Brainstorms: Be careful what you know

The risk of learning

From Sherlock Holmes by Conan Doyle:

"His ignorance was as remarkable as his knowledge. Of contemporary literature, philosophy and politics he appeared to know next to nothing. Upon my quoting Thomas Carlyle, he inquired in the naivest way who he might be and what he had done. My surprise reached a climax, however, when I found incidentally that he was ignorant of the Copernican Theory and of the composition of the Solar System. That any civilized human being in this nineteenth century should not be aware that the earth travelled round the sun appeared to be to me such an extraordinary fact that I could hardly realize it.

“You appear to be astonished,” he said, smiling at my expression of surprise. “Now that I do know it I shall do my best to forget it.”

“To forget it!”

“You see,” he explained, “I consider that a man’s brain originally is like a little empty attic, and you have to stock it with such furniture as you choose. A fool takes in all the lumber of every sort that he comes across, so that the knowledge which might be useful to him gets crowded out, or at best is jumbled up with a lot of other things so that he has a difficulty in laying his hands upon it. Now the skillful workman is very careful indeed as to what he takes into his brain-attic. He will have nothing but the tools which may help him in doing his work, but of these he has a large assortment, and all in the most perfect order. It is a mistake to think that that little room has elastic walls and can distend to any extent. Depend upon it there comes a time when for every addition of knowledge you forget something that you knew before. It is of the highest importance, therefore, not to have useless facts elbowing out the useful ones.”

“But the Solar System!” I protested.

“What the deuce is it to me?” he interrupted impatiently; “you say that we go round the sun. If we went round the moon it would not make a pennyworth of difference to me or to my work.”

What should you know?

The section above from Sherlock Holmes by Conan Doyle has been ruminating in my mind over the past week as I think about markets. These days, I spend most of my time reading academic papers and modeling data for information purposes but I read older classics for the purpose of thinking well. I don’t think this is for everyone because you need to know the language of your respective domain incredibly well before you have access to being creative.

One of the ideas from the Sherlock Holmes excerpt above is something most people don’t give much thought to: How much junk do you have in your brain?

Everyone in financial markets is likely self-aware enough to know they need to learn and grow in order to achieve success. The more important question is are you excluding the junk from your brain as well?

With today’s clickbait culture, anything that pushes you to think critically is unlikely to catch your immediate attention. The fool takes in all information without discernment but the wise man recognizes how ignorance can be an asset.

Markets:

Side note: Why read the news? I personally don’t see much of a point in it. I used to have a paper WSJ paper delivered to my house every day. I enjoyed the aspect of reading it but it is intentionally constructed to give you the illusion of certainty in the world. (I no longer read the WSJ)

Think about how much whipsawing there has been in narratives as interest rates remain elevated above their long-term channel:

One thing I touch on a lot is how momentum and mean reversion function across asset classes (link and link). These regimes of momentum and mean reversion directly connect to how the macro regime is taking place and how much of those returns are being realized.

For example, here is a moving average cross-over strategy on TLT 0.00%↑. You can see the buy and sell signals work incredibly well during large impulses but then begin to fail when the price mean reverts in a range. Identifying the TYPE of regime you are in tells you HOW to moderate actions accordingly. My interest rate strategy (very different than a simple MA crossover strategy) dynamically executes across momentum and mean reversion outcomes with precision.

Why do I bring this up? Because there are a million ways of analyzing the time series of TLT incorrectly. I am honestly amazed sometimes at the explanations people come up with. In order to perfect your interpretation of price and dynamic execution for extracting returns, you can’t have misconceptions about how things work.

While it isn’t a popular idea, great things are created in isolation:

The alpha report will be dropped for paid subscribers this weekend. Until then, maybe it is time to forget some useless knowledge in order to make room for the true value that is to come.