Devil's Advocates are Investors' Best Friends

October 3, 2022

If those on the opposite side of the trade are viewed as threats rather than friends, it's time to revise the analysis.


Of the many self-generated dangers investors face, few are more dangerous than confirmation bias , the comfort we experience seeking out views that confirm our own positions and our resistance to studying opposing views.
Confirmation bias is both self-evident and complex. We all understand the psychologically soothing feeling when others heartily agree with us, and the frustration, anxiety and sense of being threatened we experience when our core positions are challenged.
But there's more to it than just that. Taking a position with conviction empowers us, for by publicly espousing a forecast, prediction or position, we're implicitly saying, "When events show I'm right, that will show I'm smarter than the average bear."
If we push our position and conviction to an extreme and shout it out loudly enough, we'll attract those seeking to confirm their own biases. Confirmation bias thus generates a self-reinforcing feedback loop, as those shouting the loudest attract those who agree with them, rewarding their conviction with "likes."
We all know the danger of marrying your position , that is, taking not just a financial stake but also an emotional stake that eventually becomes entwined with our identity. What may have started out as a calculated risk morphs into an all-or-nothing reflection of our identity. Any challenge becomes a threat to our selfhood.
Conviction is good, but a hedge and a Plan B are even better. Hedges and Plan Bs arise from a simple question: what if I'm wrong?
If we want to avoid the dangers of confirmation bias and marrying our positions, Devil's Advocates become our best friends. Devil's Advocates delight in probing the consensus or popular view for weaknesses, and exploring how and why the consensus or popular view might be riskier than advertised, or even completely, catastrophically wrong.
The grizzled investor who's ridden conviction trades all the way to zero suppresses the desire to confirm biases in favor of seeking out informed Devil's Advocates , skeptics and proponents of the opposite side of the trade.
This is especially important in unstable, volatile eras like the present. Since every forecast and prediction (and thus every investment position) is based on previous analogs playing out, what happens when none of those analogs map to the present? Very simply, nobody knows what's going to happen, and the appropriate level of confidence in any prediction or forecast is near-zero.
If we cannot justify a conviction trade, then it becomes appropriate to pair every position with a hedge (to protect the position if we're wrong) or a Plan B (escape with most of our capital intact, limit our risk in any one position or sector, stay in cash until the weather clears, etc.).
If we listen with some detachment to informed Devil's Advocates , we might even change our minds (gasp). No crystal ball is unclouded, but being flexible enough to change our minds when presented with evidence is a positive trait.
In other words, the most fervent Bulls would be well-served by seeking out the most fervent Bears--and vice versa. There's a spectrum of Devil's Advocates , of course; some delight in puncturing everyone's balloons, others are probing their own conviction trade for potentially fatal weaknesses, and so on.
If those on the opposite side of the trade are viewed as threats rather than friends, it's time to revise the analysis. It's never comfortable to be told "you're wrong," but the possibility of being wrong should be uppermost in every investor's mind, as that possibility informs calculated risk: yes, we understand this position is risky, but we're taking it anyway because we judge the potential upside to be worth the risk.
Anyone who helps me re-think a position and hedge risk is a friend, not a threat.
What are some current Devil's Advocates' provocations? Here are a few guaranteed to make blood boil in many veins: (Remember, the key question is: what if I'm wrong? )
1. The US dollar will only continue strengthening, crushing the euro to .80, the yen to 250, the yuan to the depths of Heck, etc. It will not crash or die, not now and not in five years or ten years.
2. The 10-year yield is heading toward 5% and TLT toward 85. Rates are not going back to zero.
3. Not all fiat currencies will die.
4. Not all markets will crash.
5. Liquidity isn't all that matters.
6. Burning all the deadwood (non-performing debt, phantom wealth, etc.) is necessary to re-seed the forest.
7. Every prediction and forecast will be wrong because the past doesn't map the present. Correct forecasts will be so rare that they will be statistically insignificant.
8. Take control of your life, take ownership of everything you generate. Everything else--opinions, forecasts, predictions-- is signal noise.

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When You Can't Go On: Burnout, Reckoning and Renewal ( $18 print, $8.95 Kindle ebook ; audiobook )
When I burned out, what I wanted but could not find was a practical guide by someone who had experienced burnout themselves. None of the material I found spoke to what I was experiencing or to my sense that our economy is now optimized to burn people out.

