Ritholtz: Don’t Be a Slave to the Story

Everyone loves a good story. But in the investing world, getting too caught up in a good story can lead to serious trouble, Barry Ritholtz notes.

On The Big Picture blog (h/t Abnormal Returns), Ritholtz examines why, with stocks at all-time highs and the worst recession in 80 years behind us, so many people in the investment world seem so upset. Part of it is that many are upset that they’ve missed a 140%+ rally. “But there is a deeper, more fundamental reason for the unfocused rage and misdirected anger,” he adds. “The failure of the narratives that have been driving much of economics, investing and politics. As John Kenneth Galbraith famously said, ‘Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.’ Rather than accepting certain unpleasant realities, many participants have contorted themselves into a painful waiting game. They are ‘busy on the proof.’”

Ritholtz says this is an example of the “cognitive dissonance” that can be so dangerous to investors. “As many of the narratives have failed, rather than admit the error and face the music, the rationales have morphed into a waiting game,” he says. “Dow 5000 will happen eventually, Collapse of the Dollar — and all fiat currencies — is coming; Hyper-inflation (any day now), Gold will hit $10,000 (sold to you), Great Recession 2, Oil $200, etc.  The reference is not to any one of these errors specifically, but rather, to the entire narrative driven belief systems in general. They are by design money losing stories, either torturing the data or ignoring it entirely.”

Cognitive dissonance plays out in a variety of ways that damage your portfolio, he says: “It’s coming up short in your forecasts, and making all the usual excuses. It’s rationalizing why you are right and the markets are all wrong. It’s doubling down on the bad trades, despite the obviously failure of the original thesis. It’s sticking to your story no matter what the facts are.” Good investors, he says, are adaptable, and don’t let the story drive their decisions.