Markets are non-stationary, and the big picture constantly changes. Understanding the big picture is a daunting, if not impossible, task, yet this futile exercise is appealing to many traders and investors.
Some analysts, traders, and investors often argue that understanding the big picture in the markets is more important for success, even more so than quantitative analysis.
I can understand the desire of some market participants to understand the big picture. I could contend that cognitive biases of epistemic curiosity and need for closure are to blame for this. The former bias is due to a drive to accumulate definitive knowledge and understand the markets in depth. The latter bias is due to looking for solutions that remove risk and uncertainty.
One issue with the aforementioned biases is their potential to trigger a cascade of other biases, with confirmation being the most prevalent. The struggle to understand the big picture could also lead to selective perception and rejection of information that conflicts with prior beliefs.
Markets are complex, highly non-linear systems, and when biases contaminate analysis, not only the goal of understanding the big picture is a futile exercise, but the risks of a negative expectation from trading and investing increase significantly.
Systematic traders and investors understand the limitation of market analysis and largely avoid it. Using systems, algorithms, and recently artificial intelligence to trade and invest in the markets is not a panacea by far, but it avoids the traps of cognitive biases that, with high certainty, lead to low or negative expectations from the markets.
If very experienced and successful investors can be wrong about the big picture, the less experienced should avoid it at any cost. I will provide a few examples below.
Several months ago, a renowned investor argued that the US dollar was in a short position, based on his overall perspective. Instead, the US dollar is rallying due to a shift in the broader outlook, and it has risen 5.5% year-to-date (futures) against expectations of a significant loss.
Many crypto traders think financial independence rests with bitcoin gains. This crypto is up 82.8% year-to-date (futures) and 59.7% since 2022. However, cocoa is up 5,305.9% since 2022 and 343.1% year to date (futures). Perhaps cocoa was the key to achieving financial independence. Incidentally, many CTAs underestimated the persistence of the cocoa move and expected a decline this year.
Another example is the complete failure of intelligent analysts to predict the movement of gold. Although gold fell after the elections, it is still outperforming stocks since 2022 with a gain of 24.6%, versus 16.6% for the E-mini futures. In ETF terms, SPY is up 31.3% (total return) since 2022, while GLD is up 41.6%. Here, most analysts looking for the big picture ended with the wrong one. Note that the futures gains are lower due to the fact that the GLD ETF invests in physical gold, while futures prices are influenced by expectations and other costs.
The bond market is perhaps the most notable example of misinterpreting the big picture. I recall as far back as a year or longer, high-profile analysts expected bonds to outperform stocks. The reality is that stocks have done exceptionally well while bonds are still in the red since 2022 and year-to-date.
The Big Picture Does Not Even Exist
I would like to go one step further and claim that the big picture does not even exist due to high complexity, non-stationarity, and unknown unknowns.
I introduce the bias big picture:
- There is an assumption that a big picture exists.
- The inability to find the big picture, even if it exists, is an issue.
This bias is related to the need for closure and epistemic curiosity biases, but it is more explicit.
Avoiding the big picture bias trap entails a systematic approach. This approach may not be as exciting as reading 10 pages of market analysis every day, complete with fancy charts. However, as someone famous once said, if trading and investing are not causing boredom, people should probably avoid them.
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