Being Wrong

Being Wrong is the title of a book written by Kathryn Schulz. The book was recommended to me by someone I respect, so I bought it, read the first few chapters, and put it down. Wasn’t a fan of the prose. What do I know? The book sold a lot more than any book I ever wrote, and she’s written a bunch of stuff for the New Yorker, so I’m just an ape. Anyway, if I duplicate or plagiarize anything she wrote, it is purely unintentional.

We—and when I say “we,” I mean financial people—we live in a world where we make predictions about stuff which frequently turn out to be wrong. Spectacularly wrong. I have made my share of bad predictions, though I like to think that I have fewer than most. There is a school of thought in the financial world that if you back up your predictions with real money, then they have more merit. Maybe they do, maybe they don’t. That would only be true if you thought that losing money was worse than being embarrassed. Because I don’t. I think that being embarrassed is much worse than losing money. People would rather get poor privately than be wrong publicly. If you are punting around stocks in your personal account, if you lose money on something, you just quietly click the “sell” button and move on with your life, a few thousand dollars poorer. You don’t have your mentions filling up with goblins and trolls and people screenshotting your tweets, ripping video clips of you saying wrong stuff, or making parody accounts of you. So this idea that opinions that are backed up with money are somehow better opinions is just uninformed. Ask anyone with a large following on Twitter if they like being wrong in public. I’m sure they’d rather just lose $50,000 instead.

So what I mean by this is there is such a thing as actual capital, and there is such a thing as reputational capital. Both are precious, but you can always make more money. If you lose reputational capital, it is very, very difficult to recover. For an obvious example, Jim Cramer has no more reputational capital remaining. He was wrong too many times in a row. In fact, people now do the opposite of what he says. Gartman before him. I am in the prediction business, and I think about this a lot before I make a prediction, and the one thing I have learned over the years is that you never bet your entire reputation on one prediction. But I like it when other people make predictions. It helps my process. If I am scrolling through Twitter and I see that Raoul is bullish on bonds and Bianco is bearish on bonds and Brent Donnelly is somewhere in between, that’s helpful. It’s helpful to listen to a bunch of different voices and arguments, which assists you in making your own decisions.

The problem is that there is something that I call call-out culture that has developed online. Say one wrong thing, and the mentions fill up with goblins and trolls. Some (very sad) people actually devote their lives to doing this, hiding behind a half-dozen anonymous burner accounts, trolling the best thinkers in finance. I could tell you some stories, and I don’t have it half as bad as some people. It’s weird, because even if you thought that every prediction was a 50/50 coin toss (which it isn’t), the Law of Large Numbers is going to take over and people are going to be wrong half the time anyway. Out of years of observing this, I really can’t say there is one person in the world that has any more “edge” than anyone else. We’re all good at different things, but more importantly, the best among us are better at managing risk. If you have a bad prediction, you abandon it quickly; if you have a good prediction, you make it bigger. I’ve seen Stan Druckenmiller be wrong about a bunch of stuff. Hell, he pulled the plug on managing outside money after a series of wrong-way bond shorts. But Stan is in Cooperstown, not because he’s any more right than you and me, but because he’s the best in the world at position sizing and managing risk. If Stan was on Twitter making predictions, I guarantee you that @Joey492048392 would have a few things to say to him. Maybe we’re just all dumb for being on Twitter. I think about that a lot.

We’re not defined by the mistakes we make. It’s all about how we clean up the mess. We’re all inevitably going to be wrong at some point, so we have to figure out how to minimize the damage. Cutting losers is trite, but the decision is not trivial, because there is a chance that you could prematurely close out a position, only to watch your original thesis play out days later. There is such a thing as being too disciplined. If you are too disciplined, your entry points must be perfect, and nobody’s are. It’s a balance. I went through the ultra-disciplined part of my trading career, and ended up scratching around, not making much money. These days, I give a trade time to work. Interestingly, this is true in life as well. You may want to stop yourself out on a bad marriage, but sometimes it needs time to work. You may want to stop yourself out on a bad job, but sometimes it just needs to time work. More specifically, it needs time for you to do the work. In both cases, you may be under the impression that the source of your discomfort is someone else’s fault, but frequently it is your own. And besides, you can’t change other people, you can only change yourself. This is like high-level Stoic shit, but people get it wrong when making predictions. I’ve seen this plenty—people blame their wrong predictions on outside forces. Buddy—you have nobody to blame but yourself.

Oftentimes you find that the people who are good at making predictions are not so good at managing risk—and vice versa. Having a research service or newsletter is a particular skill, and does not lend itself well to managing money. A person who does research is good at identifying good ideas, but trading them is another matter altogether. I will say that you can make a lot of money if you are a good trader of bad ideas, and not so much money if you are a bad trader of good ideas. The idea is really the easy part, and this is why people who manage money get paid so much more than the people who generate ideas and make predictions. And I think that is fair. Sometimes you have the best of both worlds, where you have a good trader of good ideas, but that is very, very rare.

I personally don’t think there should be any shame in being wrong. But people do experience shame. They make a bad call, they hope nobody notices, and maybe they even delete the tweets. There should be no shame associated with it at all. We want as many people making predictions as possible, so we can have a vibrant discussion of ideas online. But we’re at the point where people are terrified of making predictions. They live in fear of the trolls. Well, the trolls can get fucked. I’m not going to stop making predictions, because there is a far greater number of people who tell me that the predictions help their investment process. But yeah, debate has been effectively stifled, and that is too bad.

Another way to look at this is that in order to get better at investing, you need to be wrong a lot. You need to be wrong a lot, so you learn from your mistakes, and you get better. I have had my share of bad trades in my career, real and imaginary. And just when I think I have made my last dumb mistake, I find a way to make an even dumber one. But it is an incremental process of getting smarter over time.

Let he who has never been wrong in the markets cast the first stone. Anyone who comes at me on a wrong call can suck my dick till my ass caves in.