Where can you find an individual who is simultaneously a Nobel prize in physics, an enthusiastic of a percussion instrument with a Brazilian samba style, an introducer of the concept of nanotechnology (adding remarkable accurate predictions), skillful in the art of lock picking and well known for the jokes he played on colleagues? You find it in Richard Feynman, a perfect example of natural curiosity about the nature of things and a great teacher as well. You won’t believe the crazy experiments he has done in his life. I highly recommend you to take a look at his biography, even if you’re not into physics or science in general, because he has a truly original mind and he always presented a different perspective on things. The point here is that by acknowledging his way of thinking you can think more clearly and therefore make you better prepared for your trading and investment decisions.
Let me give you an example and then try to adapt. It is said that he gained his capacity to challenge orthodox thinking – and on knowing the difference between the name of something and something – with his father. He recalls, as an example of that, a bird story when he was very young, playing in the field with other kids:
“… and one kid said to me: “See that bird? What kind of bird is that?!” and I said: “I haven’t the slightest idea of what kind of a bird it is.” He says “It’s a brown throated thrush” or something…and the kid says “Your father doesn’t teach you ANYTHING”. But it was the opposite. My father had taught me, when looking at a bird: “Do you know what type of a bird that is? It’s a brown throated thrush. But in Portuguese is a Unta da Pero, in Italian a Chutto la Piquirita, in Chinese is a Chung Won Ta, in Japanese a Patarato Korecha, etc. Now, you can know all the languages that you want on what the name of that bird is, but when you finish with all that… you will know ABSOLUTELY NOTHING about the bird! You only know about humans in different places and what they call the bird”. “Now”, he says “let’s look at the bird and at what it’s doing – that’s what counts…”
This segment of the interview has another part regarding another interesting story about something he noticed when he was playing with a little wagon, which serves as another example on what he was trying to explain – the difference between knowing the name of something and knowing something.
The comparison I want to establish is, although we are talking about different sciences, the same way we seem to be far from fully understanding inertia in physics, or why that really happens, we don’t fully understand the “laws” we rely upon when deciding where and when to invest. Through this analogy, my subsequent main point is to elucidate what we know and what we know that we don’t know.
In technical analysis, why does the concept of tendency, channel trading, support or resistance tends to hold? (I will not elaborate on how far it is from being 100% accurate or how far it is from the law of inertia’s accuracy). Where do Fibonacci retracements come from? Why do breakouts tend to work, either in the short, medium or long term? Why is the 200-day moving average important for long-term investors – why 200? In fundamental analysis, what does a P/E or a P/B ratio of a company really implicate in its price action?
We don’t know what percentage of it is a self-fulfilling prophecy, in the sense that these rules work because people acknowledge that they work and use it, and what percentage via logical explanations contribute to the real price movement, but we know both exist. We know the names, but we don’t really know what is going to happen, and why, because we are far from fully understanding time or the future and human response, thus also contributing to making the rules not 100% reliable per se. We don’t know what all the investors will do in the future. We don’t know what facts and what expectations are already reflected in price. It involves human behavior, human expectation, it is complex.
Why do numerous recessions, market crashes, euphorias and major financial panics keep occuring in history? It points to a not-so-good notion of risk, or even more simply, of what can happen. And what exactly is risk and what does it imply?
I know this exercise should probably not be taken to the extreme, but acknowledging it can help us remember and establish with better precision what we know and what we really don’t know, contributing to more realistic and conscious investment decisions.
For more on the character read the books “Surely You’re Joking, Mr. Feynman! (Adventures of a Curious Character)” (the funniest), “The Meaning of It All: Thoughts of a Citizen-Scientist” or “What Do You Care What Other People Think?”, or watch the 1993 BBC documentary “Richard Feynman – No Ordinary Genius”.
P.S.: The names of the birds presented in other languages than English on the Richard Feynman’s story that I transcribed were my invention, or attempt at understanding what he said. Maybe I’m not interested in knowing the exact names!