Macro Lesson 1: Building Your Narrative
Strong Opinions, Weakly Held. The way professional investors view investments and trades
Hey everyone,
Welcome to the first macro lesson of this new series, like I said, the level of reports and educational insights are going up.
In this piece we’ll uncover:
The mental framework of professional investors
What is a macro narrative & how to develop one
Analysing popular macro narratives and the truth behind them
Without further adieu, let’s dive in:
The Difference Between Smart Traders & Speculators
“Strong Opinions, Weakly Held.” — Barry Ritholtz
That’s the way professional investors view investment ideas and trades. The first time I came across this intelligent phrase, I was reading a report by Bary Ritholtz, that report was dated all the way in 2006, but it’s crazy to see how much relevance this plays in today’s world.
What does it actually mean?
Well, in the words of Barry this is the interpretation:
“Being a successful investor often requires you to hold numerous internally conflicting concepts simultaneously — something many the average psyche has difficulty with. One must think through the best possible analysis for your positions, and expend time and effort to thoroughly test them. You need to be able to strongly argue your postion — bullish, bearish or cash — but at the same time, be ready to admit error and change views.” — Barry Ritholtz
Now for some context, this ideology dates back to Professor Robert Sutton, from Stanford who aimed to distinguish what was “smart” and what was “wisdom”, though it perfectly sums up how the world’s largest money managers be that, Jim Simmons, Ken Griffin, Stanley Druckenmiller, Howard Marks, Bill Ackman and many others view their investment philosophy.
This mental framework is the differentiator between traders that lose and those that win in the long term, it doesn’t matter what type of trader you are, be that swing, scalp etc, the ability to hold a view ie “dollar bearish for Q2”, with a strong amount of evidence to back that trade idea but in the same breath not be glued to that trade idea when markets seemingly turns against you is vital. This falls heavily into something we know as confirmation bias, the tendency to interpret new information to support your existing trade idea, becoming in other words, delusion.
Pretty deep right? Yes—that’s the level of thought professional money managers hold themselves to when managing their funds.
Trading, investing are both excruciatingly challenging and difficult tasks to succeed in, 4 in 5 traders won’t last, so us, the remaining macro enthusiasts must explore every angle to look for a margin of improvement. This framework is one of them.
“Strong opinions, weakly held”