Value Investing

Always Two Ways to Interpret Anything

In investing, you can always interpret something in two completely opposite ways. For example, a drop in the interest rate can be interpreted positively — lower cost of funds for businesses, or negatively — it will lead to inflation which will be bad for the economy. The fact is that the economy is an intricate piece of machinery with the outcome dependent on tons of micro-interactions that is difficult to predict. It is not as simple as financial news websites that churn out “explanations” for the stock market movement every single day — those are best to be simply ignored.

Similarly in almost all investment situations, there will be positive factors and negative factors. It is common for investors to have a hindsight bias where if the stock went up, investors that missed the run will blame themselves “Ah! I knew of all these <positive stuff>! I should have bought a large position!”, and if the stock went down, investors that got caught will blame themselves “Ah! I knew of all these <negative stuff>! I should have sold or shorted!”. Investors would be best served by focusing on the process and system, and making sure they followed it, rather than the outcome.

There was an interesting situation that I came across recently. There was a company whose stock dropped like a rock in a day, with high volume in deep-in-the-money calls. The bullish interpretation is that the short sellers were shorting the stock to push down the price of the calls, and covering their prior shorts by buying deep-in-the-money calls so as not to push up the price of the stock. The bearish interpretation is that short sellers are shorting by selling deep-in-the-money calls, and the options market maker took the long side of the deep-in-the-money calls and shorted the stock to hedge their positions. It’s just amazing that a simple thing where a stock price crashed can be seen as bullish and bearish! Eventually time will shake the truth out as always.



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