The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.
Warren Buffett, annual letter to Berkshire Hathaway shareholders, February 2008.
One of the trading beliefs I cling to dogmatically is that I don’t know anything about markets and I know even less about the instruments I trade. I will happily and extreme confidence tell anywhere who asks me that I have no idea where markets are going. I will readily place a series of bets on where the market has been but where it will go is a mystery to me since what I think doesn’t matter. It is important to understand that only one-opinion matters and that is the markets opinion – my opinion doesn’t count nor does yours. All we can do is align ourselves with the markets opinion and then be wary of when the market changes its mind.
All too often traders or investors get caught up in their narrative. Somehow believing that their story is important and can in some way be communicated to the market.
Instead of finding this lack of ability distressing I actually find it liberating because I have found over the years I do not have to know where the market is going. All I need to be able to do is avoid catastrophic errors and make money when I fortuitously align myself with the market. The reason I raise the point of not knowing is that it rids me of any existing belief regarding an instrument. This freedom brings with it clarity.
Consider the chart below of Qantas.
Qantas is currently the second best performing domestic stock I hold. In conversations with others who trade similar systems to mine it has emerged that many do not hold Qantas despite their system telling them to. The reason they didn’t take the trade is that they had a perception of what an airline stock should do and go up was not one of the perceptions they held. Intriguingly, last year the DJ US Arline Index was one of the best performing sectors in the US – a rally that was missed by many because investing airlines could never be a good thing.
Knowing nothing means expecting nothing and expecting nothing is generally a good thing.