September 7, 2022

Objectivity

The marvel is that people keep buying it. 

Buying what?

That the stock market goes up and down for rational reasons.

The market plunged in the first half of 2022, worst start in 50 years.  Yet jobs numbers remain strong, the dollar is strong, blah blah.

Then the stock market soared. While we didn’t get back to all-time highs, the breadth and depth of the rebound rocked.  AAPL stormed from $130 to $175, back near where it was in March.

Now, maybe there’s justification.  We humans, and especially stock analysts, come up with reasons why something is worth X or Y times forward earnings.  As if it’s the answer.

You know it’s trading at 11 times 2023 earnings. That’s way undervalued.

Really?  What about the cost of everything? The value of the currency? The relative value of everything, the amount of debt, interest rates, on it goes?

Do you know turtles come out of the surf at Ho’okipa Beach in Maui to sleep?

Tim and Karen at Fleming Beach, Maui, north of Kapalua at sunset, Sep 6, 2022. Photo courtesy Tim Quast.

There are people saying it’s because the temperature of the ocean is rising. They’re driven out of the water to cool off, we’re led to believe.

You can come up with a reason and hold it with religious fervor, for anything. But that doesn’t make it so.

There are people who say the turtles have been doing it since one particularly wise one told the others, “You know you can go onto the sand and get an uninterrupted eight hours of sleep and then haul off into the ocean again?”

Animals aren’t stupid.  I offered George the Miniature Horse some hand-pulled grass down near the black lava rocks at Keanae on the road to Hana in Maui.

George looked at what I was offering and at the pile of fresh-cut better grass in front of him and said, “Naw, I’m good man, thanks.”

He didn’t say it out loud but I got it.

Animals and nature make you question your assumptions, if you’re willing.

And humans make a lot of wrong assumptions. Books have been written, Nobels awarded, about the human tendency toward “confirmation bias,” the ceaseless pursuit of things that reinforce what we believe is true.

Like the stock market plunged because people feared a recession and soared because they stopped fearing it.

I’m guilty of confirmation bias, too.  There are no doubt times when the data may say something different than I think. But unless we change the way the data are measured – which requires subjectivity – the data are what they are.

There’s a passage in the bible about how God makes the sun rise and the rain fall on the good and the evil alike.  Maybe it’s the basis for Hemingway’s title, The Sun Also Rises.

Causal relationships are hard. So often they carry confirmation bias, subjectivity.  This happened because of that.

I saw a headline yesterday after stocks continued down that the reason was energy concerns in Europe, interest rate concerns in the USA.

Says who? A reporter?

I can tell you definitively in the data that stocks in the S&P 500 fell 3% last week because Exchange Traded Funds sold off about 3% of holdings, and Short Volume – the market’s supply chain – topped 50% of all trading volume for the first time ever.

The sun rises and sets, because of math.  Stocks rise and fall because of math.  Rain falls or doesn’t fall because of math. 

Humans make subjective decisions because of emotion. 

So do animals in the sense that they see this and the see that and they make a choice.  The turtles realized they didn’t have to jack with sharks, breathing, drift, etc., if they hauled out of the water overnight.

And this is why math matters in investor-relations and investing as it does in every other aspect of life. It’s the only way to sort objectivity and subjectivity.

Neither thing is fully right. Math isn’t motivated. It just…is.  But you need it to understand motivation. 

We have the math for public companies and investors, while everybody else obsesses all day long about emotion.

Humans including those in the c-suite are emotional. We need a gauge. Ask us, and we’ll show you what actions should depend on math. The rest is up to you.

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