After completing Robert G. Hagstrom’s “Investing: The Last Liberal Art” I began to re-read my margin notes. His book has over one hundred bibliography entries and is a fantastic introduction to the multidisciplinary worldview of the market. One of my pencil scratches suggested that the market is a profound conversation. Hagstrom uses the word “puzzle” where I use the word conversation. This small change got me thinking further. Is that right? How does this square with my various mental models of the world and the marketplace?
Let us suppose “the market” is simply the stock market; and not the marketplace, as in the buying and selling of goods and services at prices that also vary; but rather, let’s begin our mental treatment on the stock market. What is the stock market but a series of quotations that represent the legal right of ownership of private property, of a share of a business and/or some derivative thereof. This quotation is easily construed as “a word” –despite being of numerical value, it also encapsulates the promises therein. Is it accurate? Precise? Efficient? Well, in a manner, yes. The “word” is simple and knowable. It is precise enough to be agreeable. Could there be more decimal points therein? Sure. Always. How about efficient? Yes. No extra words are contained. Was it derived swiftly, with little wasted computational power? Yes-it is capable of being derived quickly and with almost no computational effort.
Repeat after me, “one.” Say it again, just a little louder, “one.” Again! Faster!
There you go. You’ve just made a market. You and I agree.
Now, redefine that word “one” to a number “1” and divide it by shares in my company and we have accurately and efficiently agreed upon a price.
But, hold on, you say, the market is way more complex than that. There are many more factors that go into a quotation than that. There is the law of large numbers. To which, I can readily agree. Yes, if you poll the audience the odds of “1” changing from our conversation is likely to occur. How far will it change? Based upon what? Is there limited information? Excessive information? Diversity of opinions? Experiences? Models to derive a number? Variety in outlooks?
In all cases the audience’s contribution to the conversation will vary. Cancel out the extremes and find the average. Get an average response. This is good for certain things like guessing the number of candies in a jar. It’s not good for predicting the future. Which, is fundamentally what valuing a company is all about.
Some might argue that diversity of opinions strengthens the outcome. More extreme views pull it this way and that and effect the average in meaningful ways. Perhaps. But are the extremes more accurate? What about the influence the extremes have on the uneducated? Who is more easily swayed? The uninformed, ill-educated, or the person inclined toward extremism?
It seems to me –especially after the last 12-18 months–that complex, adaptive systems filled with human agents tend to bifurcate into a weird sort of oligopoly where the conversation lines are drawn and habits are formed such that social proofing allows diversity to fade rather than to increase. The effort to think deteriorates for MOST people. Thinking is simply not worth it, not pleasurable, and more or less constituted as wasteful.
The conversation crumbles. It drifts slowly into categories and auto-responders until it breaks, phase changes and hardens like water turned to ice. Firm. Unmoving. Dead.
Turn up the life. Converse. Renew.
Integrity is congruence between thought, word, and deed. Wisdom is knowledge enacted. If the market is a conversation then prices are words and the singular price is without thought. Deed is the actual business, somewhere else entirely. Perhaps thriving, perhaps a block of ice.
If Mr Market is shouting over the fence, the conversation can be swift. Yes. No. Ignore. Is he more thoughtful than you? Maybe. But not always.