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“We do not remember days, we remember moments.” – Cesare Pavese
I’m a huge fan of LinkedIn. I’ve used it for years to both reach out to journalists/producers, and also to network with others in the investment management business. Never did I look at it as an investment, purely because stock-picking has been proven time and time again as being sub-optimal to the bigger decision of asset allocation weighting.
On Friday, LinkedIn fell over 40%. In just 3 days, the stock gave back all gains made over the past 3 years. Day after day, news story after news story, analysis after analysis with hindsight all seems worthless now. Tremendous time and effort has been spent on justifying the past and extrapolating that into the future, and all for what?
The last three days for LinkedIn defined the last 3 years. That is to say that, as with life, everything in markets is defined by extremes. This is not just about rehashing arguments laid out by Nassim Taleb in his excellent book “the Black Swan” but is rather about reminding investors and traders that the day to day of market movement is meaningless. Extremes define performance over very long cycles, just as extremes define life. Test the data and you will appreciate the fact that markets do not follow a normal distribution. Kurtosis and fat tails in performance are very real and exist in every asset class, every strategy, and every cycle. Yet, so much time is spent defining the future based on the middle, rather than the potential for extreme.
The problem with extremes is that they don’t happen that frequently, despite how much they define investment performance and life. Extremes need time to play out – they don’t happen with any definable regularity. Rather, only after a very long period of time are extremes more likely to happen than not. The role of every trader and investor (and arguably every human being) is to expose one’s self to positive extremes and minimize the potential for negative ones. The dilemma of course is that in order to minimize negative extremes, one needs to quite literally shut off the TV, ignore the social media posts, and purposely become deaf to the noise around us which only reports what is happening, rather than what will with certainty. One needs to be paranoid of the conventional wisdom being wrong, and prevent confirmation bias from impacting our risk-seeking behavior. It is for this reason we prefer quantitative research which incorporates potential extremes as shown in our award winning papers (click here to read).
The irony of this? People often forget how extremes define the world until the extreme happens. Then for some period of time after, the memory of the recent extreme makes people think extremes are going to occur with regularity when in fact they almost never do. Go back to the years following 2008 and how everyone seemingly was concerned that another crash was imminent. After a cataclysmic decline, only now are people seemingly worried about LinkedIn’s future. Just one week ago, it was rarely discussed or thought about by the mainstream investor. But to think that such extreme declines can’t happen in other story stocks, other investments, other strategies, or the broad market in general completely ignores history.
Extremes happen, and define everything in life. To take control of your own destiny, ask yourself if the way you view the world is based on the small sample, or the long-term where black swans are lurking.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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