The Tribe Of Wall Street

Authored by Nick Schmitz via Verdad Capital

In ancient Rome, a clerical class known as the haruspices trained in the inspection of the entrails of sacrificed animals for omens of the future. Today’s market commentators have replaced bird intestines with an equally fervent passion for equally unreliable forms of long-term divination. 

“Bad Omen for Markets from First Signs of Yield Curve Inversion,” a recent Bloomberg report trumpeted. Two thousand years on, the vultures of clickbait clarion calls appear eager to forget that auguries are for the birds.

We would like to take a break from our usual analysis of investing through statistics, theory, and philosophy to look at the world of investing from a new perspective—cultural critique.

We have a rich academic tradition to frame our critique. Anthropology is the study of the societies and cultures of the only species known to believe that anthropology just might work. But unlike the questionably legendary and legendarily questionable anthropologists of yesteryear, we will not be studying cannibalism or mating rituals, but rather the practices and rituals of the Tribes of Wall Street through the lens of the late great Sigmund Freud.

While much of Freud’s early work on psychoanalysis and sociology has been debunked (sorry, mom), his work is still highly influential in the Ivory Tower. As structure for our analysis, we borrow the title of chapter three of his 1913 book Totem and Taboo: Resemblances Between the Mental Lives of Savages and Neurotics - Animism, Magic and the Omnipotence of Thought.

Animism

Animism is the religious belief that objects, places and creatures all possess a distinct spiritual essence, not to be confused with the Internet of Things. According to Sir Edward Taylor in his 1871 work Primitive Culture, Animism is “one of anthropology's earliest concepts, if not the first.” It is thus only fitting that it has since taken on a life of its own: while uncommon today in western civilization outside of baseball dugouts, groundhog sightings, and a few environmentalist scions of San Francisco, we find this belief system to be strikingly prevalent among our community of investors. Investors often assign a spiritual essence to the market itself.

Turn on any Bloomberg news update, read a Reuters market summary, or listen to an expert commentator invited to explain daily movements in markets, and a neutral linguistic anthropologist would find a heavy dose of this phenomenon used to explain market mysteries. The following Bloomberg headline may have been plagiarized from the Book of Genesis or Jonah: “The world’s biggest bond market has managed to gulp down a swelling deluge of issuance in recent months.” Somewhere an A.I. bot must be laughing: those chyrons hawking causal explanations don’t write themselves.

Magic

According to anthropology professor Pamela Moro (Ph.D. from Berkeley and author of MagicWitchcraft, and Religion: an Anthropological Study of the Supernatural) “Magic” involves beliefs and behaviors in which the relationship between an act and its effect is not empirically or scientifically verified but, from a Western perspective, rests on analogy or a mystical connection.

We have written extensively on numerous instances of beliefs and behaviors on Wall Street with no empirical or scientific backing that fit this operational definition. Applications of the Capital Asset Pricing Model through discounted cash flow analysis are but one example of a ritualistic practice employed by the Tribe of Wall Street that “is not empirically or scientifically verified.” Worse than magic, these rituals have often been empirically invalidated, and most dangerous of all, the conjurers have cast aside their telltale top hats and capes (in favor of $2,295 Loro Piana zip-ups).

From the movie, The Wolf of Wall Street via The Kernal/Daily Dot


Indeed, there is evidence they may be no better than actual magicians.recent investigative report on the use of psychics to forecast market movements found they may have done about as well as these more traditional, ritualistic models used within the Tribe of Wall Street:  “On the whole, market forecasts from astrological and psychic sources don’t appear to have fared any better than those from more traditional methods of number-crunching and dart-throwing."

Omnipotence of Thought 

Freud’s “Omnipotence of Thought” phrase was inspired by a patient he dubbed the “Rat Man,” whom he diagnosed with Obsessional Neurosis on account of his fixation on unrealistic fears, fantasies and theories involving rats. The Rat Man believed his thoughts were so powerful that they could both change and provide insight into the future.

We find a good deal of this among the ritualistic obsessions of the Wall Street tribe members as they run amok in a rat race that never ends. There we find obsession with the power of ideas surrounding GDP growth, TAM (Total Addressable Market), Moats and Market Share, and Income Statement forecasts that have about as much empirical validity when forecasting price returns as rats have when guessing the going rate for cheese.

Indeed, the general belief in the power of the individual mind to foresee the ebbs and flow of time has given rise to a priest class since time immemorial, and the Tribe of Wall Street has employed many in its priesthood. While the Ancient Greeks consulted the Delphic Oracle when considering major political actions like the declaration of war, millions of Americans turn to the seers of Wall Street when making important financial decisions. Casual analyses are now revered like mystics’ mantras—an irony we can safely assume the Oracle of Omaha saw coming.

