Overanalyzing Investments Leads To Underperformance
I have a real smart friend with his CFA in the Traditional Finance industry. I can't help but think that him getting his CFA has forced him to become a bit "too cute" when analyzing investments.
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There's no worse feeling as a market participant than when you get the signal correct but the investment or the trade wrong.
You know, when you're right about the government reported numbers but you're wrong about the market's movement.
We've all been there.
It's human nature to overthink things. That's why insurance companies make a lot of money. They sell us the fear of something bad happening, and that something bad typically doesn't happen.
We overthink it, and overthinking typically costs us money in the long term.
It's also human nature to find a way to justify our overthinking. We make up excuses for our fears real easy.
Below are three real examples in different areas of Finance showing how excuses are made to justify overthinking and underperforming.
Analyzing An Option Trade
Analyzing Macroeconomic Data
Analyzing Bitcoin vs A Bitcoin Miner
One that comes up all the time within the Sky View Trading community I work for is the fear of holding on to an option trade that is dwindling below 21 Days To Expiration.
The gamma risk of a short option trade increases in the shorter term expiration cycles. However, there's not much difference within the area of 21DTE - 10DTE in terms of P/L Day swings.
The graphic below from TastyLive is a good visual on this.
Almost every single time I have closed a trade early out of fear I can look back within a week or two and see that it cost me money to do so.
My excuse is that it helps me sleep better at night knowing I have reduced my gamma risk. But the hard evidence seems to suggest it's been some expensive sleep because I've been known to reduce my gamma risk a bit too early at times.
Of course, hindsight is 20/20. But we need to be very cautious of this as we participate in Financial Markets long term.
Fear, excuses, ideological beliefs can all get very expensive if they hold too much weight in our trading and investing decisions throughout the decade(s).
It's not just in the option market where this type of fear exists either. It exists in every single corner of Financial Markets.
I consume a lot of Finance content from all angles throughout my weeks and have gotten to know a lot of the more popular Finance folks across the internet. I don't know them personally but I know how they think. I've been listening to many of them for several years.
One analyst in particular has been banging the table about a recession in the US for 18 months now, since the bear market lows of October 2022.
Over the last week this analyst finally capitulated. But not because he admits no recession ever came. That would make too much sense.
Instead, this analyst capitulated by telling us the recession started last month, in April 2024.
It's a bit cringeworthy to listen to.
It's worth noting that this is supposed to be a Stock Market Analyst. Not some macroeconomics professor at a University, or a talking head in the mainstream media whose job is NOT to put their money where their mouth is, but simply to entertain/inform an audience.
This is supposed to be a market analyst whose primary focus should be creating outsized returns in Financial Markets.
It reminds me of the old adage, "do you want to be right or do you want to make money?"
Logically, this analyst believes that recessions create bear markets.
Illogically this analysts refuses to acknowledge that he has been wrong despite the S&P's and the Nasdaq being up +47% and +75% respectively over the last 18 months.
Instead, he triples down to tell us the recession just started... again.
It's asinine.
If and when the recession does start and the markets do pull-back a bit this analyst will claim they were correct and that they called it. They will relish in their glory and take their victory lap. They will capture a whole new slew of followers as they bow down to the Messiah who called the recession to the day.
And then sooner rather than later those same followers will give up 75% upside in the markets because this particular Messiah is more interested in being right rather than making money.
These are the type of things that happen when we try to get "too cute" with markets or our analysis.
It's similar to a trader buying bonds in 2022 because they thought the S&P's will move lower and bonds have traditionally been the safe-haven that move higher during that time.
Any trader that did that was right about the bear market of 2022 moving the S&P's lower, but they placed the wrong trade by buying bonds. Bonds moved lower too.
They should have just sold S&P's! Their opinion was on the S&P market, not the bond market.
They were right about the signal but wrong about the bet they placed. Oh, the agony of defeat gets no greater than that my friends.
I have a real smart friend with his CFA in the Traditional Finance industry. I can't help but think that him getting his CFA has forced him to become a bit "too cute" when analyzing investments.
A CFA is the top certificate you can get in the Finance industry. It's hard to obtain. I studied for the first part of it over a decade ago and one little chapter on technical analysis is what led me to pursuing the Retail Trading side of the business from there.
I don't use much technical analysis today to make decisions in the market, but I love being a retail trader and also working with other Joe Shmo's like me who don't have their CFA's or work for a bank.
The thought process on the Traditional Finance side of the business often confuses me. It also sucks they can't necessarily buy whatever they want. They have a lot of restrictions in what they can do in markets, and I never liked that either.
I chat with my buddy several times throughout the week. He claims he doesn't understand Bitcoin as much as he'd like to give him the confidence needed to invest more in it, but he understands a company like SDIG.
SDIG is a Bitcoin mining company. Below is what the stock chart of SDIG looks like this year.
The stock is down about -60% on the year, and that's with a +7% rise in the stock's price today.
Bitcoin is up about +60% on the year, and that's with it being -8% off it's highs.
If you're like me you're probably shouting right now, "stop the madness please!"
You can't make this stuff up.
The reasons that my friend stated he likes SDIG over Bitcoin are irrelevant and I could probably write a book on picking them apart.
The point is, buying SDIG and selling Bitcoin is a trade that is down -120% compared to just buying Bitcoin since the start of the year.
-120% on the year before Memorial Day weekend. Houchie Wallie Wallie.
Not to mention, the only way a Bitcoin mining company succeeds is if Bitcoin succeeds, and specifically if Bitcoin appreciates higher in price.
The reasons my friend stated he likes SDIG over Bitcoin weren't reasons. They were excuses.
He "understands" it more. They have a balance sheet, asset statement, and all the other things I don't know how to decipher anymore from my days as an Accountant.
He refuses to acknowledge or accept the extremely transparent on-chain analytics of the Bitcoin market. He wasn't taught on-chain analytics while studying for his CFA.
It makes him "sleep better" seeing those traditional documents for SDIG that Bitcoin doesn't have, just like me exiting my option trades a little early to reduce gamma exposure helps me sleep better at times.
I really do love sleeping. I try to get 9 hours a night. But I think we can all agree -- that trade has caused some expensive fucking sleep.
As we head into the long Memorial Day weekend I want to cheers to the overthinkers we all know we can be at times. Here's to doing our best to work on it as the years progress.
That's all from me this week folks!
I wish you all good trading, great health, and a fantastic weekend!
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Disclaimer: These are not recommendations. These are just my two cents, or two satoshis as the kids say. Remember to do your own homework before making any financial decisions. Also, keep in mind I might have some personal investments in the things I discuss.
Good post. Thanks.
The point of analysts being too cute makes me giggle. This industry has too much ego and it is hard for people to admit they are wrong! You are right it is never about just being right but to make good returns for your clients/portfolio. You need to change when market/data change!