Mindset Shift to Analyze Markets

Some conversations just stick with you. Like this one, nearly a year and a half ago, on one of those sunny, warm November afternoons Northern California gives us now and then. I was having coffee with a dear friend who asked, as people often do, if I ever saw myself switching career paths and opening a bakery. Nah, I said, much as I like the thought of being the gal with the pie shop, I have no desire to run the business, manage inventory or make cakes and pies at scale. If I turned my hobby into my job, I surmised, I’d probably have to start analyzing the stock market for fun. He laughed, and I think I was joking. But this week, while working on a project, I realized I wasn’t joking. And it gets at the heart of why investing is so darned hard for many people.

Ken Fisher, the illustrious founder, Executive Chairman and Co-CIO of Fisher Investments, has long observed that people tend to treat investing like a craft. A trade. Like cobblery, woodworking, a sport, even engineering. Something they can practice over and over again, always improving and gaining mastery because what works always works. The vast majority of financial curriculum takes this approach. Newcomers are taught the same methods, tools and tactics as those preceding them … and those before them. And so on.

But there is a philosophical flaw with all of this: The market evolves as it prices in widely known information. Tactics work for a spell, then lose their edge as everyone uses them. Events that were negative for stocks in one environment become benign in others. And when everyone is convinced it is now benign, it has negative power once again. Therefore, investing is more science than craft. Not the unquestioning kind of science some people seem to blindly “trust,” but the actual scientific method in a constant search for new wisdom and knowledge, new understanding about how and why markets have done X and what, therefore, is likely to happen from here.

That afternoon, my intended point was probably something about letting your hobbies stay your hobbies and your work stay your work, lest your hobby stop being fun. Maybe there is some truth to that, but the thing is, I think my job is also pretty fun. I like reading and thinking about the stock market! I like channeling all that reading and thinking into articles! I like bantering with my team and the friendships and ideas that result! And as for my hobbies? The baking and the sewing? They are fun, but they aren’t relaxing. They are work. But I enjoy doing them in my off hours because they exercise a mental muscle group I don’t get to use much at work and don’t want to atrophy.

The real difference here is that baking and sewing are crafts. I know the more I practice them, the better I can get. I know when I fail, there are always concrete reasons and actionable solutions. If my coat fabric comes out of alignment while I’m sewing, I know it is because my machine can’t feed all the layers evenly and I need to use a walking foot instead. If silk puckers, I know I need to adjust the tension and add a layer of tissue paper. If a jacket doesn’t drape properly, I know I need to add interfacing with a specific hand stitch. If a bodice pulls, I know I need to adjust the shoulders. If a cake collapses, I know I overmixed it. If my pumpkin pie cracks, I know it is because I overcooked it and the egg proteins began to shrink. At every turn, I know I can test, iterate, take notes, test again and find the right solution.

These mental muscles aren’t much use in investing. For that, I need to exercise a different muscle group: My scientific method muscles. There are no certainties here, only probabilities. In my role as one of your friendly MarketMinder editors, it is a constant journey of testing people’s claims about what A, B and C mean for stocks and helping you, dear readers, know what to do with the information.

A lot of the time, my laboratory is market history. Like: Right now, everyone says the UK’s upcoming payroll tax hike is going to knock the country’s economic growth and markets. I don’t have a time machine or crystal ball to look into the future and tell you what will happen. But I do have the entire history of UK payroll tax hikes to show that, the vast majority of the time, UK GDP grew, UK stocks rose and inflation didn’t surge in the aftermath. That gives me a probability to share with you in hopes it will help you avoid knee-jerk reactions to bad moves. It is no ironclad assurance, naturally. But a reality of the stock market is that those don’t ever exist.

I work one set of mental muscles at work and another outside, in my “hobbies.” I like being well-rounded, so if I started working my craft muscles in my profession, then my brain would gravitate to working its scientific muscles in my off hours. Maybe you are like this, too, maybe not. But it is important to recognize the difference.

In my experience, a lot of investors don’t do this, to their detriment. Outside academia and research-oriented professions, many jobs are crafts or trades. And the people who practice these crafts tend to take the same mindset to investing. Not to pick on anyone, but I have seen it vividly with engineers. Not all, but many, expect the market to behave in a systematic fashion, with B always following A, because that is how things work in their world. My grandfather, who I hope wouldn’t mind my saying this, was a prime example. When he retired, the stock market became his hobby. He would pass the days carefully charting stocks by hand, jotting down prices as they flew by on CNBC’s ticker. He plotted them, sought patterns and perfect entry points and because it was the mid to late 1990s, everything went up and he mistook serendipity and right-place-right-timing for skill. So when it all stopped working as the Tech bubble imploded, he decided the market was broken forever, it was impossible for retail investors to make money, and bonds and CDs were the answer.

But the problem wasn’t the market—the problem was his approach and its failure to account for the market’s ever-changing nature. My grandfather was applying his craftsman tools, filtered through his engineering mindset, to an endeavor that requires constant learning and discovery as the market adapts and evolves. He was using a skillset that depends on certainty in an endeavor riddled with ambiguity, where probabilities are the best you will have.

The market is so full of contradictions and complexities! Sometimes stocks with high price-to-earnings (P/E) ratios outperform. Sometimes they lag. Sometimes high-P/E markets rise. Sometimes they fall. Sometimes returns after Fed rate cuts are bad. Sometimes they are good. Inflation isn’t inherently bearish, but inflation fears contributed to stocks’ bad 2022. High oil prices have sometimes coincided with rising stock markets, sometimes falling. Ditto low oil prices. At all turns, we have to look at the whole landscape, what else is going on, what people broadly think about what is going on, how it all intersects and what history can teach us about the probabilities.

In most endeavors, when things fall apart, we go back to basics, back to what we know, and get back on our feet. If I fail in the kitchen, I can always make a batch of chocolate cupcakes to remind myself baking soda still reacts with buttermilk to make cake rise. A tennis pro who gets the yips can practice their ball toss and footwork. With investing, it is different. The best we can do is return to first principles, like markets’ being efficient and incorporating all widely known information. Stocks’ moving on fundamentals in the longer term but sentiment in the short term. Once you understand this, you can lean into the ambiguity and learn how it generates opportunities you can exploit. Ken Fisher has written entire books about this—The Only Three Questions That Count and, shameless plug alert, Beat the Crowd.

So to all the engineers, pilots, doctors, accountants, bakers, sewists and other craftspeople who read this: You are very smart! And good at what you do! But you will probably have to shift your mindset away from what you do day-to-day to analyze markets. Success will require exercising the muscles that don’t get much use in your day-to-day life, the scientific discovery muscles.

Investing isn’t about building a skill. It is about cultivating a mindset and then exercising the relevant mental muscles to get stronger. It is about failing, learning and trying again. It is about staying calm and even, not getting hung up on the highs or the lows. Hypothesize. Observe. Analyze. Test. Deduce.

Have fun.