“What’s in a name? That which we call a rose
By any other name would smell as sweet.”
Romeo and Juliet
One of my goals for 2017 was to read more. While I’m nowhere close to the Patrick O’Shaughnessy-level of 100+ books a year (Patrick’s book club is a great place to find new titles to read by the way), I am trucking along with my reading list and I’m currently in the middle of reading Pre-Suasion by Robert Cialdini. So far the book has been excellent and is one of my favorite books I’ve read so far this year. While not a finance-related book, there’s one section that stood out that is trading related and helped reinforce something I’ve believed for quite a while.
That is, that many make trading and the evaluation of stocks much more difficult than it truly needs to be. Hours are spent building complex spreadsheets, forecasting cash flows, counting cars in parking lots of retailers, analyzing changes in tone of a CEO during a media interview, etc. Meanwhile, (it’s of my belief that) the market rises and falls on the simple shift of human emotion and psychology which drives supply and demand for a stock.
That’s where Mr. Cialdini comes in.
Below is a page of Pre-Suasion from a chapter in which Cialdini discusses the idea that people prefer topics and names to be as easy as possible to perform or say. For example, he cites a study that was looked at the names of lawyers and found that those with the hardest names to pronounce were less likely to advance up the ladder of their respective law firms. He also discussed the stock market and the performance of stocks with easy to pronounce names and ticker symbols.
Seriously! From 1990 through 2004, stocks that had easier to pronounce names outperformed those with unpronounceable names. Now obviously what’s considered easy can vary by the
eye mouth of the beholder. But this boils down to the notion that people are drawn to things that are simple – even when it comes to deciding where to invest the trillions of dollars that make up the U.S. financial market.
This is unlike to persuade many of those involved in our field from continuing to expand their spreadsheets with costs of goods sold and revenue projections; nor should it as there is likely value that can be derived from that practice. But it’s important to not lose sight of the idea that at the end of the day, supply and demand within the stock market is largely driven by human emotion. Well what about the HFT traders and all the algos? Sorry to disappoint you but those algorithms were originally written by humans too!
Einstein said “Make things as simple as possible, but not simpler” and he was right. I believe that’s why the concept of long-term trend following has been so effective for so many years. While being one of the simplest ideas of trading (but one of the toughest for investors to stick to), almost binary in its genesis. In fact, AQR showed an example of positive performance of trend following going back to 1880.
This isn’t a post arguing that trend following is superior over other methods or that discounting cash flow is a waste of effort. But to show the simplicity of human desire for the easiest and simplifed solutions, even when it comes to stock selection. At the end of the day basic emotion reins supreme in the search for the easiest route to decision making.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.