Holiday Window Dressing

Vol #64 - December 17th, 2021

You can count the number of trading days left on your fingers.

Another year in the books means investors, traders, and casual market observers take a look at their statements and tally up their PnL Most assets have gained in 2021, so more likely than not you’re looking at a bigger number than you did last year - congratulations. 

The end of year is a natural time for reflection. The turning of a metaphorical page on the calendar invites introspection, and lets us savor our wins and lick our wounds. 

Regardless of where your book is marked, remember that there are zero emotions in figures. If you’re winning, don’t become overconfident and increase your size or risk tolerance. If you’re down, don’t let the red ink alone convince you to change course - most strategies expect some volatility. 

A difficult part of investing is knowing when to hold them, and knowing when to fold them. Markets are dynamic organisms with an ever changing group of participants and objectives, so there will never be a one size fits all strategy. 

Scientists and philosophers alike agree that “the map is not the territory”. Any model or abstraction will always be an imperfect representation of the true texture of the land. You can’t describe every nuance of reality in a stripped down framework.

But without a map, it is extremely hard to navigate uncertainty. Having a rubric to evaluate your decisions is critical. If you don’t have an expectation for how long the journey will take, your limbic system will constantly nag you that it is taking too long and it’s time to turn around. 

While it’s hard to calculate the true odds of decision ex-ante, if you’re given a $60 payout on heads and a $40 charge on tails, that’s a coin most people are going to want to flip as many times as they can.  Rarely do we see that kind of edge in a market. 

If you flipped that coin three times in a row, and got tails every time, what do you think about that strategy now? After just shelling out $120, you’re going to find it hard to continue despite the highly favorable odds. That exact scenario will happen to about one in eight people that play the game. If you don’t have a model for what your journey could look like, you’re much more easily shaken from the course. 

We feel losses much more acutely than we relish wins. This frustrating part of prospect theory makes us naturally risk averse, and liable to make innumerate investing choices. Chopping off the pain of a loser too soon can lock in losses and tilt the power of compounding against you. 

When looking at the markets over these next two weeks, it’s also important to have a mental model of the dynamics happening under the hood. While headlines blare about inflation, tapering, and Omicron, much of what’s happening is more about structural mechanics. 

Whether it’s the end of a fiscal year, or just the end of another quarter, December 31st marks the last day of something, for just about everyone. Money needs to be moved, and books need to be tallied as portfolio managers and treasuries window dress their accounting.

While throughout the year much of market movement is ascribable to funds flow rather than immediate information digestion, it is particularly acute at the end of an accounting period. Harvesting tax losses or collecting profits to pay taxes has a material impact on order flow. 

As the ranks of desks slowly thin out from top to bottom, market liquidity falls off too. Fewer traders and lower tolerance for risk means that the market will tend to slip around more. At the same time as you have an increase in flows, you have the other side looking to lock in their year end bonus figure. 

It’s an important time for reflection, though remember not to read too much into what’s happening right now. When you pull out your market map, and attempt to review the strategy as objectively as possible. 

Any investing strategy is designed for a single purpose - to serve the needs of the investor. The ticker tape will always be blinking red and green, but the goal of funded contentment is to enjoy the lights off the page. 

Programming Note: The Till will be off for the rest of the calendar year. We’ll see you back on January 7th, 2022. Happy Holidays to all!