Being Wrong

I was wrong about something last month, and I'd like to tell you about it.

Not because I think public self-flagellation is useful — it isn't — but because the shape of how I was wrong is instructive, and writing it down is how I process things that I want to remember.

The short version: I had a strong view on a name, the name did the opposite of what I expected, and I got out later than I should have. Not dramatically late. Forty-eight hours. But later.

Those forty-eight hours cost more than the original loss, in the sense that they told me something I didn't entirely like about how I was reasoning.

···

There's a thing that happens when you have strong conviction on a trade and it starts to go against you. The information that confirms your view becomes more visible. The information that contradicts it becomes easier to explain away. This is not a character flaw. It is how human beings work. The psychological literature on it is extensive.

The problem is that the market doesn't have this bias. The market incorporates all the information, including the information you've decided is noise.

I've developed some habits over the years that are specifically designed to counteract this. The most important one: when a position is moving against me, I ask myself what I would think of this trade if I didn't already own it. If the answer is "I wouldn't touch it," that's information.

This sounds simple. It is genuinely difficult.

···

One other thing I've noticed, specific to my corner of markets. The names I trade sometimes get caught up in what I'd call technical flow — not fundamental buyers or sellers, just positioning, rebalancing, momentum strategies doing what momentum strategies do. This flow can move a name significantly without changing its underlying value by a single cent.

The mistake is to interpret technical flow as fundamental signal. When a position is going against you and you're trying to figure out whether your thesis is broken, you have to first ask whether the thing moving against you is telling you something, or whether it's just traffic.

Sometimes it's traffic. Sometimes you just sat down in the wrong lane.

The forty-eight hours I mentioned: it was traffic. I knew this pretty quickly, actually. But knowing it and accepting it are different things when the P&L is moving. That gap is something I'm still working on.

We are all, I think, perpetual works in progress on this particular issue.

—C

P.S. The position did reverse, eventually. This is not the lesson. The lesson is that I shouldn't have needed it to.