Yet some Americans, like Jack Bogle, are skeptical of the divination power of Wall Street’s prophets of profit.  The renowned anthropologist E. E. Evans-Prichard famously rebutted such criticisms, arguing that outsiders rarely understand the societies they study.  Non-believers like Bogle, he noted, are quicker to explain religion as an illusion while believers understand that mystical beliefs are an important “method of conceptualizing and relating to reality.” If an Excel model and a 100-slide PowerPoint presentation helps you conceptualize and relate to reality, Evans-Prichard might have argued, then go for it!

Evans-Pritchard noted that although many of the Azande people he studied decried individual witch doctors as cheats and liars, he never met a single tribesman who did not believe in witchcraft. If a particular diviner was proven wrong, it was because he did not practice his art well: the failure of the individual practitioner does not undermine or disprove the system as a whole.

Hocus Focus

And so we come full circle on our cursory tour of the anthropological disposition of many among the Tribe of Wall Street. After 10,000 years of Homo sapiens repeatedly displaying such predilections toward Animism, Magic and the Omnipotence of Thought, is it so unimaginable that the modern investment profession’s short 100-year history might reveal similar cultural affinities among the much younger Homo investicus? In an age when commentators can still make a living pulling the same old rabbits out of the same old hats, we should take care to ask how they got there in the first place, when half-truths breed faster than hares.

But why are such traditions so prevalent? In his 1972 book, Violence and the Sacred, the renowned French anthropologist René Girard argued that oftentimes these practices become “unformulated dogma to be accepted on pure faith,” because “whatever makes other things clear does not need, apparently, to be made clear itself.”

Perhaps more relevant to Wall Street, the anthropologist Bronislaw Malinowski noted a curious phenomenon in his 1948 study of the societies of the Trobriand Islands, Magic, Science and Religion. He found that “in the Lagoon fishing, where man can rely completely upon his knowledge and skill, magic does not exist, while in the open-sea fishing, full of danger and uncertainty, there is extensive magical ritual to secure safety and good results.”

If the investment profession is characterized by its need to cope with uncertainty, then it appears that Wall Street may be precisely the sort of culture where we would expect to find reliance on such unfounded beliefs.

This means that vigilance has never been more vital: as financial instruments grow more complex, and market movements remain just as inscrutable, it hardly takes a master magician to make your money disappear.

But for the skeptical investor, where there lurks superstition, there will always lurk opportunity. These misplaced myths inevitably lead to market mispricings, and we believe that understanding the Tribe of Wall Street’s conceptual weaknesses is the first step to exploiting the value of its wares.

Comments

VWAndy Mon, 05/07/2018 - 16:31 Permalink

 Well the math went out the window the day PPT was hatched. Good luck trading against that. Then you got moving goal posts thing.

Polynik3s VWAndy Mon, 05/07/2018 - 16:32 Permalink

The author is stuck in time, a product of 1990s thinking. 

Wall Street is a Casino.

No one on Wall Street is to be trusted in a fiduciary position.

Outiside of your 100 closest relations, Humans are incapable of caring for and acting in a fiduciary position. The brain is not wired for reciprocation or caring for those outside your tribe of 100 (see Robin Dubar's brain studies).

Secondly, the author speaks poorly of Majic. He does not know that there are four planes of existence. He only acknowledges the material plane. 

Thirdly, the author gives weight to Freud, a Cultural Marxist hack. Jung is the real authority.

This author is sad product of Cultural Marxism and of 20th Century schooling.

In reply to by VWAndy

Giant Meteor VWAndy Mon, 05/07/2018 - 18:28 Permalink

It almost became routine. Remember so and so. He just blew his brains out with a shotgun. Remember so and so, he just set himself on fire in the front yard, died days later. Remember so and so, found him dead from an overdose of heroin. Remember so and so, he is doin time for burglary and home invasion, or knockin off a drugstore .

These were kids from a really small Berg, relatively small community. I would note however, a community, like many communities apparently without a soul, like many families themselves, lost, souless ..

The natural question of course, what the fuck happened?

One thing is certain however. These epidemics way greater than Fraud and Spock explanations ..

In reply to by VWAndy

Polynik3s VWAndy Mon, 05/07/2018 - 18:37 Permalink

VWAndy,

Watch out what books you don't read and yet operate upon their principles. History and the social sciences have been written by Rothschild money printing funds.

