Crap Advice And Critical Thinking
Every so often I get sent an article for comment – these generally turn out to be an exercise in critical thinking more than analysis. It is not difficult to pick apart a general thesis. The issue is that most lack the confidence, skills or experience to do so. We are also programmed to fall into line with what we perceive to be a higher authority.
However, there is a larger problem bedevilling our thinking. This is what Daniel Kahneman describes as “thinking fast” from his book Thinking, Fast and Slow, where he describes two modes of thought: System 1 (fast thinking) and System 2 (slow thinking). System 1 operates automatically, effortlessly, and intuitively, handling tasks like recognizing faces or reacting to danger. It relies on heuristics and past experiences, making it prone to biases and errors. While useful for quick decisions, it can lead to overconfidence and snap judgments. In contrast, System 2 is slower, more deliberate, and analytical. Kahneman’s work highlights how much of our thinking is driven by subconscious processes rather than rational deliberation. We make snap judgements based upon how much the narrative we are looking at appeals to us rather than whether their is any validity to it or it is merely just another story.
Each time a piece such as this appears it does provide an opportunity to help traders with their analysis process.
The piece I want to pick apart is from LiveWire and is titled Gold Deal of the Decade.
It opens with the following paragraph.
In December 2024, Greatland Gold (GGP-L) completed the acquisition of 100% of the Telfer Gold mine and the Havieron Project from Newmont (ASX: NEM). Not since Evolution acquired Cowal from Barrick in 2015 have we seen such a compelling opportunity for investors.
The rest of the article is simply a narrative rationalising their advice. If we leave aside the hyperbole which is designed to trigger our fast thinking, the opening paragraph gives us a few clues as to what we need to look at in order to make a decision as to the usefulness of the advice given. We have two data points that we can investigate to get a general sense of the interaction between the price of gold and the company GGP which is listed on the LSE.
Part of the justification for the advice comes from this chart of gold.
This chart is largely irrelevant to the argument since we know that the price of gold has been trending up since the last quarter of 2023 – what is of interest is the relationship between GGP and the price of gold. The hypothesis is that GGP is a gold stock – gold has been trending up and GGP has made an acquisition that should increase its exposure to gold. Therefore the price of GGP will go up.
Testing this hypothesis can be a little tricky since you need to be able to perform a comparative performance analysis but there are websites such as Koyfin that will enable you to do this. If we look at a comparison of the two instruments dating back three years we get the following –
We can see that over the period in question, GGP has significantly underperformed the price of gold. This underperformance is sustained over a variety of time frames encompassing the recent rise in gold. Ideally what you would want to see is a stock price tightly married to the price of the underlying so that any increase in the price of the underlying is reflected in the share. However, in this instance this hasn’t happened – at present GGP looks like a dog.
The breakdown of such investment ideas is reasonably simple if traders take a deep breath and sit with the idea for a little bit. It is then a matter of calling up some data to see if the idea checks out.
The key point to take from this is that stories are bullshit – data beats narrative every day of the week.
