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Wisdom vs Instinct


As you will recall, a pair trade is a trade that goes long one side and short the other with the idea of capturing the difference in performance.  Another way to frame my current favorite pair trade is “Wisdom” vs “Emotion”.

It is my hypothesis that a species’ evolutionarily successful emotional responses are codified in DNA as instincts. We also  know that markets punish herd behavior, since the herd can be spooked, and therefore trusted to overreact in moments of peak agitation.  This is why I like to measure volatility and describe it with statistics in such a way as it is both stable enough for continuity  and yet adaptive enough to respond to change in accord with deeper trends which are evolving underneath the surface of direct observation

In this pair trade Buffett plays the role of wisdom, the prototypical wise uncle who has seen it all, and knows how to frame the problem and navigate through uncertainty.  The latest, hottest ETF, the metaphorically exuberant youth in search of riches in the land of milk and  honey, is represented by EEM (the emerging markets).

There is a time for each in the human life cycle, in the passing of seasons, in the cycling of markets. Would we really say that the exuberance of youth should be cut out of our life and experience? where would the ventures come from? the entrepreneurship?  wisdom is not everything, but it also has its time and place.

Just as we can grow and mature in our judgement, so to can we bring different values and insights to bear as the market morphs around us.

This is clearly Buffett time, however you slice it 😀

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