Notes, Views, and the Occasional Provocation
September / October 2018

A story is told of the financier JP Morgan, who, when asked by a young man what stocks would do next, said, “They will fluctuate.”

It’s a better story than most for explaining the global stock market and its propensity to dip unexpectedly as it’s done this week. Yet it’s a tale soon forgotten among competing narratives that serve our more pressing need for reasons and assurances in the face of market complexities.

Best regards,

Milo Benningfield

A Market In Search of a Story

Sometimes reality is too complex. Stories give it form.

— French director Jean-Luc Goddard

After yesterday’s stock market drop, the usual alarming news articles appeared, but more interesting were the reader comments that tracked each publication’s editorial focus:

“Stocks Plunge, as Fresh Tensions With China Batter Tech Shares,” The New York Times:

“Dow tumbles more than 800 points as Treasury yields tick higher,” Fox News:

“US Stocks Suffer Worst Falls in Eight Months,” Financial Times:

It’s easy to roll one’s eyes at the reader comments, and the articles themselves were more circumspect. They reported Thursday’s three to four percent U.S. stock decline in plain terms and proffered less partisan views of what might have caused the fluctuation – “a response to higher U.S. interest rates,” “investors taking profits,” “algorithmic trading strategies.”

But though dressed in finer garb, these seemingly more sober theories didn’t offer much more insight. One astute Financial Times reader was willing to point out that the emperor had no clothes:

We can only hope that this reader continues to post such sentiments anonymously and not share them with friends and family, since they contravene one of our most cherished character traits, our love of a good story.

We are biologically wired to respond to stories. Stories help us pass down important information from generation to generation; they entertain us at the campfire and help us navigate an otherwise insurmountable set of decisions each day. One theory of human evolution even holds that it is our ability to tell stories that, more than anything else, helped us organize ourselves and ultimately dominate the earth.

But stories are also our collective Achilles Heel, leading us astray, often at critical moments in the face of complexity. Why? In an entertaining TED talk, economist Tyler Cowen suggested three reasons:

The antidote, Professor Cowen suggests, is to be skeptical of stories that “seem right” intuitively and “feel good.” Rather, we should ask, “What am I missing?” We should be receptive to explanations that seem messier, uncertain and incomplete – pretty much the opposite of what’s typically considered a good story.

When it comes to investing and its inherent abstractions and complexities, stories abound – interest-rate stories, corporate-earnings stories, deficit and trade stories. There are so-called “story stocks” such as Tesla or Apple that attract investors with narratives about innovation and new technologies. There are technical narratives – “buy the dip,” “sell in May and go away,” or “beware the Death Cross of moving averages.”

Probably the most potent investment narratives of all are the political ones. Political news triggers our deepest concerns about personal security and fairness. For most people, political developments seem more understandable than news about fiscal or monetary policy, offering more plausible, intuitive causal connections to help interpret market events.

More than anything, politics is about people and thus drama, plot, narrative arc, and all the other elements that make a good story. Thus, the political stories are better able to prey upon our emotions, cloud judgment, and reduce our analyses to the simplistic good vs. evil narratives that Tyler Cowen warned us about.

Both sides of the political aisle are vulnerable to these narratives, as the reader comments above suggest. In 2008, it was conservative investors who feared that Barak Obama’s election would make the global crisis worse and were dumping stocks. On March, 6 2009, as stocks were still falling during the Credit Crisis, the Wall Street Journal published an opinion article, “Obama’s Radicalism is Killing the Dow.” The timing was impeccable: three days later, the U.S. stock market shot out of the gate and essentially didn’t look back until just recently.

Since Trump’s election, politically liberal investors have been asking how the markets could be ignoring calamitous news about election manipulations, tax cuts, trade wars, and the Supreme Court appointment fight. It’s easy to see why a lot of them would view this week’s stock declines as the chickens coming home to roost, and a lot of money has been sidelined for nearly two years by such concerns while markets continued to rise.

The power of political filters is such that even the brightest among us are tempted to abandon hope and well-laid investment plans during a moment of doubt.

In the months before Trump’s election in November 2016, the consensus was that the stock market would crash if he won. On election night, the futures market validated these predictions, and no less a luminary than economics Nobel laureate Paul Krugman wrote:

Warren Buffett was no less a passionate supporter of Hillary Clinton than Professor Krugman. He even appeared with her before crowds on the campaign trail, contributing both his reputational and financial capital to her cause.

Yet, just a couple of weeks after Trump’s election, Mr. Buffett revealed he wasn’t letting his political views interfere with his investment decisions:

There are many stories, of course, about Warren Buffet’s investment acumen. His company Berkshire Hathaway is itself a “story stock,” tied to his personal legend as much as anything else. But one of the keys to his success seems to be his own ability to ignore such narratives and to try to take himself as much as possible out of the equation when distinguishing between fact and fiction with his investment ideas. Now, that’s a story worth telling.

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BFA Media Quotes

The New York Times, August 22, 2018
Milo was quoted in an article by Tara Siegel Bernard, “5 Steps to Take if the Bull Market Run Has You Thinking of Unloading Stocks,”, which discussed how to address concerns about the long bull market ending. Milo noted the importance of focusing on what you can control: “There’s a lot to be said for doing a ‘financial checkup, both to uncover financial gaps and to rest easier knowing you’ve addressed everything in your control.”

Thank you for reading.

Best regards,

Milo Benningfield

1 Paul Krugman: The Economic Fallout,” The New York Times, November 9, 2016.
2 “Warren Buffett: I Bought $12 billion of Stock After Trump Won.,” Reuters, January 31, 2017.

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