Expensive Storytellers: The Narrator

I spent the last few posts laying out foundational knowledge for building and managing your investment portfolio. Understanding asset pricing helps you to identify and take compensated risks. You buy and sell in the markets that price the probable outcomes. Markets are not perfect, but they are efficient and competitive enough that you will likely regret trying to beat them. Instead, you can diversify to win by not losing. I hope that this education will help you to get paid. Not played by others or yourself.

Even with that deep knowledge, it is hard to avoid what is going on around you on a daily basis. You will be constantly challenged. So, you also need a simple mantra to keep you out of trouble. It must be simple because the dangers trigger our lizard brain. I use “It is priced in”. Chanting that can get me off of the ledge. Then, I can read The Loonie Doctor or listen to The Money Scope Ep 6, to remind myself why. From a safer more rational place. Hone your skill at saying “It is priced in”.

Let’s start practicing that response by conversing with a few common tellers of tall tales that you’ll encounter. Everyone loves a good story. Which is what makes The Story Tellers so appealing. And dangerous. So, I will fight fire with fire and tell some stories today too. The most common storyteller that we encounter daily is The Narrator.

The Narrator

Narrator [in an authoritative voice]: Artificial intelligence is the way of the future. It will revolutionize how everything works. For example, The Loonie Doctor can make his meme’s way faster using Photoshop AI. Look at the recent rise of NVIDIA. Many other players are going to be part of this revolution. You should overweight companies in this sector. They are the future.

You: It is priced in. Now, back to watching The Terminator.

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Who is The Narrator?

The narrator gets paid to tell you stories and explain things. Often in a rich voice. Like a Disney nature documentary. However, their natural habitats are actually business news media outlets, YouTube, and dark corners of the internet. Very similar to me. Except I lack the voice acting and am trying to change the narrative. They may also be old-school narrators and sell books.

Narrators get paid to make compelling content that attracts eyeballs or sells copies. Your financial outcome doesn’t register on that metric.

A good narrator is not only great at telling stories but there are facts and logical arguments to back up their stories. Humans love stories and most of us also relish learning about new things. It makes us feel smart. Unfortunately, that does not make a good narrative into tradeable information. If you have read it or seen it, the narrative and the probability of it coming to fruition is already priced in. Even if you haven’t, someone else has likely thought of it and that is incorporated into the price.

The Fable of Kathy’s ARKK

When the most recent global pandemic hit, it disrupted many ways of doing things. Kathy Woods has a fund called ARKK that is focused on these disruptive innovative technologies. As the pandemic unfolded, the narrative was plastered all over the place and ARKK shot up in price. Investors following the emerging trend and narrative piled into ARKK. How did they fare?

Humans love narratives and are also subject to recency bias. The ARKK fund was opened in 2014 and tracked slightly above the US mid-cap market indices until 2020. In 2020, The Narrators were out in full force and ARKK rocketed. Hearing those stories and seeing the recent performance, investors piled in. They did not benefit from the previous rise in ARKK. Instead, they rode it down.

Commonly investors bail when a fund drops. However, the compelling narrative has kept more than usual propping up the ARKK. Or perhaps it was the anchor – the anchoring bias to peg the price to what you paid and hold on with the plan to sell when you get back there. Even if it never happens or has a lower expected return than redeploying the cash elsewhere.

The ARKK fund had returned ~9.6%/yr since inception. Mostly before the narrative was common. In contrast, the average investor in ARKK has a money-weighted loss of over 35%/yr! That is not a typo. This is an extreme example of the dangers of making a sector bet based on some narrative. You are taking on progressively more uncompensated specific risks as you do.

The ARKK saga has been a very expensive story. Many narrators told the story. However, Kathy Woods, the fund manager was also telling the story. The difference is that she got paid for selling the product, and not just the story. That makes her an incarnation of The Sales Advisor about whom I’ll tell stories next week. In the Fable of Kathy’s ARKK, ~$300 million in fees were made while $10 billion of investor’s money was washed away in the flood.

The Prophesies of Dr. Doom

The Narrators told an expensive optimistic story about ARKK. However, the most powerful incarnation of The Narrator is The Doomsday Soothsayer. You don’t have to look hard to find one of these. They are on every corner spouting about the next impending financial calamity. In modern times, they are no longer out on the street. Instead, they are showcased by those who get paid for clicks and eyeballs. There is a good reason for that.

Negative headlines have a 60% higher click-through rate. Not only is that psychologically harmful. Those stories can be devastating to investors. The most expensive book that I ever bought was Aftershock: Protect Yourself & Profit From The Next Global Financial Meltdown. The first author was Dr. David Wiedemer, PhD. I now refer to him as Dr. Doom and his book cost me a few thousand dollars.

