Saturday, November 13, 2010
Kiss Das Gupta Goodbye
[Kiss Your Assets Goodbye When Certainty Reigns: Barry Ritholtz Bloomberg Opinion - Barry Ritholtz - Nov 10, 2010
“The markets hate uncertainty.” … The problem with these supposed truisms is they are no more accurate than the flip of a coin. A closer look at this uncertainty meme reveals it to be a false-ism -- one of those emotionally appealing phrases that ping around trading desks… To recognize how meaningless these statements are, consider the opposite:
Could markets function without uncertainty? It takes only a little thought to realize that markets actually thrive on doubt, imperfect information and a lack of consensus. Uncertainty drives the market’s price-discovery mechanism. Investing requires there to be differences of opinion. When there is broad agreement as to an asset’s fair value, trading volume falls. Without any uncertainty, who would take the opposite side of your trade?
History teaches that whenever the opposite occurs -- when certainty overwhelms uncertainty -- the herd tends to be wrong. In rare instances, when there is a near-total lack of uncertainty in the market, the outcome is usually a spectacular disaster…
When we discuss uncertainty, what we are really discussing is risk. All unknown outcomes contain risk, and therein lies the possibility of loss. Risk is inherent in the concept of uncertainty. However, anyone looking for performance must embrace risk, for without it, there can be no reward.
Uncertainty is what makes alpha, or market-beating gains, possible. Smart traders know that uncertainty is where the money is. No uncertainty, no risk; no risk, no possibility of outperformance…
The future, by definition, is unknowable. Investing involves making our best guesses about the value of an asset at some point after this moment in time. There will always be an element of uncertainty involved. We can discount various outcomes, engage in probabilistic analysis, but no one knows for certain what tomorrow will bring. Those who claim to know fail to understand the most basic workings of markets…
Pundits may hate uncertainty -- it tends to makes them look foolish -- but markets harbor no such bias. In fact, markets thrive on uncertainty. It is their reason for being. (Barry Ritholtz, author of the book “Bailout Nation: How Greed and
Easy Money Corrupted Wall Street and Shook the World Economy,” is the chief executive officer of Fusion IQ, and blogs at The Big Picture. The opinions expressed are his own.) firstname.lastname@example.org]
Spotting leaders is much like stock picking. Group Discussions are an age old technique to bring out leadership quality to the fore. Uncertainty, not only drives price discovery, but also facilitates leader discovery. High time to dump Das Gupta and “embrace risk.” [TNM]