In investing as is in life, it is easy to fall into the trap of overly simplified narratives. These narratives are often propagated by the media, our peers and even our elders. They are designed to be easily digestible, make us feel smart, and to appeal to our emotions. However, they often lack nuance and complexity, and can lead us to make poor decisions while making us feel that we’ve done the right thing.
Everything should be made as simple as possible, but not simpler.
— Einstein (probably)
Quotes are a great example of overly simplified narratives. They are often taken out of context, and can be used to justify almost anything. For instance, the quote “Jack of all trades, master of none” is often used to discourage people from pursuing multiple interests. However, the full quote is “Jack of all trades, master of none, but oftentimes better than master of one”. This changes the meaning of the quote entirely. The aforementioned quote by Einstein is, I believe, one of the few quotes that successfuly encapsulate the nuances that’s required to make it useful. I fear that I still don’t understand it fully.
Politicians wield this tool of “overly simplified narratives” to gain the support of the masses. They often use fear, anger, and other emotions to manipulate people into supporting their policies. They often present complex issues as black and white, and offer simple solutions that are often ineffective or even harmful. This brings out two issues:
On the flip side, giving overly complex narratives can also be harmful. By presenting yourself as smarter than your audience, you risk making them feel inferior (well, they could also think that you’re stupid and they’re smart and disregard your ideas altogether). Inevitably, one loses the support of their followers or fail to garner any.
It’s my view that we should strive to understand the complexities of the world, and to avoid falling into the trap of overly simplified narratives. We find solace in certainties and discomfort in uncertainties. But what’s easy, what makes us feel good may not always be what’s right. We should be wary of those who present the world in black and white, and seek to understand the nuances and complexities of the world.
Only then can we make informed decisions and avoid the pitfalls of overly simplified narratives. Only then, can we avoid being misguided by those who do not have our best interests at heart.
It is frustrating to see YouTube advertisements of “financial gurus” (better known as “scammers of the greedy, uneducated and uninformed”) who claim to have the secret to making millions in the stock market. They often present investing as a simple game of buying low and selling high, and claim that anyone can do it. The same old pattern of pedalling simple solutions to complex problems is evident here.
In the short term, such ideas become a self-fulfilling prophecy. Say a group of 10 people are told that a stock is going to go up. They all buy the stock, and the stock goes up. They all make money, and they think they’re geniuses. They tell their friends, who tell their friends, and so on. The stock goes up even more, and everyone makes even more money. Did the underlying business become that much more profitable to justify the increase in stock price?
The same goes for over-simplified technical analysis. “If the line hits, the SMA, buy!” — it’s once again a self-fulfilling prophecy! Granted, some people do make money this way, but it’s not sustainable. It’s like a game of musical chairs. When the music stops, will there be a chair left for you to sit on? When the hype dies down, who gets to cash out with a profit?
In the short term, absent of any real changes in underlying business value, investing is likened to a zero-sum game. For every person buying, someone is selling. For every big winner in a sharp price rally, there are many other investors who bid up the price of the stock. But I digress.
Financial gurus promoting simple solutions and giving general ideas on how to make money in the stock market are not only misleading, but they are also dangerous. They prey on the uninformed and the greedy, and they often lead people to make poor decisions that can have serious consequences.
A simple tool to prevent being made use of in this way is to ask “What is the incentive of the person telling me this?” Politicians want to gain power and support, and there’s nothing easier than tricking the masses into believing that they have the solution to all their problems. Financial gurus want to make money, and there’s nothing easier than tricking the uninformed into believing that they have the secret to making millions in the stock market.
Life is too short for you to be living the life someone else wants you to live, at your expense.
Be very careful of overly simplified narratives.
Disclaimer: The ideas presented in this post are solely my personal perspective and have not been substantiated by any verifiable evidence. Please form your own opinions on such matters.