Faith and Finance

It is very fashionable to be a skeptic these days. I was first exposed to skepticism through the writings of Nassim Taleb, who talked about the great philosophers Hume and Popper. Popperian skepticism will tell you that you don’t even know if the sun will come up the next morning, because, well, it might not! You don’t know. It has for the last 4 billion years, but some rogue asteroid could knock the Earth off its axis, and then the sun wouldn’t come up the following morning. You never know.

You see this in people’s Twitter bios, too: skeptic. People wear it as a badge of honor, and it means to be not easily convinced; to have doubts or reservations. Short-sellers, by nature, are skeptics. They have doubts or reservations about what companies say on their quarterly earnings calls. This is a weird and hard way to live, because you’re always assuming the worst, and you can miss out on a lot of life that way.

I will say this: there is much more money to be made with faith than skepticism in finance.

Look at all these nincompoops buying Nvidia. At 41 times sales, probably the most expensive company in the history of the stock market, buying Nvidia is an act of faith. It’s faith that the business will grow in exponential fashion—forever. Let me put it this way: there is a lot more money to be made being long Nvidia than short some midcap manufacturer where you think there are accounting irregularities. Faith is belief, without evidence. And pretty much all of finance (and the CFA program) teaches you that you should examine financial statements in a backward-looking fashion for evidence that the stock will go up in the future. Buying Nvidia at 200 was insane; buying it at 800 is ludicrous. Both have the potential to make a lot more than short selling, provided you take profits at some point, and that last part is very important.

The same was true of Apple. I suppose at the iPhone launch, you could have seen the future, and said to yourself, self, everyone is going to be walking around with smartphones in a couple of years, and bought the stock. Seems obvious in hindsight. Nvidia seems obvious in hindsight. But in real-time, it is not obvious, as there are a lot of risks to the thesis. Buying Apple at the iPhone launch was partly an act of faith—you had no idea how it was going to turn out.

There are times in the market when we have all the evidence in the world, we’ve done hundreds of hours researching a company, we have it all figured out, it’s checkmate, there is no way we can lose…and then we lose. A lot of professional money management is about doing that hundreds of hours of research, so you have all the evidence at your disposal, and you’ve minimized the possibility that something can go wrong. And then it goes wrong.

As most people know, I am a sentiment investor, so I vulture out from behind a rock when sentiment gets too one-sided, when everyone is on the same side of the trade, and take the other side. That is an act of faith. Take October of 2022, for example—the whole world was bearish. And the bear case was very compelling. And I will add that the bear case is always most compelling on the lows. I had no evidence that the market was going to rally. None. At the time, with the economic backdrop, it seemed like the bear market was going to continue for months. Buying stocks was an article of faith. I had belief, without evidence. Now, a lot of technicians wait for evidence before they take a long position in something. They wait for the chart to base, they wait for it to turn higher, they wait for it to break some key resistance, and then they get long…and then it is too late. They already missed two-thirds of the move. If you wait for the evidence to come in, the returns are correspondingly lower. You have to invest when things are at their scariest to earn those supernormal returns. I saw someone do this on the short side with gold a few months ago. It failed at this support level, it broke this moving average, it broke that moving average—time to sell. It ended up being time to buy. If you wait for all the evidence to come in, your returns will be zero, or negative.

You have to act on faith.

About six years ago, the big trend was something called Evidence-Based Investing. The funny thing about evidence-based investing was that it was actually faith-based investing. A lot of it was trend extrapolation. XYZ grew at 30% last year, so it will grow at 30% next year. That is faith. It is belief, without evidence. The future is unknowable. I’ll go further and say that anytime you take a long position in anything, it is partially an act of faith—you just don’t know. Not that that’s a bad thing, of course. “It’s going higher, dummy” is an expression of faith. “Bull market, dude” is an expression of faith. The CFAs and strategists who will blind you with science about how the market is going higher is not an expression of faith; it is an expression of skepticism.

There is a saying: “Fear knocked. Faith answered. No one was there.” Faith is the antidote to fear, both in real life and in financial life. You will experience much less stress about a trade if you have faith that it is going to work out. Now, of course, not all trades work out, but you have your risk limits, and you stop yourself out, and you move on to the next trade, and if you have a process that works, you will make money over time. You have faith that it will work out in the long run, subject to fluctuations in the short term. If you don’t have faith, you have fear, and there are a lot of people managing money out there who are just consumed by fear. They will make their 15% a year, but they won’t do it gracefully, with lots of yelling and screaming along the way. If you have faith, there is no reason to yell and scream. Everything is going to work out. And even if it doesn’t, that’s fine, too! Nothing has to be a big deal. The markets are filled with fear.

I have faith in my personal life, too. I am a reformed agnostic. When I was in my 20s and 30s, I figured I would believe in God if I saw the evidence. Well, guess what—I saw the evidence. Countless miracles, and I see them to this day. And because I have enlarged my faith in my personal life, I have enlarged it in my professional life, too. In the markets, none of us have big enough imaginations. It is hard to see the possibilities. It is easy to be a skeptic, and disbelieve what you are seeing with your own eyes. And no, I don’t own Nvidia. It’s not really what I do. And I don’t have FOMO—those people are on their path, and I’m on my path. And I know what their path looks like—the vast majority of them will never take profits, and end up where they started, or worse. If your investment strategy is infinity or zero, nothing goes to infinity, so you will end up with the zero.

Of course, if you started a hedge fund where you told your investors that you were going to buy things where you had no reason to believe they are going higher, you wouldn’t raise a lot of money. But none of us knows anything. We spend all our time trying to quantify this field of study that absolutely resists any attempts to quantify it. It is all human emotion. If you have a CFA, is it helping?