly reiterated, this "information" seems credible. However, although assisted by cutting edge technology, human beings have a limited ability to process over a certain amount of data. In the context of an investment process, it matters little, if at all.

At The Quintessential Centrist, we believe that a much more appropriate use of one’s time would be to identify and carefully research stocks you want to buy or sell. When short term market gyrations – that are generally impossible to forecast – provide an advantageous opportunity to buy or sell them, consider doing so.

Nobody can accurately and consistently predict, conclude and explain daily moves in stock market. Consider the following: if an “expert” really knew why the stock market moved up or down on a daily basis, why would they be so foolish and let everybody else in on their secret? It would be more advantageous to keep that knowledge to themselves and in-turn, amass a fortune.