- I don't view the investment industry as overly competitive, based on the simplest interpretation of Game Theory.
- To get an advantage, though, we can learn from some legendary investors; most notably Paul Tudor Jones, Peter Lynch, and Charlie Munger.
- Additionally, we always have Newton's first law of Motion applied to markets to rely on.
I’ve recently read discussions on how competitive the profession of trading continues to be. My Blink reaction is that it shouldn’t be viewed as “competitive”, having talked before about how the only game (based on Game Theory) trading fits into is the classic One-Person Game. Given that, it can be viewed as Man vs. Nature, with the market in general playing the role of nature. As Morton D. Davis wrote in his book, “Game Theory: A Nontechnical Introduction”, “Nature differs from man, of course, in that you cannot anticipate its actions by guessing its intentions, since it is completely disinterested.” But then I gave it a second thought. The original discussion was about trading, and I’m looking more at the investment side (see my recent piece on Cotton). For this conversation, then, I want to focus on the relatively noncompetitive angle of market investment.
I say “noncompetitive”, thinking of my hypothetical corn December futures (ZCZ24) only fund. Whether that fund makes money is generally independent of what another fund does in the same market, particularly with both driven by different algorithms. Instead of competition, it comes down to intelligence. And though I just said most funds are driven by algorithms at this time, I’m not talking about “artificial intelligence”, at least not completely. Instead, I think it is important to remember three classic quotes from legendary investors.
Let’s start with one from Paul Tudor Jones, who reportedly said, “The secret to being successful from a trading perspective is to have an indefatigable and an underlying and unquenchable thirst for information and knowledge”. I agree with this, mostly. One of the things I’ve noticed over the years, particularly with investments in the commodity complex, is traders get overwhelmed by all the information available. Along with much of it being contradictory, a good deal of it could be classified as “misinformation” packaged to get traders who act without thinking to move a certain way. In the Grains sector, there is a cult-like following of Commentators/Analysts/Reporters who doing nothing more than regurgitate faulty data from USDA (and other government agencies). As I’ve talked about endlessly over the last number of decades, this is wrong on so many levels, yet it never changes. From an investment point of view, I can count on the majority to make mistakes because of it, something I’ll talk about in more detail later.
Peter Lynch, the one-time manager of the Magellan Fund at Fidelity Investments, was famous for saying, “Trade what you know”. I read this piece of advice early in my career as a commodity broker, and it has grown more important to me as my career transitioned more to the long-term investment side of the industry. When I first moved to Omaha 20 years ago, my background as a broker and grain merchandiser in central Kansas was largely dealing with wheat. But I knew back then that wasn’t the path to wealth and well-being, the markets’ moniker as “Poverty Grass” going beyond those who grew the crops. Since moving to the Corn Belt, I’ve spent most of my time studying, writing, and talking about King Corn[i]. What I’ve learned over the years is that corn is the bonds of the commodity complex: Usually not that exciting, meaning the market is generally predictable if we eliminate much of the noise. How do we do this? By understanding the basics: Price trend (money flow), basis (cash minus futures), futures spreads (and forward curves), and seasonality. Looked at in this way, corn is not all that difficult and can be profitable over long periods of time.
Last but certainly not least is one of my favorite quotes from the incomparable Charlie Munger. The longtime other half[ii] of the duo at the head of Berkshire Hathaway said something to the effect of, “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent”. There are so many Charlie Munger quotes I could use, and this one comes in a number of different forms. The bottom line is those who don’t consistently act stupid have an advantage. Again I go back to the majority of the industry that believes it can hedge/trade/invest based on government numbers of any sort. Why? Because that’s what their brokers tell them to do.[iii] It’s stupidity, and there’s no other way of putting it nicely. That being said, it gives those of us who ignore the misinformation an advantage, without “trying to be very intelligent”.
Those of you familiar with my 7 Market Rules will see how they fit with these simple lessons from some of the industry’s greats. Additionally, we can throw in a little tidbit from the greatest market analyst of all time, Isaac Newton. His First Rule of Motion applied to markets remains the standard, “A trending market will stay in that trend until acted upon by an outside force, with that outside force usually noncommercial activity”. Again, it’s not complicated.
[i] So much so I’m still planning on writing a book, someday, titled “An Kansas Jayhawk in King Corn’s Court”.
[ii] Mr. Munger passed away in November 2023, just short of what would’ve been his 100th birthday the following January.
[iii] Few remembering the first 5 letters in the word “Broker” is “Broke”, something I was reminded of constantly during my time as a broker.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
