Seizing opportunity in an uncertain world

The other day Mohamed El-Erian referenced Donald Sull’s The Upside of Turbulence: Seizing Opportunity in an Uncertain World (HarperCollins 2009). I don’t have a copy of the book, so I’m at the mercy of the bits that are publicly available.

The gist of the book seems to be that "our theories about the future remain subject to revision or rejection in light of new knowledge that might arise in the future. All our theories will let us down; we just don’t yet know how or when.” So we have to be agile; that is, we need “the capacity to identify and capture opportunities more quickly than rivals.” (p. 138)

It is critical to understand who’s on our playing field, who our rivals are. We need not be more agile than high frequency traders if they are not our rivals. We can play a very slow game if we’re competing against pension funds, a faster game if we’re swing trading, and must be considerably faster if we’re scalping intraday. We shouldn’t feel disadvantaged because we’re not the speediest players in the markets; we just have to be more adroit than our adversaries. And this means, as I mentioned the other day, acting on the least amount of information necessary to reduce the inevitable uncertainty.

Market players should be well aware that “all our theories will let us down.” A trending market stops trending, momentum gives way to mean reversion, and theories of regime change are in constant need of revision themselves. After all, we have to remember that we’re trying to predict what our rivals will do in the future, they are trying to predict what we will do, and no one has a crystal ball. In some limited sense we’re predictably irrational, as Dan Ariely wrote; we leave footprints on every chart. But circumstances change, and we are often caught flat-footed.

Staying nimble is difficult on many levels. We certainly don’t want to flit from trade to trade and strategy to strategy at the slightest sign of weakness. We have to distinguish between a theory that is being challenged and one that is failing (or has failed). There are lots of meta-theories here, most of them grounded in history. But since we’re talking about the present and the future, and history keeps shifting forward, they’re also subject to revision.

We must accept the fact that we’re trying to make money based on uncertain cues and uncertain prospects and that we’ll find certainty nowhere. We don’t know which trades will fail and when and how they will fail, which theories will fail and when and how they will fail. It doesn’t matter how smart we are, how experienced we are, we’re mired in uncertainty. The upside is that our rivals are no better off. If we can reduce uncertainty even slightly and act on our perceived opportunity quickly and decisively, we should have a clear edge over our rivals.