Tuesday, March 13, 2012
Here's a riddle:
How is it that a Fund Manager who lost 20 percent last year is able to convince himself that a fund manager who gained 200 percent is really incompetent?
Well, according to momentum trader Dennis Gartman, holding onto a fundamental conviction through a 50 percent slide only to end up with a 200 percent gain is the height of incompetence:
"In retrospect he was right in having lived through those sorts of downward
price movements, but as a trader/investor this was borderline suicide. To have lived through a movement of such consequence without taking some sort of defensive action is nonsense and we think it terrible, terrible trading technique."
Apparently Gartman is proud of the fact that while ending the year with a 20 percent loss he was able to exhibit all the trappings of smart money management.
How is this possible?
This is the classic example of what Dr Daniel Kahneman labels: fast thinking. It is thinking done in shorthand, relying on "what is normal," "the mental shotgun," "illusions of truth," "mental anchors," "heuristics," and "Sheer laziness."
According to Dr. Kahnemann this fast thinking is typical of most of what passes for thought right now, for the simple reason that it is far easier, for more reassuring than the painful process of slow or deliberative thought that often exposes the myths and fictional narratives that we build up around our world and ourselves.
In trading it is thinking that relies on technical models that dictate when and what to buy and sell. After all, these models are the time tested results of normative delusion. They reflect that which everyone agrees to be can't-miss-economic-truths that result in disasters "nobody could have predicted" like those of Long Term Capital Management, the S and L crisis, the banking collapse of 2008, and the second banking collapse that is right around the corner.
Relying on technique, catch phrases and meaningless correlations rather than analytic thought is a tragic symptom of the fast thinking that dominates American discourse: political, economic and social.
Fast thinking is why Ben Bernanke creates mountains of new debt to solve a debt problem. It is why Newt Gingrich assumes that cutting taxes in a deficit economy will produce the same results as cutting taxes in a surplus economy. It is why armies of liberals and conservatives think Obama's economic policy is different from that of George Bush. Think that Ronald Reagan's economic policy was more conservative than Jimmy Carter's. It is why Larry Kudlow believes America can have a strong dollar by adopting a "Strong Dollar Policy." It is also why most Christians believe that the New Testament is an historical document. Why most Americans believe we have a Free Market.
And fast thinking is why 95 percent of Americans believe that the US dollar is the world's most stable and reliable currency. It is why they think that gold is just another commodity to be traded like wheat or coffee. And why they will be shocked at the world's most predictable crisis (that nobody could have foreseen) which is unfolding right before their very eyes.
And fast thinking will be the tragic cause of why the vast majority of Americans will be convinced that keeping a well diversified portfolio dominated in US dollars was the wisest thing to do even though it left them stone cold broke.