Myth & Reality In Markets & The Movies

February 12, 2015

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features John Forlines III, chairman and chief investment officer of Long Island, N.Y.-based JAForlines Global.

 

It's Oscar season, and media coverage makes it easy to get caught up in the Hollywood money machine, but for some of us it's still about the art. There are many years when there are simply no great movies—the stuff that our grandkids will care about.

 

This is not one of those years. For our money, Alejandro Gonzalez Inarritu's “Birdman” flies above the rest as a magnificent statement of human failings, desires and above all, the perilous intersection between relationships and the nature of love. 

 

Michael Keaton plays a has-been superhero movie star trying to reinvent himself as a serious director and actor on Broadway. He has adapted a classic Raymond Carver short story, “What We Talk About When We Talk About Love,” as his comeback vehicle.

 

The ensemble cast with Edward Norton, Emma Stone, Zach Galifianakis and Naomi Watts make the harrowing process (for play investors and actors alike) of developing and opening a play come alive in a slow-burn mixture of fantasy, gritty backstage politics and emotions. 

 

So, what does this great art have to do with financial markets? What do we talk about when we talk about markets?

 

Let me count the ways.

 

1. Living Firmly in the Past is the No. 1 Investor Mistake

Michael Keaton's character is haunted by the vision of his incredibly successful Birdman franchise that ended decades ago. He thinks that doing a "serious" drama will transform him from a washed-up Hollywood icon into an artist.

 

But the search for career renovation has cost him his marriage and the relationship with his just-back-from-rehab daughter, played by Emma Stone. His redemption comes when he embraces the love of those around him and puts his past into proper perspective—it's something to cherish and evolve from, not to reject and regret. His future is uncertain (cue the ambiguous ending to this movie), but he's not afraid of it.

 

While looking at past investment cycles is a useful exercise, far too much attention is paid to "patterns" and "this year is like that year" analysis. As the post-2008 world has demonstrated, correlations and causations can stay out of whack far longer than most investors realize.

 

Instead of embracing uncertainty, many investors cry "fire" and run to the exits almost every quarter only to sheepishly crawl back in after the latest false alarm is revealed. Individual investors may be much better off (and happier) spending more time with their loved ones, families, communities and their own economic activities rather than worrying about 1929, 2002 and 2008 coming back to haunt their investments. 

 

 

2. Life Is Continuous And So Are Markets

Birdman is presented as a series of continuous takes. Until the very last scene, the camera never stops following the principal characters around. And isn't that more lifelike? When was the last time you were able to retake a bad trade or a careless statement that hurt someone's feelings?

 

Markets and their drivers never really stop, but the financial media has lulled us in to thinking that they do—as if there's a narrative that materially changes each and every day.

 

But nothing changes as fast as human emotions. The big data sets are still issued only once a month, and central bank guidance less than that almost everywhere. And macro changes are gradual, far more gradual than price movements that drive the "signals" of quant shops and excited day traders. We all need to slow down far more often than we do.

 

3. Friends And Enemies Are Nonsensical Terms In Life And The Markets

Edward Norton is cast as an acclaimed Broadway veteran who has swooped in to save the day only a few previews from opening night. He's brilliant, cynical, intelligent, hateful, sensitive yet emotionally damaged.

 

In short, he's just what the production needs: He's the greatest enemy and the greatest friend of Keaton's character, and he helps make the play great (the ultimate goal) while undermining it in the media and with the critics (not the main goal, but often perceived as such). 

 

In the investment world, so many investors and even professional managers, are influenced by their own herd: people they like, research that fits their view—in short, "inside" perspectives on the world. It's a terrible habit that leads to crowded trades and panic when members of a large influence-group act in concert. A perfect example is the doom-and-gloom mindset that many investors have had since the Great Recession. 

 

That mindset is constantly reinforced by the media or research inputs they choose—that the next risk "crash" is just around the corner. The next "crash" is more likely to be a healthy correction in a long-running equity bull market.

 

In fact, we believe there is a solid case to be made that the next five to 10 years will see risk investments in a positive uptrend, even with the intervention of recession and a correction. Note to advisors: Find smart people who disagree with your world view and buy their research, too. It will make your "production" better, too.


JAForlines Global (JFG) provides investment advisory services to clients of broker-dealers, their registered representatives and independent RIAs. JFG specializes in constructing actively indexed portfolios using ETFs, which are available for private wealth management investment or in qualified retirement plans via a collective investment trust. Contact the firm or visit its website at 516-609-3370 or [email protected] or www.jaforlines.com.

 

 

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