SocGen's Dylan Grice On The (F)utility Of Trading The News
The 'other' of SocGen's strategist dynamic duo, Dylan Grice, chimes in with some off the beaten path observations on the (f)utility of following and trading the news. In experimenting with the impact of newsflow absence on one's trading record, reaches the Nassim Taleb conclusion that news "makes idiots of us because it gives us confidence, not insight." What Grice does find, however, is that living without news nonetheless is difficult as it removes the entertainment aspect of sub-stories spawned by any given news thread. His words: "Without the news, I was missing the joy of a good story." And for those who have not read "Fooled by Randomness", and find the topic interesting, we suggest going through Nassim Taleb's seminal book which does a far more in depth analysis on the topic. On the other hand, since the average Zero Hedge reader has the attention span of an HFT algorithm, here is Grice's abbreviated perspective. (Of course, since Grice is right, and news are fundamentally irrelevant, we sometimes wonder why we have any readers at all).
I've been on the road these past few weeks, marketing across Europe and Asia with Albert and Andy. And although I usually try to keep up with what's going on while I'm away, I rarely find the peace and quiet to sit down, read and think. My travel companions are a bad influence.
I still haven't caught up with my reading, but from what I can gather, nothing much has changed: the doom and gloom of Europe still stands in contrast to the shiny optimism of the miracle that is emerging Asia (it really is amazing what a little credit growth can do!); Japan's politicians trying to deal with Fukushima are still making their American counterparts look competent; the jasmine revolution is still stalled ....
I'm glad Harold Camping's prophecy that judgement day would be the 21st of May 2011 was wrong. With a poker-faced nonchalance that would make a broker blush he now claims that he only got his timing wrong, and that the world will now end on 21st October (fear not readers, I've already suggested to senior management that we hire him!). Apparently, UK bookmakers William Hill were offering odds of 1/1,000,000 that he'd be right, and people took the bet, not quite thinking through the implications of being right.
Maybe that's where using the news to predict events gets you. It's something I've been thinking about recently because I've only just begun reading newspapers again, having been on a ‘news diet’ this past couple of months. In “Fooled by Randomness” Nassim Taleb said the news makes idiots of us because it gives us confidence, not insight. Like a PhD in macroeconomic theory. So a couple of months ago I decided to experiment. I took Taleb's advice and restricted myself to just The Economist each week and the occasional blog, avoiding everything else.
And I came to the conclusion that Taleb is right: surprisingly, I didn't actually feel less informed; it made no difference to the performance of the pitifully small Grice retirement fund (which was unfortunate, some "performance" would have been nice!); it made no difference to conversations I had with friends or family; to my overall sense of well being. I found that if anything was important it would find me. And reaction is easier than prediction.
But I also realised that I missed the news for its pure entertainment aspect. Finding out how sub-stories end after the fact without the suspense before was a bit like seeing only the football results on a Monday morning. I had as much information as anyone who watched the match, but I hadn't taken part in the richness of the journey, and the safe thrill of not knowing how it would all end. Without the news, I was missing the joy of a good story.
So I'm back reading the news again. I know it won't give me any particular competence at forecasting the big events, any more than watching the football will make me better at predicting the scores. I'm reading the news because I like to read the news (incidentally, after bragging a few months ago that I was top of our office fantasy football league, I ended up coming second behind Georgios Oikonomou, one of our quant gurus. I'm sure he has some cheat team selection algorithm though, and anyway, I still beat Albert!).
So treat the news for what it is. Read it, speculate about how stories will end, enjoy it. But be cautious about how much help it will be to you when investing. Writing about what things are worth might not make for as compelling reading, but I think it's actually far more important. So for the next few pages, let's have a look at the latest output from my equity valuation models.
We'll skip the next few pages as they are not news per-se, or a discussion thereof, and thus are not entertaining.