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Siren Songs


Published 17/10/2018

Carles Anguera, how to respect the market as it deserves and not to swallow us.

In our normal vocabulary we use an occasional catchphrase or slogan, and curiosity sometimes prompts me to search out the meaning of some of them. In one of his Mediterranean voyages, Odysseus, returning from the Trojan War, had to face one of the greatest fears that sailed the seas of that age, the Sirens, whose beauty and celestial songs were such that they were said to enrapture sailors, who were hypnotised by their voices, lured toward the danger, and crashed their boats on the rocks and drowned. The Sirens were obliged to use this enchantment because if any man was capable of hearing them and resist being attracted, a Siren would be doomed to die. Odysseus, drawn by his curiosity and his yearning to be unique, asks Circe, the Greek goddess of magic, if there is some way to listen to the Siren songs and not die. She told him that when he sailed within hearing range of the Sirens, the sailors should strap him to the ship’s main mast and plug their ears with beeswax, and not untie him no matter what they saw. Odysseus, spellbound by the beautiful music, begged to be released but the sailors ignored him. He was thus able to listen to the music without suffering any harm. But this meant that one of the Sirens had to die, and the one chosen for this fate was Parthenope, who dove into the sea, where she died and her body was dragged to the coast to be buried with great honours. A temple was built in her honour and around the temple there sprung up a town bearing her name which in time became what we now know as Naples. From this appealing story we have the expression “siren songs”, which is used to refer to an argument that is put together with pleasant and convincing words, but which is only intended to seduce or lead astray.

In our day to day work as managers, we have a large amount of information that we have to know how to handle. Like Odysseus did, we must tie ourselves to the mast and even though we listen to those songs, we must know how to ignore the Sirens and channel the information that matters for our decisionmaking. The market, like the Sirens, is not designed to scare investors; just the opposite, to attract and ensnare them with songs promising great fortunes. We will always find invitations to join in on something, newspapers are replete with announcements by analysts of huge upside potential for shares, enormous profits in the offing and many recommendations that leave us wide-eyed and would have us believe that it is easy to triumph, that it is child’s play.

Headlines that begin with “Potential of 40%” lure us into taking the time to read the article and, without having any idea of what is being discussed, if we like it, we approve of what that expert is saying. Who hasn’t at some time heard a client say that he is sure he would have done it better than you, that if he had bought Amazon, Apple or one of those odd technology firms he would now have piles and piles of money, a millionaire to be sure, and that with you, expert manager, he has the impression that the only thing he is doing is losing money? The information we receive tries to seduce us, showing us the shares that have performed the best and the percentage return we would have reaped had we paid attention to the analyst who writes the article, after it has all happened, naturally. Who has not received a call from a client telling us that the company Beautiful Blue Pyramids rose 25% yesterday, why didn’t you buy? That is when you take a deep breath and answer with arguments that follow the line of diversification, risk profile, market momentum, all with a clear penchant for capital preservation. Never or rarely do you receive a call thanking you for not having purchased that stock that has folded and is now worth 0, because it is assumed that you should know or that it was clear that the stock was worthless.

But clients have one thing clear in their mind: you are the expert and they pay you to make them money. They will often show you a graph and say why didn’t you buy here and sell there, as they point to the low and high on the graph, as if it were so easy. And there are also the typical questions that reveal the client is trapped in a stock, by which I mean he is losing money, and the questions come down to “this share can’t go any lower, right?”. And that is when they become long-term investors, and use expressions such as “at that price, I won’t sell, and if it drops farther, I will buy more; the truth is that I don’t really need that money”.

One of the most widely held beliefs in the investment universe is to lean toward buying shares that have fallen sharply or that are at their lows versus others at their highs. If we ask any investor this question, there will be a very high percentage who leans toward buying the one that has dropped significantly instead of one that has risen strongly. We are easily swayed by the idea that if the share has traded above the current price in the past it will likely recover that price. My experience teaches me that this premise is borne out on some occasions, but time has shown me that it is best to buy shares with a strong underlying uptrend that are hitting high after high. I think it is just as difficult to guess a share’s low as its high, as the most likely scenario in both cases is for the underlying trend to continue over time, so I believe it is more likely that you can win by buying a share that is rising and that it continues to rise, than by investing in one that is falling with the idea that the downturn will end after my purchase and that it will start to go up.

It is also curious how we tend to look for arguments that show we were right in the decisions we have made and erase from our minds or downplay those that we do not like or that suggest we were wrong. When we buy a security, we tend to look for news that gives us positive justifications because that makes us think we are right. One of the most difficult things to do in this job is to know how to accept losses and accept that we were wrong, and that is why we cling to any news that makes us thing we will come out winners. At times, this mistake, if not cut off in time, can become quite harmful.

The only thing that is true in all if this is that no one has a genuine winning formula always; that is the truth of the market, one must forget about quick windfalls and be humble enough to see when one has made a mistake and know how to change course in time. To understand that every day is a learning experience, that we are part of the market and not who controls it, and that we must therefore always give it the respect it is due, because the day we lose our respect for it, it will sound siren songs that will bewitch us and swallow us up in the sea.