David Fuller's view -
In "Adventures in the Screen Trade," screenwriter William Goldman wrote that "nobody knows anything." It is a quote that is enjoying a second life these days.
The book’s first mention of that line, which is repeated throughout, referred to the many studios that passed on films that would go on to be blockbusters. Every studio in Hollywood but one (Paramount) turned down "Raiders of the Lost Ark." It became one of the highest-grossing films of all time, and was nominated for nine Academy Awards. "Star Wars" was passed on by the largest Hollywood studio at the time, Universal. It grossed $1 billion, and spawned a franchise with five films that are in the all-time top 100 in gross box office sales. Eventually, Walt Disney Co. purchased the Star Wars production company, Lucasfilm, for more than $4 billion.
Goldman was referring to the fact that, despite all of their research, experience, focus groups and smarts, no one in Hollywood has any idea how well a film will do before its release.
Whenever we try to figure out complex future outcomes -- like what movie might do well -- we enter a minefield. Start with a screenplay, which may or may not translate well from the page into a visual medium. How compelling is the director’s vision? How likeable are the character portrayals? And perhaps least known, what are the public’s tastes going to be in three to five years, when the film ultimately is released to theaters?
There is an enormous degree of serendipity and good fortune that goes into a blockbuster movie. The same seems to be true of just about everything in life, from marriage to careers to stock portfolios.
How easy is it to mistake good luck and randomness for skill? How readily do we convince ourselves we understand what is going on, that we are in control of our destinies, when nothing could be further form the truth?
Consider this election cycle’s primary contests. Bernie Sanders, a 74-year old Jewish Socialist was widely expected to drop out of the Democratic race almost immediately. Despite the delegate math, he’s still in the race. And almost all of the pundits had proclaimed -- quite loudly, too -- that Trump had absolutely no shot at winning the Republican nomination. You were admonished to beware their calls of “Peak Trump” last year, because (say it with me, people) nobody knows nuthin’.
I know nothing, but at least I am aware of my own ignorance, and am willing to admit this publicly. Most of the rest of the commentary class has yet to learn this all-important lesson.
I think Barry Ritholtz intentionally overstates his case for emphasis but there are some very important points that every investor and trader can take from this theme.
Those of us who are experienced investors know that we need the luck of the big trend, to make significant profits at an acceptable risk. Price charts will help because we can monitor the momentum and consistency of a trend, even though we have no idea how far it will run.
Looking for temporarily out of favour and relatively undervalued sectors and shares is a good starting point, even though there is a subjective aspect to this analysis. However, we do not want to be solely focussed on value because the best moves become manias. Identifying relative strength will tell you that the crowd is participating. Charts will help you to see when that enthusiasm is overextended and beginning to wane.
Common sense should tell you that when everyone is bullish, they are telling you more about what they have already bought, rather than what the market will do. Conversely, exceptionally bearish sentiment tells us that the market is oversold and close to a reversal.
Do not mistake a bull market for brains, if you wish to remain objective and keep your feet on the ground.
Warren Buffett has reminded us once again that high management charges are too often better for the manager than the customer – shades of ‘Where are the Customers’ Yachts?’.
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