Strangers in a strange land

Maybe it’s a question of language. To communicate and transact, it’s a necessary exchange, a bridge even if between opposing viewpoints. And maybe the language of finance, rooted in earnings and cash and growth prospects and etc. and so on, is an arbitrary construct like any other.

Why not, for instance, evaluate an investment based on the number of squirrels climbing around the second nearest tree to where you are right now? No matter where you are, there is a second nearest tree, and if there are no squirrels, that’s only a factor in the calculation that the market builds a consensus around. If that’s the language that the market understands, is that not the definitive language and the basis of the valuation that matters? Who are we to judge if we don’t speak the language?

Here’s an example of a headline that is rooted in a different tongue, a culture where it’s been established since forever that common stockholders get wiped out in a bankruptcy restructuring, because the value of the asset and the cash flow on which this is based doesn’t support the asset’s financial obligations, and on the basis of this ingrained notion the words and phrases spill, the values are set, and the markets flow…


… until the language as though in a reset or a passage through a wormhole changes, and suddenly the headline observation makes no sense. What “massive risks”? Have you not seen the second nearest tree? It’s overwhelmed with squirrels, look, it’s in the data.

This question of language, I think, underlies the general distinction between fundamental and technical analysis. The fundamental practitioners tend to be language purists, if you will, with vocabulary, grammar and diction like Victorians at tea time. The technical analysts, on the other hand, with their charts and patterns and chaos drawn out like a map, are akin to machine learners that get trained to understand the sentences and unstructured data sets, hopefully.

When the two groups agree, that is not even fortunate, despite the harmony that might ensue, because there is limited opportunity then. There is no gap.

The opportunity arises when the language changes… especially for those who grok its meanings before others do.

This very rarely lasts, we think (we hope), until we finally relent and readapt. And right then, at that precise moment, the language again changes.