Brainstorms: A Thesis Accounting For All Varaibles
How To Form A Thesis
Ideas and theses are the lifeblood of any type of money management process. This is true in markets and any domain of the economy. The markets happen to have more liquidity and instruments to express a higher degree of specificity in the TYPE of view you have.
Constructing an idea or thesis properly has the same importance as constructing a house properly. If you don’t do it correctly, the quality will be exposed when there is a hurricane or earthquake. Remember, “thinking” is just like any other good or service except you can leverage it exponentially.
When I think about constructing an idea or thesis, I always break it into two parts. 1) The idea and 2) its implications. Let me provide an example:
Imagine you take your wife out to dinner at a very nice restaurant. You order the finest piece of meat and have an amazing dessert. Both of you are absolutely enjoying the time. You look over at your wife and say, wow honey this is such a good meal, isn’t it? Instead of smiling and agreeing with you, she says, “Oh so you don’t like my cooking huh!” (seems like a communication issue lol).
You were simply stating how good the meal was. She didn’t disagree with your statement, she made an incorrect implication from it. This might seem like a small difference but imagine what would happen if the people around you always made wrong implications from the information you provided? (if you really want to be a nerd and learn more about this, you can look up speech act theory with locution, illusion and perlocution).
Let’s use an example in markets that is similar. Imagine you believe some specific catalyst will take place and the implication of that catalyst is that bonds will drop and the dollar will rise. Well let’s say you got the catalyst correct but the implications wrong? You still lose money.
In markets (and life), you have to get the idea and implications right. So anytime I think about building an investment thesis, I want to make a clear distinction between the idea and its implications. On top of that, I want to know how either of these might be dynamically changing through time.
This is intuitive to all of us but talking about specifics always helps us be intentional when relying on our intuition.
Forming A Thesis:
When I think about constructing a thesis, I think about testability and falsifiability. A great book on this is The Beginning of Infinity.
Fundamentally though, my thesis needs to properly account for all the variables and moving parts. The way people go wrong is by only selecting the variables and data points that confirm their thesis.
The other mistake people run into is by having an Occam's Razor approach where they just select the simplest explanation. I just did a whole article on simplicity and intuition but the danger is going so far that it’s reductionistic.
Reductionism will inevitably result in implications occurring that you never expected. The value of having “higher quality thinking” is the ability to make distinctions between things. Practice and experience show you the necessity of making distinctions between things.
This is obvious if you trade markets. You go through a period of growth or inflation and realize a new distinction or implication that you never realized previously. It wasn’t that you were ignoring it but just that you didn’t have the base of knowledge or specific temporal position to notice it.
Two Things:
I will end with two ideas:
I like having a thesis or idea that continually updates and adapts. My thesis is constantly changing as information moves across the spectrum from uncertainty to certainty. The thesis is either confirmed or falsified. Either way, the result is updating the ideas I previously held.
Right now, I believe the market is mispricing the implications of monetary tightening AND the implications of an upside surprise to inflation into the end of the year. I don’t really care what podcasts or financial news media says because they always have an extreme view about one of the tails. I care about how the market is pricing the distribution and path. Right now, I think we are at a type of “options straddle” cyclically where we are compressing before the next move. I laid out my views on this in the macro report (link) and the week ahead (link).
Keep refining your thought process! The quality of your thinking and ability to leverage it is what allows you to monetize it.
Thanks for reading!