— On why some people move markets —

Charlie Munger reportedly said: “It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.”

This assessment notwithstanding a lot of garbage gets tossed around as market-relevant talk; some of it sticks to the proverbial wall, if only briefly. My friend Roberto Frigo recently wrote this piece inspired by a late 1970’s TV commercial for the then-independent broker-dealer E.F. Hutton (“When E.F. Hutton talks, people listen!”). His concern was the remarkable price-moving power some individuals and institutions have.

The above observations are connected: it is precisely because people don’t like to wait and make an effort to invest that many well known and financially semi-literate persons can impact prices.

Munger’s simplicity and forthrightness is deceptively boring: to make money in investing try to be patient, wait for the right opportunity and don’t move in haste. It sounds like watching grass grow. He is also implying that true investors fully understand the interconnection of time, return and risk: patience allows us to let time pass and absorb the volatility we need to take on in order to achieve greater returns.

A number of things can happen when we are not patient. For one, we’re bound to seek quick kills. As a client used to tell me when I queried his frequent trading, “I’m doing what I’m supposed to do: making the capital work!” Trading and “moving money” is associated with investing usefulness; standing still is not. Another thing that happens is that we are bound to listen to opinions and commentaries because we need ideas and want to make money out of them. But most ideas aren’t worth the electronic space they occupy, tend to be too short-term oriented and need to be known before anyone else to be useful (which in most cases implies illegal behavior). When they are useful, the ideas will likely require patience and discipline to implement, so we are back to square one.

Market commentators and institutions are aware of these dynamics. Their business models by definition almost require that they provide fuel for the fire: if they don’t do it someone else will and get the business. This is a self-feeding mechanism in which “research” ideas generate volatility primarily because we can’t stand still. No wonder randomness is so pervasive over brief periods of time.

One branch of the financial communication apparatus that could stand for the just balance is the press. Unfortunately, news appears to be more exciting and sells better when it deals with turbulence or extreme views. This tends to amplify instead of dampen the resonance of the views of the “experts”. Daily market comments are another manifestation of this tendency, even though we really don’t know what caused them. When you read something like “Investor took profits” the day after a market decline, ask yourself “When do they ever take any losses?”


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