The Full English Accompaniment – On Brexit, social psychology and market timing

What’s piqued my interest this week?

I’ve been reading Tim Hales Smarter Investing over the last couple of weeks, which appears considered essential reading by most FI/ passive investment sources (1). It has prompted me to write down a philosophy and a draft set of goals for my investment plans. One of the cautions is against market timing, because it’s very statistically difficult to be good at it, incorporating not a small amount of luck. Much better to go Bogle, and buy then hold a low cost tracker (2). So far, so sold.

There’s another section of the book which documents how one of the most important, most overlooked parts to a portfolio decision is target country allocation. This is where I’m currently stuck, as Brexit presents a big hit of unknown outcomes, and is turning my market timing milk sour. Oh look, another r/UKPersonalFinance post triggered me (I’ll cut out all the Reddit relevant-only bits)…

Everyone, put on your tin-foil hats and join me on a journey considering a Brexit scenario…

I’ve personally suspected that Brexit is being pushed along despite it outwardly, appearing to be in no-one’s interests perhaps as a textbook example of Naomi Klein’s ‘Disaster Capitalism’ but maybe just as a way for massive money to be made from the lurches in exchange rate and FTSE etc.

So one outcome I suspect is that the pound will stay relatively weak to the EUR/USD etc, keeping the FTSE reasonably high, until we suddenly hit a point where it gets revealed we’ll basically stay in the EU (or EEA), perhaps after a 2nd referendum, so…

If the timeline of this is the next 6 months, how will the politicians and their chums be looking to maximise the person financial benefit to themselves? Assuming a, say, 15% increase in the value of the pound, and 10% drop in the FTSE 100, would they be looking to sell most investments, have cash and then be ready to re-invest after the correction?

What would you do in this scenario if you had this inside information? (3)

This is a little tinfoil hat brigade, although the murmuring the Nigel Farage shorted the value of the £ when he found out the result of Brexit before it was officially released could provide some evidence (4). An ex-investment banker wouldn’t call up his mates still in the industry with privy information would he? The main issue I have with the above is that it appears to go against the political wind and public opinion polls. The Conservatives and Labour are both loath to go back on the stated plan to exit (would be seen as weak?), and YouGov’s last poll in July found that a fraction greater percentage thought Brexit was the wrong decision than didn’t (5). Opinion polls may be a pretty poor judge, but they’re not so bad as to miss half the nation suddenly decided they do want to stay in the EU, after all (6).

Brexit therefore represents a challenge to the efficient market hypothesis (7). Pre-Brexit vote, a commentator in Forbes discussed how the referendum would represent an excellent testbed for efficient markets (8). It truly did, as the unexpected (to the city) voter decision was integrated into share prices in a number of hours. The fact that the referendum result was unexpected and therefore prompted such a dramatic shift in the markets challenges the efficient market hypothesis, and specifically what makes it efficient. The efficiency relies upon the sum of all the traders individual access to information. To bring it round to psychological terms, it is a form of social Gestalt theory, where the individual chaotic pieces of information/ action contributes to a total pattern (9, 10). Market traders were unaware of the depth of feeling in favour of Brexit prior to the vote (those pesky polls again), and were suddenly exposed to it and integrated it into the markets on referendum day.

But why were market traders so unaware? I wonder that the possibility of a Leave vote did not comply with the collective conscience of market traders and ‘the city’ and therefore was not appropriately considered by the markets (11). To go back to Durkheim’s original use of collective consciousness (very separate from Jungian collective unconsciousness), it is the ‘general feeling’ towards a position, experienced and perceived by the individuals in the collective (11). A shared unconscious understanding of social norms. In the city, it was a social norm to be pro-EU. In the general populace, not so much. Therefore the true risk of a Leave vote to the markets was a Rumsfeldian ‘unknown unknown’. To be pro-Leave in London pre-Brexit went against social norms, it didn’t fit with the social reality constructed in that environment, even if it did fit with the social norms and social reality of the wider UK (12).

Which brings me to my market timing and allocation conundrum. The market is efficient when it is integrating information which makes sense within it’s system; IPOs, sales data, quarterly returns etc. It appears less efficient at integrating popular opinion and behaviour. The market is vulnerable to collective psychological effects (herd behaviour etc), and changes in the market are made by people. The people who change the market (traders etc) operate in a different social world (‘social reality’) to the general populace, by nature of their social interactions. Yours is visible in day-to-day life in your twitter or social media sphere, which may differ from general public opinion. The markets will therefore be generally running on the market traders social reality, whilst the rest of us live in a slightly different social reality. Politicians span the divide, but take their lauded mandate from the general populace’s social reality. The difference comes to the fore when the market has to integrate decisions which are made by the wider populace that didn’t fit with it’s reality, e.g. Brexit. The reddit comment quoted above appears to sit well within the market reality bubble; we’ll stay in the EU in the end, it’s all a sideshow. My concern is that the general populace appears fairly relaxed about a ‘No-deal’ Brexit. Knowing that we’re a few short months out of formal Brexit, do I choose allocations based on that worry which insulate against this outcome. Does even thinking about this represent market-timing, and I should just bung my cash ‘somewhere’ and sit it out. Your opinion welcome here…

Have a great week,

The Shrink

Side Orders

Other News

Opinion/ blogs:

What I’m reading:

Smarter Investing 3rd edn – Tim Hale – essential reading

Religio Medici and Urne-Buriall by Sir Thomas Browne – the theological and psychological reflections of a C17th doctor. This is turning out to be real heavy-going.

Enchiridion by Epictetus – Bedside reading for a bad day

References:

The Full English Accompaniment – On Brexit, social psychology and market timing

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