The Problem With ‘Simple’ Markets

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Via Brian Lund’s The Lund Loop

Recently, I dropped my Ford Mustang off at a repair shop for some long overdue work. This car has been in my family since 1967 when my great Aunt bought it brand new, at age 67. I love this car, but it’s not safe for kids and stopped being my daily driver over a decade ago, and for the most part, has just sat in my driveway.

The mechanics spent a week pouring over it from bumper to bumper to give me an idea of what had to be done to get it back on the road. When a car reaches 50 years of age you start having issues with things other than your run of the mill items, and when I returned to the shop I was presented with three single-spaced pages full of suggested repairs.

As the owner went over each issue in exacting detail, a mental calculator kept a tally in my head. As much as I wanted to get the car running again, I had a line in the sand about how much I was willing to pay and figured that by the middle of page two I was way over that number. But when he finally hit me with the total, it was less than half of what I was expecting.

I was shocked at first, but then realized something I had forgotten over the last 10 years – a 67’ Ford Mustang is a simple car. You control your direction by turning a steering wheel connected to a metal shaft, not a computer brain. It has no electric locks, windows, defrost, or air conditioner. There are no sensors, GPS, or autopilot. Repairs are simple, and thus inexpensive.

Right now, we are in a simple market. One that doesn’t lend itself to overly complex strategies.

If you are on an institutional desk, you short volatility. Simple.

If you are a long-term investor you put your money in an index fund. Simple.

If you are an active investor, you buy every f**king dip. Simple.

If you are a trader, you buy every breakout or pullback to support. Simple.

If you want exposure to an exotic portfolio, asset class, or strategy, you buy the appropriate ETF. Simple.

If you’re a Millennial who has too much of a life to follow the market, you put your money in a robo-advisor. Simple.

If you don’t like paying commissions, you buy stocks through Robinhood. Simple.

This market is simple, and thus inexpensive to take part in.

The only people who don’t think this market is simple are hedge funds and perma-bears who try to make it complex. Yet even as they are continually wrong, they are right. Markets are not simple by nature. A simple market is an aberration, just like the ones that came out of Black Monday, the Dotcom boom, 9/11, the Financial Crisis, the Flash Crash, Brexit, and so on.

Historically, simple markets don’t last because the perception is that they are risk-free environments, but to have a two-sided market you need risk. You get paid to take risk. Smart risk. Measured risk. Manageable risk. No risk is dumb risk, as it puts everybody on one side of the trade, and though it may pay in the short-term, ultimately, it’s a loser’s game.

Nobody knows when complexity will come back into the market. But sure enough, when it does, it will take down those who aren’t prepared to adapt. It’s just that simple.

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