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This book is my account of what helped me. The intended audience is other burnouts and those who want to better understand the experience of burnout.

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The Epidemic Nobody Talks About: Burnout



Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States ( $22.50 print, $9.95 Kindle ebook , audiobook )
Nations that embrace Degrowth and social cohesion will survive. Those that cling to "waste is growth" economies and destabilizing extremes of inequality will perish.

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Recent entries:

Devil's Advocates are Investors' Best Friends October 3, 2022

Chart a Course To Self-Reliance September 28, 2022

Loonshots and Collapse September 26, 2022

2022-2030: Transformation or Stagnation? September 23, 2022

Two Easy Predictions: Wealth Tax and Windfall Tax September 21, 2022

Peering Into the Crystal Ball, We See... Instability Leading to Collapse September 19, 2022


January 2022 entries February 2022 entries March 2022 entries April 2022 entries May 2022 entries June 2022 entries July 2022 entries August 2022 entries September 2022 entries

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"There is no security on this earth; there is only opportunity."
(Douglas MacArthur)

"We are what we repeatedly do." (Aristotle)

"Do the thing and you shall have the power." (Ralph Waldo Emerson)

"Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius and a lot of courage to move in the opposite direction." (E.F. Schumacher, via Tom R.)

"He who will not risk cannot win." (John Paul Jones)

"When we drink coffee, ideas march in like the army." (Honore de Balzac)

"Progress is not possible without deviation." (Frank Zappa, via Richard Metzger)

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"Chance favours the prepared mind." (Louis Pasteur)

"Success consists of going from failure to failure without loss of enthusiasm." (Winston Churchill)

"Where there is ruin, there is hope for treasures." (Rumi)

"The realm of gratitude is boundless." (CHS, 11/25/15)

"History doesn't have a reverse gear." (CHS, 12/22/15)

Smith's Law of Conservation of Risk : Every sustained action has more than one consequence. Some consequences will appear positive for a time before revealing their destructive nature. Some consequences will be intended, some will not. Some will be foreseeable, some will not. Some will be controllable, some will not. Those that are unforeseen and uncontrollable will trigger waves of other unforeseen and uncontrollable consequences. (July 8, 2014)(thanks to Lew G. for retitling the idea.)

Smith's Neofeudalism Principle #1: If the citizenry cannot replace a kleptocratic authoritarian government and/or limit the power of the financial Aristocracy at the ballot box, the nation is a democracy in name only.

The Smith Corollary to Metcalfe's Law (The Network Effect): the value of the network is created not just by the number of connected devices/users but by the value of the information and knowledge shared by users in sub-networks and in the entire network. (CHS, 4/6/16)

My Credo of Liberation: I no longer care if the power centers of our society--the distant, fortified castles of our financial feudal system--are changed by my actions, for I am liberated by the act of resistance. I am no longer complicit in perpetuating fraudulent feudalism and the pathology of concentrated power. I no longer covet signifiers of membership in the Upper Caste that serves the plutocracy. I am liberated from self-destructive consumerist-State financialization and the delusion that debt servitude and obedience to sociopathological Elites serve my self-interests. (Thank you, Klaus-Peter L., for reminding me)

"We've become a culture of excuses rather than solutions: solutions always require sustained effort and discipline." (CHS 4/9/16)

"Fraud as a way of life caters an extravagant banquet of consequences." (CHS 4/14/16)

"Creativity = problem solving = value creation." (CHS 6/4/16)

"Truth is powerful because it is the core dynamic of solving problems." (CHS 7/21/17)

"We live in a system of human emotions that masquerades as a science (economics)." (CHS 1/1/18)

"Always remember, your focus determines your reality." (George Lucas)

"Diversity is for poor people. Sameness is for the successful." (GFB)

"When power dissipates suddenly, it dissipates completely." (CHS 7/14/19)

"Disobedience is the true foundation of liberty. The obedient must be slaves." (Henry David Thoreau)

"Markets cannot price in the value of non-monetized natural assets such as diverse ecosystems." (CHS 7/14/19)

"Magical thinking isn't optimism, it is folly." CHS 1/3/22)

"Tune in (to degrowth), drop out (of hyper-consumerism and debt-serfdom) and turn on (relocalizing capital and agency)." (CHS 1/5/22)

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