Different Games

February 23, 2024

Every golfer has strengths and weaknesses. My primary distinction as a golfer is I am not a very good one. To say my golf game has strengths is an exercise in relativity. It is more accurate to say I have weaknesses that are less pronounced. Anyway, when I step up to a tee box on a par five I’m holding a seven iron. This is always shocking to whomever I’m playing with (except Rory, who is accustomed to it now). For the uninitiated, par five tee shots are typically when the driver makes an appearance. A par five is a long hole, and a seven iron is a short club. But I know the game I’m playing. One that minimizes my weaknesses and maximizes my (relative) strengths. My biggest weakness is I’m terrible with long clubs. Put a driver in my hands and there is a zero probability the ball will land in the fairway and only a slightly higher chance it will ever be found. Then there is the possibility of yelling “Fore!” before drilling some poor soul on the adjacent hole to consider. But a (relative) strength of mine is I’m built a bit like a linebacker, so I hit my seven iron about 67% as far as a good golfer hits their driver. And I hit my seven straight (usually). Another relative strength is my short game – within 100 yards of the pin I begin getting comfortable. Two shots with my seven gets me within 100 yards of the pin, which puts me in a decent position on a par five.

Nonetheless, anyone that tees off with me is mystified when the seven comes out of my bag.

But I know the game I’m playing.

And it’s different from the game they’re playing. Whip out the driver and swing for the fences - chicks dig the long ball.

My decisions are rational, but they look irrational to people playing a different game.[i]

There are people playing different games in the stock market too. Hedge funds deploy algorithms to trade at lightning speed, entering and exiting positions within a fraction of a second. Speculators make long shot bets on obscure positions. Professional traders keenly monitor price movement by the second on their Bloomberg terminals. Degenerate traders buy 0DTE options looking for a quick dopamine hit. Technical analysts buy and sell based on chart patterns and 50 day moving averages. Fundamental traders buy and sell based on earnings reports and price to earnings ratios. Commodities traders worry about the price of coffee beans because of a drought in Brazil. And on and on. Speculators, traders, investors, and algorithms all swimming in the opaque morass we call “the stock market.”

They’re playing different games.

All too often people playing one game are unduly influenced by those playing a different game.

“Bad news is good news” is the latest shibboleth bandied about the financial media since the Fed started raising interest rates. Conventional (over-simplified) financial theory is low interest rates are good for stock prices. “Bad news is good news” is shorthand forbad economic data will reduce the risk of further inflation and induce the Fed to cut rates, which will be good for stock prices.” So we’ve spent two years living a strange dynamic where people are rooting for bad economic data. I’m reminded of Brad Pitt’s eccentric character in The Big Short chastising two young short sellers celebrating future profits on their short positions by the economy collapsing: “every 1% unemployment goes up, 40,000 people die.”* There are traders and speculators in the market rooting for bad economic news because it increases the odds of rate cuts and stock prices bouncing in the short term (theoretically). But that sentiment bleeds into long-term investors with 20+ year time horizons. Suddenly the long-term investors are rooting for bad economic data. Which is strange because the best thing for long-term stock prices is good economic data. An irrelevant factor for long-term investors is interest rates this year. Can any long-term investor recall where interest rates were in 2004? Of course not. Interest rates today are as irrelevant to the long-term investor as interest rates in 2004.

Too many long-term investors are duped into hoping for the inverse of favorable news for their portfolios by people playing different games.  

Morgan Housel said it beautifully, “the market is rational, but investors play different games, and those games look irrational to people playing a different game.”

Know the game you’re playing and avoid influence by those playing different games.

Sean Cawley, CFP®

*I don’t know how precise this is, but it’s a good line. I suspect it’s at least directionally accurate.


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[i] Credit to Morgan Housel for the original insight: https://collabfund.com/blog/little-rules-about-big-things/