Meme Reversion

500 and Counting

I’m now about 500 posts and a million words into the back-to-front world of financial psychology and you might think I'd have learned something useful by now. Well, it turns out there are only a couple of things you need to bear in mind: that mean reversion is the only certain thing about markets and that (almost) no one is interested.

The reason that no one is interested is that everyone is convinced that they can identify the narrative, the story, the meme that will find the next wonder stock that defies the law of mean reversion. And you might, but the chances are you still won't become filthy rich on the back of it, because only in hindsight is success inevitable. 

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The Dangerously Miasmic Myth of a 4% Safe Withdrawal Rate

Miasma

One – rare – area where academic economic research intersects with the interests of private investors is on the topic of Safe Withdrawal Rates – the maximum amount you can safely withdraw from your investment pot each year following retirement. Opinion is divided on exactly how much is safe, but the general consensus is somewhere in the region of 4%.

Of course this is utter baloney. As usual, when academic analysis meets commonsense understanding it creates a perfect miasma of miscomprehension and, no doubt, bad retirement planning. Your safe withdrawal rate is dependent on you, not on some mythical, half-baked rule of thumb.

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You’ll Never Grow Rich Taking A Profit

“I made up my mind to be wise and play carefully, conservatively. Everybody knew that the way to do that was to take profits and buy back your stocks on reactions. And that is precisely what I did, or rather what I tried to do…..They say you never grow broke taking profits. No, you don't. But neither do you grow rich taking a four point profit in a bull market.”

Jessie Livermore, Reminiscences of a Stock Operator

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Memes, Money, Madness

Meme Machines

The appearance and disappearance of investment themes over time is a fact of life – remember “you can’t lose with the railways”? Me, neither, but in the 1840’s it was a guaranteed winner until it wasn’t.

Other dubious ideas have more legs, like the Efficient Market Hypothesis and the theory that most analysts can figure out which shoe goes on which foot. All of these ideas influence markets and participants and help move prices, sometimes with startling synchronicity. A popular theory of how this happens is based on the idea of the meme, a cultural equivalent of the gene, propagating itself through human brains and influencing group behaviour. So are we meme machines, buying stocks at the whim of transient ideas?

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