Freud has major flaws as a researcher: applying his incestual fantasies to theories encompassing all of humanity; molesting women to treat their hysteria (you know, crimes guaranteed to get a high five from Bill Cosby); and coming from Cultural Marxism with its stated goal of destroying Western Civilization through corrupting all its ideals.

Carl Jung worked under Freud for a while, he saw Freud for what he was and left.

In reply to by VWAndy

bowie28 Mon, 05/07/2018 - 16:38 Permalink

The only way to accurately forecast market moves is to be part of the central banking cabal that can create unlimited money and perform fraud and market manipulation on a global scale.

Everyone else is just guessing, regardless of all the pretty charts and graphs and "analyses" they publish to make it look like they know what they are talking about.

It's about as reliable as predicting it's going to rain (or not rain) on June 8th 5 years from now.  And you can assemble lots of data points to make a convincing argument either way.

 

 

AlphaSeraph bowie28 Mon, 05/07/2018 - 19:01 Permalink

I agreed mostly but I wouldn't go as far as to say the rest of us are GUESSING. Maybe on the day to day, but if you're an investor the horizon is much further out then just a trade you have earmarked for re-evaluation before your 2nd morning coffee is even finished. The difficulty is not that we are guessing, it's that fraudulent money is the status quo and that causes severe dislocations in asset prices (malinvestment). It NEVER goes on and on and on. I know to many of us here it SEEMS that way, but the reality is 10 years is not a long time.

The real problem for us "guessers" is usually patience and fortitude. How do you not capitulate in these environments and just start buying 250x earnings companies that seem bullet proof as the companies you hold you KNOW provide real world value (Canadian oil producers for example) languish at 7x earnings and seem down for the count?

Those of us who are diligent in our research and firm in our convictions will end up doing just fine - maybe even great.

In the last 9 months or so I've noticed a lot of capitulation. Silver bulls capitulating and selling all their silver. Stock bears capitulating and going all in on this or that stock. You name it. This is usually a late cycle marker for trend reversal.

Be diligent, be patient, be disciplined. Invest in what you know and like, find low(ish) multiples. You'll be fine.

I'm a 5-25% of liquid assets in precious metals kind of guy. 5% when things are great. 25% when things are bad. At the moment I lean heavily toward the 25% allocation. Could take another few years before the genius is proven correct (or luck proven lucky).

A few years ago I was talking to my dad about investing, precious metals etc. and I explained to him that I thought commodities were in the midst of a secular super cycle and that gold was the center point. This was around 2012. I outlined that I thought this cycle would peak no earlier than 2025 and as far out as 2030. I figured the correction in PM's could last as long as 6-8 years but that it would BLAST it's 2011 peak of ~1900 as though it were nothing - but only in time, not tomorrow.

I know the the typical thought is that the last secular bull cycle for gold was 1971-1980, that's wrong. It was 1965-1980 (think de Gaulle). No Russia, no China, no EM's partaking.

This cycle is at minimum an order of magnitude larger than that one. The time frame to a degree will reflect that. 1999-???? (I argue 2030).

1974-1976 saw a cyclical bear within the secular bull that smashed PM gains (and market psychology). Massive correction. "The bull is over, gold is dead". YA OK. How'd that play out?

This secular bull is bigger, badder, meaner and LONGER. The cyclical bear within the secular bull is longer because the secular bull is longer. By a lot.

Stay patient and disciplined.

 

In reply to by bowie28

Fantasy Free E… Mon, 05/07/2018 - 16:41 Permalink

All folks need remember is that this is a political agenda. The complex explanations emerge because the real one is so simple, but completely distasteful.

http://quillian.net/blog/war-room-for-stock-market-manipulation/

The era of stock market manipulation began in a small way just after passage of the Full employment act of 1978. It started under Reagan and has increased every year since. It is a mature political agenda. The outcome is completely uncertain.

Herdee Mon, 05/07/2018 - 16:44 Permalink

Truth is, the people in power sold out the United States to the international banking cabal headquartered in London, England. This is actually the biggest economic factor that Trump is up against. Whether or not he understands this power and corruption that America is up against is another story. When I say sold out, just take a look at a lot of American Cities and the industrial wastelands. It's awful. The world loves the American people and a lot of the rhetoric that's heard should be interpreted as what needs to be done to get rid of the swamp and the banking cabal that has decimated an entire country that is head over heals in debt. It's the political and banking corruption and the corruption within major departments like the FBI, CIA and Justice that is against the American people.