Investing based on measurable correlations vs on unexamined presumption

With a title like that, which of the two alternatives do you expect me to recommend? I will begin by saying that all investments are speculative and presumptive. So a key issue is knowing what my current presumptions are, then ongoingly re-examining my presumptions relative to actual reality.

When reality matches a prior presumption, I would know. When reality does not match a prior presumption, I would also know. The magic is to value current reality over my past presumptions, then occasionally revise my presumptions (or at least relax them).

I will digress now. I consider it rather unremarkable to propose to revise presumptions based on studying reality. However, I am also clear how rare that practice may be.

I could bring up instances in which I had a presumption that I quickly released due to some new experience. I could also mention instances in which I ferociously resisted revising a presumption.

To me, this topic is potentially a very intriguing “sidebar.” In some cases, people rapidly release presumptions based on new information. However, what if humans sometimes use presumptions as coping mechanisms to distract themselves from a reality?

Consider cases when people invest time in to ridiculing contrasting opinions. What is the appeal of that?

The issue could be simple. Either I value the reality about a particular topic or not. If not, then I may want to invest time in to arguing at length and even in ridiculing “absurd theories.” If I value the actual reality, then would I “waste my time” in long arguments with people whose opinions I do not value?

If I truly consider something absurd, why would I ridicule it? Maybe a majority of 3 year-olds in a certain neighborhood believe that Santa Claus sneaks down a few million chimneys in a single night. So what? Why would I ever be interested enough to ridicule the idea?

The absurdity of an idea is not what leads people to ridicule it. There is no end to the list of ideas that are absurd.

The choice to ridicule specific ideas might never be about the idea. It may also never really be about the “targets” of the ridicule.

It may be about the one practicing the ridicule. Does that one care about displaying loyalty as a priority… and then identify a way to demonstrate loyalty… and then publicize that display?

Obviously, the display of loyalty is not a demonstration of greatly valuing comprehension of a topic. People who value comprehending a reality tend to do a few things. They study it independently and thoroughly. They also SEEK out people that may have greater expertise on the topic and then specifically SEEK opinions contrary to what is familiar.

If someone is not doing that, then maybe they do not value the comprehension of a particular topic, right? They may value some other possible outcome (other than increasing their own comprehension). Their commentary on a topic may be “instrumental” as in “incidental.”

The topic itself may not interest them. But a specific narrative ABOUT the topic may greatly interest them.

So, they may invest time and emotion in to maintaining a certain narrative. The narrative is what they value. The specific topic may or may not be part of their narrative after a week or after a decade.

That is just one thing that can happen. People can display a total lack of interest in a topic itself and display their tremendous interest in a certain narrative. If in a moment they choose to integrate references to a particular topic in to their valued narrative, so be it. If other topics later provide better “fuel” for that narrative, then they may “drop the other topic like it never existed.”

So, this is a commentary about comprehending the reality of markets for the purpose of improving one’s own financial conditions. If you are emotionally investing in “defending your current investment strategy,” then this article is not for you. Go elsewhere. If you are emotionally investing in “defending a certain political narrative,” go elsewhere.

I don’t care what should or should not be done by politicians or the media or the Federal Reserve or even by other investors. I may care about what they actually do. I may even care about what they say… especially when there is a clear contrast between what they say and what they do.

But I do not care about such contrasts so that I can gloat in a self-important, condescending ritual of “heroic” narcissism. I care about such contrasts because they can be signals of opportunity and risk. Such contrasts can allow for me to unemotionally invest in correlations.

So, what if we could measure the presumptions of other investors? What if other people were already rigorously measuring the changing presumptions of investors and then publishing those measurements? In that case, I could examine correlations between future price movements and certain presumptions reported in surveys of investors.

palazzo-propaganda-fide

Below is a chart that covers a little over 1 year of time. It shows one particular correlation.

