Since it's Friday, I’d like to wax philosophical about headspace and intellectual approach than focus on the details of any one monthly retail sales report. Let us discuss information sources, methodologies, and precisely the choices we choose to make when we select what to believe.
This is a much more significant point than many investors and traders realize.
Over the years, I have identified in my own investing a number giant blunders that called out for correction. I have made many ordinary, as well as a few spectacular, gaffes. These were fortunately early in a career arc, the time when you are supposed to make lots of errors. It is less painful when you are responsible for a lot less money (though it took me quite a while to figure out that is somewhat by design).
What sorts of errors did a young trader like myself make earlier in his career? All of the usual – i.e., expensive – ones. A short list of my mistakes looks something like this:
Optimism Bias: All traders suffer from the inherent bias you humans have -- you think you can beat the market. Perhaps I can phrase it differently; young traders have not yet figured out that after the costs incurred, expenses, taxes paid, time and labor invested, most of the time, it is not worth the effort.
There are a handful of exceptional traders who make it so challenging to let go. Just as every high school B-Ball player isn’t going to become Michael Jordan, neither will most traders go on to become John Tudor Jones or Jim Simons. But the mere possibility keeps lots of kids working on their crossover dribble -- and plenty of traders busy chasing alpha.
Confirmation Bias: The Internet has allowed us to carve out fiefdoms of reinforcing belief systems, rather than challenge ourselves and our beliefs on a daily basis. We see it in politics (Drudge vs HuffPo), we see it in investing. When we are leveraged long, we all tend to read bullish research and commentary. When we are in cash or short, we seek out bearish writings. This is a basic function of human nature, and in finance its a dangerous and costly habit. The Smart Money seeks out research and commentary that challenges its existing beliefs.