Sunday, 24 August 2014

Lenses, Bart Simpson & Gatsby

19:17 Posted by The Thalesians (@thalesians) No comments

The Simpsons is perhaps the most famous cartoon of our age, featuring Homer, Marge, Lisa and Bart Simpson as a dysfunction family from Springfield. During this month, FXX are screening every episode (see Forbes: Every 'Simpsons' Ever: Is FXX Using Netflix's Business Model On Cable? 21 Aug 2014), a testament to its continued popularity. I suspect most of you have seen at least one episode. I have lost count of the number of Simpsons episodes I have seen, although I must confess much of my viewing was skewed towards my childhood.

Despite that, whenever I have seen an episode recently, I rarely fail to enjoy it. As I child, whilst I enjoyed watching the Simpsons, I rarely understood all of the jokes and simply took the dialogue at face value. However, whenever I watch it now, the satirical references which pepper every episode are far more evident. The cartoon has not changed: it is I, who has changed in these intervening years.

Of course, this is not purely a matter of the Simpsons. I have also reread books, which I read as a child. I remember racing through the Great Gatsby as a 13 year old. At the time, I recall being suitably entertained by the novel. Rereading the same book a few years ago, as an adult, the experience was totally different. I saw the deliciousness of Fitzgerald's prose, which effortlessly envelopes a reader in Gatsby's world, a man whose greatness was a fa├žade. Fitzgerald's last line ends with perhaps one of the most famous sentences in the English language, which encompasses Gatsby's failure to break away from his the "current" of his past:

So we beat on, boats against the current, borne back ceaselessly into the past.

As a 13 year old teenager, my "past" had hardly been formed. Hence, it would have been quite difficult to reconcile such a line with my somewhat limited experience. Whilst, I am hardly what could be termed as "old" now, my past has certainly become a richer place, filled with more events, some successes, some failures. Even now, I am simply to young at this thing called life, for me to truly understand comprehend this line.

Just as with interpreting Bart, Lisa and Gatsby, in markets our understanding of events can differ with other market participants, depending upon our varied experiences of markets. My experience of markets started in 2005 and includes the tumultuous year of 2008. The way I might view price action, differs with those who have started work in the past few years, Their experience of financial markets has been fuelled by an interest rate environment which is unusually low, and a growth picture which is mixed at best, with an equity market which appears to mainly go "up".

Contrast that to a trader with 20 years experience, who has lived though not only Lehman, but also the various Asian crises in the late 1990s and the dotcom crash in the early part of this century. Memories of bear markets are likely to skew his or her perception of the current rally in equities. Furthermore, for a foreign exchange trader whose memories of the EUR/USD include levels such as parity, the valuation of the single currency in the mid-1.30s is likely to be seen as "expensive". This is not to say that such views are right, but they are likely to subconsciously skew how price action is viewed. The difficulty is that trading floors can often be skewed towards the younger end of the age spectrum. For an investor, diversification is key to reducing drawdowns, but do investors think about a diversification of trading experience, as much as they think they should do? I haven't got a proper answer, although my suspicion is no.

So pick up a book you haven't read in years. Watch an episode of the Simpsons you haven't seen in years. Look at a chart of historic price action at a time near the start of your career. How has your interpretation changed over the years? Can you see things now, that you couldn't see before? I suspect the answer is yes to both questions. Our different experiences are like spectacles, we all have different lenses to view the world and these prescription of these lenses change continually over time.

My book Trading Thalesians also has some colour on understanding how different experiences can impact how different traders interpret the market (mixed in with a bit of ancient history).

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