The top area of the chart is price movement (and it happens to be for stock prices, but that is trivia). The bottom areas of the chart (with the blue and red lines that cross a few times) is one particular “signal” system.

I could show a wide variety of markets, time periods, and different signal systems. This system actually is not all that great across this time period, but it still shows a favorable overall result.

This system is also simple in that it only has two signals: buy and sell. An actual trading system would generally have at least three signals: buy the market, exit the market, and sell the market short. If you don’t know some of that terminology, great. That is why I am presenting an ultra-simple example. (For reference, a more complicated system might have 5 “grades:” strong buy, weak buy, neutral, weak sell, and strong sell.)

Does it still look complicated to you? That is fine too.

Here is a short report on the “outcome:” there are 6 black arrows representing “gains.” There are 5 red arrows representing “losses.”

From a probability standpoint, this system is barely above 50:50. However, 3 of the black arrows are large. Those represent the relative size of the gain.

So, a few of the gains are several times as large as the largest loss (like 4-5 times as big). And that is why… across months and years and decades, it can be valuable to assess the presumptions of the mass of investors.

However, that system is ONLY based on the changing presumptions of investors. Previously I mentioned that in addition to monitoring the changing presumptions of investors, one can ALSO monitor the changing realities of markets.

That is when probabilities as well as profitability can soar. Naturally, to explain a more complicated approach would take longer and this is not an education or training article, right? This is just a general commentary.

I can provide a wide variety of other examples. Here are a few more.

On August 31. 2019, I published this post:

and featured this chart showing my accurate anticipations of 4 reversals in silver prices across 9 months:

On that same day (8/31/2019) I also published this comment “I am extremely confident that gold prices will begin to plunge very soon.” It started a few days later (9/4).

Here is a chart I made on 9/13/2020 showing a gain of over 20% in under 2 weeks relating to the DECLINE in silver prices (plus 2 other investments that did even better than that across the same time).

Several months later, note my comment and the future price movements:

 

The greatest value for an investor is to identify correlations that correspond to a very high probability of a very profitable future change. Here are two cases when I did that (one on 2018 and one in 2020). Note that such developments might have a few times in a single year or only a few times in a decade.

However frequent they are, they can be the most profitable trades within that year or decade. They also may be the most expensive changes to fail to anticipate.

Here is the post: https://www.facebook.com/jrfibonacci/posts/3939591866110970

Here are the 3 main images:

Here are gains of hundreds of percent in just a few months:

Here are gains of thousands of percent in only a few weeks:

And, once again, as of August 13th, 2020, a historic decline in US stock prices is again “highly probable.” Indeed, investors in several markets (including silver) are presenting a gap between their presumptions and actual reality that is “historic.”

I am not certain that the majority will again be wrong. However, the correlations are very strong toward that outcome.

Silver prices already fell 15% in 1 day this week. That is unusual. The last time silver fell more than that in one day was about 15 years ago as I recall.

However, if the market conditions recently were similar to conditions just before prior declines, then anyone who is interested in profitability would be interested in probability as well. So they would know already that recent market conditions have been “very bad relative to historical correlations.” Or, at a minimum, they would utilize the services of someone who values probability and profitability.

If the vast majority of investors and professional analysts have a well-established track record of consistently being wrong just prior to the large reversals in history, then anyone interested in maximizing profits and lowering risks would be interested in that detail, at least in passing. However, what is the bast majority of investors have consistently demonstrated that they are not interested in maximizing profit and lowering risk?

In my first published investment commentary (in early 2003), I favorably featured a specific sector of the US stock market (companies that mine precious metals). By 2011, that sector had done rather well.

But even before 2011, I was quite clear that the trendline of rising prices would eventually reverse. Indeed, most of the profitability of this trend was over by the end of 2003.

What is important to me is not where prices are now, nor where they were a few months or a few years ago. What is important, for an investor interested in profitability and probability, is what the current market conditions are (and how those conditions correspond to past correlations with future prices).

