Which game are you playing?
Voting machine or weighing machine? We mostly play former, but pretend it's latter. At extremes, this pretence can get especially dangerous.
Much as I hate calling investing a game, I do so here to make a point. Based on how long people hold onto stocks, it’s easy to see how most investors play T20, some play one-day and a few play Tests. While I believe some formats offer better odds, this essay isn’t about that. This essay is about being true to yourself about which format you have chosen to play in, especially at extremes.
There are two games: voting machine, weighing machine
While there’s no one way to segment investing, my favourite way is using voting machine vs weighing machine analogy, first articulated by Keynes and Graham nearly a century back. Voting machine game is a popularity contest, where key is to figure out what others will prefer. Weighing machine game uses intrinsic characteristics of what’s being bought to gauge what it’s worth. Like all things messy world, it needn’t be 100% one or other. However, most of the time, it’s clear which game someone is playing.
Most play one but pretend it’s the other
Voting machine game’s more popular, overwhelmingly so. Weighing machine game’s viewed as more respectable, possibly because investing’s patron saints swear by it. Graham’s original distinction between investment and speculation still stings. It doesn’t help that no one playing former has achieved similar wealth or respect. This leads to a weird dynamic. Given empirically observed holding-periods, most participants play voting machine game, cheered on by intermediaries who clearly make more money off this game. However, most don’t admit it. There’s an elaborate veneer of playing the weighing machine game, partly to deceive others, but mostly to deceive oneself. There’s no point getting too fussed over this charade, as it happens all the time. Except at extremes, as I’ll discuss in a bit.
Both games are fine (not really, but who am I to judge)
I’m biased since I play Test cricket. I can’t prove that I do, but since my batting and writing are as boring as it can get, I don’t mind making the claim. But I’ve written earlier that your investing approach has to (1) work, and (2) more importantly, work for you so that you can stick to it over long periods. So, you play whatever game suits your nature, so long as the consequences of doing so are bearable given your circumstances. It’s preferable you don’t have to sell family assets or members to meet margin calls, but short of that, it’s a free country. Neither game is illegal or immoral, even if one tends to extract greater toll over the long run. If results aren’t satisfactory, you can try switching games or better still, have others to play it for you via low-cost, direct-plan, SIP into passive funds.
At extremes, pretending to play one game while playing the other can be dangerous
Most of the time, ‘weight’ is subjective. You and I can reasonably disagree on what a business weighs, with both of us thinking we’re playing weighing machine game despite differing actions. Every so often, in some corner of the market, things get crazy. Without getting too precise about what correct ‘weight’ is, it’s clear that scales have gone totally wacko. In such times, everyone on the field is playing an extreme version of the voting machine game. Since popularity is more fickle than weight, this is a particularly high-risk game where extreme outcomes become more likely. If you know it for what it is, you’ll be somewhat prepared for the consequences even if you can’t avoid it entirely. However, if you’re maintaining the weighing-machine façade, eventual shock could get particularly nasty.
Others telling you it’s still weighing-machine game is meaningless. They’re not in the game at all.
While all of us are self-delusional to some extent, there are a whole class of intermediaries with a vested interest in maintaining our delusion. That’s because they’re not in the game but make money off it. Surest way for them to keep making money is to keep the game going. Surest way to keep the game going is to maintain the veneer of respectability that comes with weighing-machine label. Even as weight becomes impossible to determine, they’ll pretend to know using new units, new measures and new language. Sophisticated models, attire and commentators will be deployed to argue from authority. You can revisit justifications of past excesses by seemingly reasonable people, whether it be eyeballs, order-books or NAVs. You can see the who’s who that blessed calamitous IPOs before they blew up. To avoid getting suckered, remember who’s actually playing the game and who’s making money off you no matter how you fare. New age weighing scales are actually scales over your eyes.
What’s the point of it all?
These are strange times. We have been numbed into accepting unprecedentedly large negative numbers and egregious behaviour. Clipped accents tell us that this is the new normal. Mathematical chicanery is deployed to pretend that voting is weighing. Absurd outlier parameter-values are being passed off as mid-range. There are a host of people drawing bullseyes around arrows, after they’ve landed. In such a context, it’s all the more important to know what game we are playing. Set expectations accordingly and make sure you can handle the consequences. It’s your game, especially if it’s your own money. Do whatever you please, but with eyes wide open.