Apr

9

I was re-reading Learned Optimism (Seligman) while with my 11-year-old at baseball practice. One point that jumped out at me was the why organizations keep the pessimists around. If optimists outperform in almost all areas, why hasn't evolution taken pessimists out?

"Lauren Alloy and Lyn Abramson, then graduate students at University of Penn did an experiment in which people were given differing degrees of control over the lighting of a light. Some were able to control the light perfectly. The other people, however, had no control over it at all.

"The people in both groups were asked to judge, as accurately as they could, how much control they had. Depressed people were very accurate, both when they had control and when they didn't. The non-depressed people shocked us. They were accurate when they had control, but when helpless they were undeterred: they still judged they had a great deal of control (p 108). Alloy and Abramson added monetary incentives to the test. But the benign distortions of non depressed people did not go away, rather they got even bigger (p 109)."

Let's examine why a trader would or wouldn't want a pessimist around. For arguments sake, let's say with the usual after the factness in market calls the pessimist were accurate. Of course no man has a monopoly on correct calls. The human nature of forecasting is we usually remember the last place we parked our car. For trading, a man can make the usual tens or hundreds of anecdotal pessimistic points. Yet the magnitude of the event, usually a decline called by the bears, is remembered. There are hundreds that called the decline of 1987, yet no one mentions what they made in the 20 years since.

The always-optimistic don't want the bears growling in their ears on the decline and every rally back. Perhaps it's human nature to believe prices the longer the exist. I can go on and on, from 10-year bond yields that "must go up" from 2002-2006, to now "a recession is imminent."

After a decline in stocks, the optimist and the bull trader do not want to lose their confidence. If prices stay down long enough, they might start to believe the bears' banter. His position goes from profiting to not losing. Perhaps the joke is pessimists already have this market stance. Therefore they are grateful to the bears' warnings of a market decline.

One must be very careful not to be hung out to dry. The realist has a system, ignores the lunatic fringe, scales in and out adjusting for current movement. These traders are reliable profiteers, never taking huge losses, yet never having a big score.

A bear that goes long, buys too late and sells too early. A bull on the short side is almost comical. "Why bother?" is the perfect quote. The poor bastards that trade news and price, buy strength and sell weakness, are almost guaranteed losses. The market eco-system's banter is set up to be more bullish after rises and bearish after declines. It's rare, once a year when the market falls or rises so much that everyone agrees it will reverse for a trade.

The lunatic fringe is always bullish or always bearish. A good question for a short-term trader is, is it better to be a lunatic or a realist? Any system is better than no system at all. I commented years ago in the bucket shops there were guys in year 2000 that went long only in tech stocks and made a fortune.

I've been hung out to dry twisting in the wind so many times. It seems it's much better to always be optimistic and bullish. For a trader it's comical how many great trading days end near unchanged. The joke is always, it's bullish for today, we will drop 10 points and close up one on the day. It is sad when you are a realist and buy small in case the market does not rally back.

None of this is to say the pessimists can't profit off the annual big declines. This is not to say that you can't keep a good pessimist around. Perhaps when a pessimist is bullish a big run to the upside can occur.

There seems to be a few kinds of traders. One that thinks everything is BS and takes a mechanical approach to stocks. Pessimists talk far more than they trade and go against a rise that any study of market history shows it happens more often than not. Yet they are accurate and so-called disciplined enough to wait for a decline and hope to sell down prices so low everyone thinks they are oversold. Then the optimist, up markets expected, down moves are great buying opportunities, everything is great. Finally the suckers that are always caught twisting in the wind.

Maybe it's the optimist that turns pessimistic who is the sucker. I sure know one when I do not trade aggressively. If a pessimist isn't saving you money from losses it's a double whammy. For certain trading not to lose, it costs profits.

After re-reading Learned Optimism I can see why an optimist can't stand to have the pessimists around.


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