Narrative Fallacy & We

After years of being in a terminal decline, Yahoo finally decided to sell off its core business to Verizon for $4.8 Billion. Given that adjusted for its holding of Alibaba and Yahoo Japan, the core business was actually valued at Zero.

Nassim Taleb explains Narrative Fallacy and I quote

The narrative fallacy addresses our limited ability to look at sequences of facts without weaving an explanation into them, or, equivalently, forcing a logical link, an arrow of relationship upon them. Explanations bind facts together. They make them all the more easily remembered; they help them make more sense. Where this propensity can go wrong is when it increases our impression of understanding.

—Nassim Nicholas Taleb, The Black Swan

On Twitter, the reactions to the Yahoo sale were wide though one picture seemed to suggest how badly it had played it out

In fact, the above missed out the fact that at one time, Yahoo was pretty close (closer than it was with Google) at acquiring Facebook for $1 Billion (Market Cap of FB today being $350 Billion) or the fact that what Microsoft offered was for the Entire company and not just its core business. But, hey, why spoil a good story with facts.

Hindsight is 20/20. As investors / traders, we too fall for this phenomenon which can be illustrated by the following Whatsapp message that I received today

Wonders of Market :

22nd Jan 2009 – price of Bajaj Finance Rs.55/-
26th July 2016 – it touches Rs.9745/-

Investment of Rs.55000 becomes Rs.97.45 Lakhs.

How wonderful it would have been if we could have invested just 5,500 Rupees in 2009 and see it grow to nearly 10 Lakhs today. No Real Estate investment has grown by such a measure in the same period.

But the bigger question that is missed is whether there were any signs of such greatness in Jan 2009 given that the market itself was in doldrums and all the signs were of further doom and gloom to come.

In 2000, at the height of the Infotech bull run when Yahoo was valued at $125 Billion, we had our own Infotech boom with stocks that had anything (or even nothing other than having a name that reflected it being a Infotech company) getting valued wildly.

Then as now, the thing that everyone thought was, what if I had invested just 13K in the IPO of Infosys, today I would have been a Crorepati. Then as now, very few had any clues and even those who did somehow hold on to the stock (I know friends who held) sold very little for the assumption was that this rally will go on forever and it was stupid to sell (I know many a client who got destroyed buying IT stocks which then couldn’t be sold since when the cards tumbled, there wasn’t a easy way to exit).

Everyday Jokers who come on Television try to explain why the market or stock did what it did making us wonder why we did not think about it earlier. For instance, today morning a Television Anchor explained the bullishness in markets as Liquidity driven and went on to say “This is the market in which momentum is on your side and there is no fun in missing out.” And despite all the buying by FII’s, markets closed the day negative – where did that liquidity go one wonders.

In a Freakonomics podcast,  Authors of the book – Think Like a Freak, Stephen Dubner and Steve Levitt tell us that the hardest three words in the English language are “I don’t know,” and that our inability to say these words more often can have huge consequences.

No one really has a clue as to what stock will double (in a given period of time) or how the markets will behave over the coming days / months and yet, day after day we are bombarded by information most of which we don’t really require to manage our money better.

To me, the way to be a better investor is to read good books rather than watch business channels or read the pink papers. Then again, the human mind is always looking for easy ways to accomplish our needs and business that want to exploit that are dime a dozen.