We Have Met The Enemy And He Is… Dumb?

If reading this blog hasn’t convinced you that I’ve got a huge ego, well, let me make another attempt.

Once of the best things that happened to me back when I was just learning to play poker was discovering that many of my opponents were dumb.  I don’t mean tourists uneducated about poker or gambling in general.  I mean dumb.  I’m talking about the sorts of people who regularly lost that ongoing battle of wits with their VCR (yes, those things) to record at the right time on the right channel.  The sort of people who can’t make correct change without counting on fingers and/or toes.  Dumb.  I’d be sitting there at the table, and suddenly out of the blue one of my opponents would say or do something so profoundly stupid that I knew right then and there I was facing a blithering idiot.  I remember one lady very earnestly explaining how she used astrology to figure out what her lucky hands for the day were.

Now, why was this such a big deal?  Because I was new to the game and needed courage.  When you’re a newbie it’s easy to believe that everyone else is better at the game, and at least within those limited confines smarter than you.  So it’s refreshing when someone hangs out their “stupid” sign.  Until that lady opened her mouth, I honestly believed she might be a better player than I was and that I might be in over my head.  Turns out I need not have worried.

Trading is the same way.  You see all these guys on TV or whatever, and they’re in New York.  They’re wearing suits.  They’re talking about about the repo market.  You don’t know what the fuck the repo market is (hint: it has nothing to do with this).  Obvious conclusion: they must be smart.  You must be dumb.  Trading against them would be a disaster.  If you feel this way, what you need is healthy dose of courage.  You need that astrology moment – you need to see the dumb in action.

Thankfully, the fine folks at Franklin Templeton Investments did a nifty little survey that shined a light into the least intelligent recesses of the market.

The survey isn’t online that I can find, but there is a press release about it here.  They asked a large number of investors a simple question: did the US stock market go up or down overall in 2009, 2010 and 2011?  Now, here’s the dumb: for each year, roughly 50% of the respondents incorrectly believed the market had gone down.  Certainly ORF readers are too well educated to believe that 😉  You’ve all looked at the chart, and you know the market made healthy gains in 2009 and 2010, closed right where it opened in 2011 (slightly higher if you look at the DOW instead of the S&P), and is well on it’s way to another sizable gain in 2012.

I love this survey, because it asked a question I would never have thought to ask.  Until I read it I would never imagine that any active market participant wouldn’t know in broad strokes what had happened to prices over the last few years.  OK, maybe 1-2%.  But 50%?  That’s, uh, I just can’t explain it.  What’s weird is that they have to be a certain special kind of dumb.  We know at least some of the people surveyed were educated about the market.  So for 50% of the people to be wrong, the uneducated remainder had to be actively and creatively wrong in order to do substantially worse than guessing.  If they just flipped a coin the wrongness rate for the whole group could never reach 50%.  So much like the astrology lady, they actually had to put effort into being wrong.

The good news is that any would-be traders reading this should be greatly cheered by the survey results.  While some of your market opponents really are very intelligent, capable, even brilliant people over half of them are actively dumb and self delusional.  They may not be the biggest market participants (dumb is expensive and tends to shrink the size you can trade).  But there are a LOT of them.  Like millions.  And their money is just sitting out there doing dumb things, waiting for you to take it from them.

Faced with a survey result like that, I hope no one can believe the market is somehow efficient and full of rational and crafty profit maximizers.  We’ve just proven over half the market is made up of people too stupid to know even the most basic facts about it.  And they got that way though an active process of being wrong, not randomly.  In other words market bears more resemblance to a clown college than a rocket scientist convention.

Now, there’s some takeaways here.  If you’re active in the market and would have gotten the survey wrong, GET OUT OF THE MARKET.   Seriously, you don’t know enough to win, so stop.  You can come back when you get educated.  But for now stop.  If you got the survey right, but are still a losing trader, relax.  Yeah, losing sucks.  Do it in your demo account rather than on real money.  But realize that the market is full of dumb money, and with some practice and diligence you will be able to get a share of it.  For those who are already profitable, the clown college will be back in session tomorrow morning 😀

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One thought on “We Have Met The Enemy And He Is… Dumb?

  1. Love it.
    If you ever get to meet an “expert” in any field and he/she knows it all and displays not a shred of doubt, then run, don’t walk. The “expert” that doesn’t know it all and is open to listening to a different opinion might be worth your time.
    In the financial world, the only things the “experts” are expert at is taking your money.

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