If there is a “clear set-up” for a very high probability of gains of several hundred percent within a few months, which there is now, then that might decrease my interest in lower probability opportunities that, according to historical correlations, clearly offer lower profitability. The vast majority of investors may ask, at best, “what justifications can I find to keep holding my current investments / maintaining my current strategy?” Are they like 3 year-olds who prefer to maintain a certain narrative?

Why don’t they ask “which investments today are the best for me?” Why are they “emotionally investing” their focus in one or two markets rather than “systematically investing in whatever market or markets are objectively the most exceptional?”

For those interested in displays of loyalty, certain patterns of behavior are typical. Displaying loyalty is fine of course. If I choose to practice loyalty to certain people, I can.

But how much do I value displays of loyalty to an idea or to a narrative? If an idea or narrative is valuable to me, that value is not altered by my display of loyalty to it (or the absence of such a display).

Could there be psy-ops or marketing campaigns that promote a sense of loyalty toward certain investment markets or investing strategies? Could “heroic patriotism” lead people to discount the future value of a certain currency and to fixate on the potential value of a certain market?

Let’s look at the purchasing power of silver across about 100 years. Since a high in 1917, the purchasing power of silver has remained below that peak across nearly 90% of the time.

Note that the above display is “adjusted for inflation.” Here is a chart comparing silver to gold:

Gold has performed about 400% better than silver across those 50 years. In fact, the US dollar has performed far better than silver since the peak in silver’s speculative bubble in 1980 at $49.45.

Silver prices have been down at least 30% (as in below $35) almost the entire time since that 1980 peak. There were only a few years (out of 40) in which silver was down less than 60% for the entire year (as in over $20). The vast majority of the time, silver prices have been at least 80% below the 1980 high (as in below $10).

So, is this a sign that silver is a far more stable and steady “store of value” than the US dollar? Or is the exact opposite clearly the case?

The data is what the data is. The presumptions and commentaries of different people will reveal to you their narratives and their values.

 

While it is actually quite easy to change one’s focus or one’s narratives (or one’s investments), sometimes it seems that people adopt loyalty to a narrative or mantra that “change is not easy.” Is that claim absurd? Shall we ridicule the absurdity of it?

I am giggling a bit as I type this, but that may be mainly about me, right? Maybe I have experience with a narrative of “it can be very valuable to display loyalty by defining things as absurd and then ridiculing them.” Maybe I was giggling at the absurdity of considering ridicule to be highly valuable.

Maybe… I am STILL relaxing a reactionary loyalty to such narratives. Maybe I was laughing not out of antagonism or animosity, but just out of recognition.

So, I produced quite a chuckle as I was typing the word “recognition.” That could be a sign.

 

There are groups that may value encouraging the masses of investors to take actions that benefits the groups at the expense of the masses. There may even be campaigns to encourage the masses to say “it should not be like that but instead should be this other way,” then to take actions related to such ideas.

Are such ideas absurd? They might be.

But promoting absurd presumptions in the masses could be very profitable. It could be the basis for creating the institutions of mainstream media and mainstream educational programming.

“But it should not be like that!” Says who? The vast majority of people? Based on what programming methods from which systems of programming?

Again, I chuckle as I typed those words above. Is it profitable for some groups to invest in distracting and deluding the masses? Could it be?

Could it be beneficial to adults for 3-year old children to adopt certain ideas and then act based on those ideas? Could it be that there is some functional value to promoting the idea that “Santa is always watching to track whether your behavior is good or bad?”

Imagine that such ideas could be extended to an eternal, omnipotent “conscience-ness?” Could there be any value in that to certain groups?

“The patriotic thing to do is to hoard precious metals, stocks, and flags. Then, tell everyone you can about how flags are the best long term store of value and the only intelligent investment in human history. It is clearly the heroic and loyal thing to do, and, as you know, big brother is watching.”

 

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