Thursday, April 12, 2018

Beware Like-Minded Dunces

What the Idiocracy has yet to figure out, is that the stock market is a zero sum Ponzi scheme. And fearless consensus is the trigger for collapse...

Consider these two contradictory quotes from the Oracle of Omaha:

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” -Warren Buffett

"Consistently buy an S&P 500 low-cost index fund, I think it's the thing that makes the most sense practically all of the time. "Keep buying it through thick and thin, and especially through thin" - Warren Buffett

What it comes down to is that most people are not confident in their own market opinions therefore they seek out the consensus of other dunces. The duncefest ends the moment there is full agreement.  

I've been hanging out on the S&P 500 (emini) futures message boards to gauge sentiment. These guys are not just day traders, they are day and night traders, as the futures trade 23 hours around the clock on weekdays. So far, I've learned absolutely nothing new on these boards other than the fact that human beings seek consensus. The problem is that unfortunately in securitized assets there is nothing more dangerous than consensus.

This is the contradiction that Warren Buffett doesn't want to admit about investing. On the one hand he asserts his familiar axiom that in the short-run the stock market is a (zero sum) voting machine, and in the long-run it's a fundamentals-driven weighing machine. Hence, his advice to buy an index fund and hold it through thick and thin. And yet on the other hand he says when others are greedy it's time to sell. Unfortunately those two pieces of advice - to buy and hold, and then sell when 'others' are greedy, are somewhat contradictory. In aggregate there is no such thing as the 'others'. You see, Buffett is a value investor, which means he is inherently contrarian. He's always selling to the crowd and therefore he is always against the consensus. Therefore his long-term success is dependent upon everyone else forming a cozy consensus so he can sell at the top. 
"In his annual letter to shareholders of Berkshire Hathaway Inc. Buffett expressed continued frustration over the company’s growing pile of cash, which hit $116 billion at the end of fiscal 2017 versus $84 billion a year earlier. It’s been more than two years since Berkshire’s last major acquisition"

What I'm trying to say, is that for the majority at large, investing in stocks is always a zero sum game regardless of timeframe. Because once consensus is achieved. The party is over.

And the only reason this con job works over and over again, is because EVERY dunce thinks they will get out ahead of every other dunce. 

Which is the other thing they all agree upon.