His book explained all of the bad stuff that happened to result in the 2008 stock market crash. It also explained all of the other bubbles that would soon pop. Culminating in the downfall of the US Dollar due to debt and deficits. The aftershocks of the recent financial earthquake natural disaster.

At that time, they went on to recommend gold as the hedge against the impending Doomsday. The chart of SPX:GOLD is what subsequently happened after the book was published on November 9, 2009. The S&P 500 almost tripled the relative return of gold. I didn’t buy gold, but I did miss a few months of the stock market rise due to my fear. An expensive opportunity cost.

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They Sound Smart & Are Sometimes Right

Dr. Doom’s thesis all sounded really smart. There were debts and deficits. The money supply was expanding. Lots of concerning details. And they had called the 2008 crash too!

That is part of the power of The Doomsday Soothsayer. There are constant crises that hit markets meaning that if you constantly call for calamity, you will be right. Like a broken clock that is perfectly accurate twice daily. I gave the example from a book that I bought, but CNBC and BNN have a stable full of Doomsday Soothsayers that they trot out regularly. A lot of them are really smart PhD’s. Unfortunately, a PhD doesn’t bestow prescient superpowers.

Here is another Dr. Doomsday Soothsayer appearing May 24, 2023 on CNBC. He goes on about the model from his doctorate and the impending recession. Here is the stock market chart since then.

They aren’t all PhD’s. For example, Harry Dent Jr is also a frequent flyer on the media circuit and a bestselling author. When I googled him, I found articles and appearances where he just predicted the big crash coming in 2024. There are also similar predictions dating back to the 1990s at least.

He is sometimes right. Because markets do go down. In fact, they do so frequently. It is an expected part of investing. It is not news or some genius prediction. See the frequency and duration of drawdowns, corrections, and bear markets below. Also, note the overall direction of the chart from the bottom left to the upper right.

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Narratives Change. Humans Not So Much.

Part of the danger of The Doomsday Soothsayer is that they have an outsized influence on investor perception of risk. Relation of investor sentiment to media articles in the preceding days showed that articles about market crashes increased pessimism while positive articles had no effect. We are wired more strongly to run away from danger than to run towards reward.

That human nature is particularly harmful when it comes to investing. Just missing the best 10 market days while you cower in fear from listening to the Soothsayer can cut your return in half. The danger of these prophecies is magnified by the fact that those best days tend to cluster around the worst days. Just when you feel smart and give The Soothsayer credence is around the time that the next rally rips your face off.

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The Knowable is Still Priced In.

During those periods of extreme volatility, the market is re-pricing due to new and unexpected information. Whatever the different narrators are saying to explain it is already known. It is priced in.

The only thing that is not priced in is the unknowable future. Despite their claims, The Soothsayers don’t know that future either. Instead of relying on what one storyteller knows, the market takes all of the stories out there. Both those on TV and those discussed in hushed tones around an investment firm’s strategy table.

The market as a whole prices the probability of all of those predictions coming to pass into the current price. It is a weighted average, and the institutions with the most investment dollars also probably have more information and resources at their fingertips than you do. Further, the most successful ones are not giving away their advantage for a media appearance.

Dealing With The Narrators

The storytellers will never be silenced. We humans simply love the tales that they tell too much. It is big business and the stories haven’t ended. I am now hearing narratives about using REITs with interest rates possibly peaking. Or about companies that may benefit from the AI revolution. Bitcoin to survive financial system or government implosion – while the internet is left intact. Again, the probable risks (including more than just interest rates) and expected returns are already priced in. Don’t buy narratives. There are always new ones.

The reason why we can expect a return on risky volatile investments, like equity markets, is because they gyrate in the short term. Ignore that, and the narratives used to explain why it is happening. Remember the long-term. Yes, there will always be new unexpected stories. But, you can diversify to mitigate the uncompensated specific risks. You cannot predict the future, good or bad, with enough precision and reliability to trade off of. Neither can The Story Tellers.

I am a storyteller too and have tried to use that power in this post to help you become a better investor. Hopefully, you will remember the Fable of Kathy’s ARKK when someone tells you an optimistic tale about the next hot investment. Similarly, galvanize yourself against the constant negativity of The Doomsday Soothsayers. The best way to do that is to avoid reading about financial “news”. If you do, remember that it is just entertainment and not tradeable information. Whatever you see or hear: “It is priced in.” Chant that as required to drown out the noise.