When We Speculate, We See What We Want
“Everything that deceives does so by casting a spell.” — Plato, 380 BC
Can you intimately explain games of chance? That is, can you quote the odds of getting a specific number on a roulette wheel, a roll of the dice in craps, or a hand in poker?
Odds are you understand how each ranks in relation to other options in a particular game—more likely, less likely, etc.—but you can't explain the exact statistical odds.
When we find ourselves involved in these situations and emotions run high as the stakes grow and fortune continues to smile on us, we stop thinking rationally. As if the good times have to continue and Lady Luck is in our corner.
In many ways, the stock market reflects the same kind of thinking. In a bull market or a frenzy, we see people falling over themselves to buy in and be part of the trend that is gripping the investment community. It's the ultimate in FOMO.
We’ve seen the results of this play out numerous times in memorable history, such as the Dot Com bubble in 2000 and Black Friday in October 1929. But go even further back, and we find the Dutch Tulip Craze of the early 17th century and the Mississippi and South Sea bubbles of the early 18th century.
It’s tempting to think that we’re living in unprecedented times (we hear that quite a bit these days). A global pandemic, a stock market seemingly without a ceiling—as if humans have never experienced such events.
“Not to know what happened before one was born is always to be a child.” — Cicero
While it’s true we may not have personally experienced such events, we must be unimaginative indeed if we think humanity has never grappled with them.
We have no further to look than Washington Irving for perfectly encapsulating the Mississippi Bubble in his essay “A Time of Unexampled Prosperity” in 1819. See if this doesn’t sound familiar to you:
“Speculation is the romance of trade and casts contempt upon all its sober realities. It renders the stock jobber a magician and the exchange a region of enchantment. It elevates the merchant into a kind of knight-errant, or rather a commercial Quixote. The slow but sure gains of snug percentage become despicable in his eyes: no ‘operation’ is thought worthy of attention that does not double or treble the investment. No business is worth following that does not promise an immediate fortune.”
How curious it is that we use the term speculation for investing: the dictionary defines this usage as “investment in stocks, property, or other ventures in the hope of gain but with the risk of loss.”
The primary definition of speculation? “the forming of a theory or conjecture without firm evidence.”
Hope is not an investment strategy. Putting money behind ideas without firm evidence is an invitation to potential ruin.
This is exactly what we've witnessed over the last week with GameStop.
In Friday’s essay for premium subscribers of Timeless & Timely, we’ll go deeper on the issue of trust behind the GameStop fracas: specifically how there are multiple points where trust was broken or was already lacking in multiple actors in this drama. (Don’t miss out on this, plus the best curated content for you every Friday.)
The GameStop incident is something of a Rorschach test. We’ve all watched this play out, almost in slow motion, getting uglier by the day and moving from opaque to somewhat clear and then back again. And in doing so, we can stamp upon it that which matters to us or is most familiar to us.
Part of my research material for the newsletter is the journal Lapham’s Quarterly. Filled with examples from history and literature, there is nary a subject that isn’t covered. As the morality tale of financial sleight of hand plays out, I have a hard time choosing which issue will inspire this week’s theme.
Looking at the players (Reddit, hedge funds, the stock market, Robinhood), my thoughts swing from the function of the market and currency, and how investors got whipped into a drunken frenzy of trading.
I consider how the stock market can be viewed as nothing more than a sophisticated casino, where Lady Luck smiles on those whom she deems worthy.
Then I wonder if the r/WallStreetBets redditors are using their sway and social media as something of a revolution, where the little guy sticks it to the man, or if we’re being hoodwinked by people pulling a scheme worthy of Charles Ponzi.
As this tale races toward its inevitable conclusion, I note that GameStop stock (NASDAQ: GME) was trading around $20 three weeks ago, reached a high of $483 last week, and now hovers around $90. It’s a disaster for all involved: day traders who bought in after the run, hedge funds that lost money shorting the stock, and Robinhood’s liquidity. There’s a palpable sense of fear as to what might come next, if not with GameStop, then with other vulnerable stocks.
Finally, I imagine that this storm will blow over, and when it does, there will be plenty of debris remaining. It’s already a scandal, but as the authorities investigate the series of events, what more will be uncovered? Will those responsible be held accountable for their actions?
The Morality Tale for Leaders
All of this is to say that there will be moments in your company’s operations when speculation is rampant. When investors, employees, customers and the public make guesses based on a hunch or a rumor.
Each of these groups—even each individual within each of these groups—will draw their own conclusions and paint their own biases onto the situation. They will read into it what they wish, as the mind is notorious for filling in narratives when there is little to no information.
Your best defense in this scenario?
Communication.
Transparency, frequency, and honesty. Whenever and wherever you can, apply these to your communication strategy.
The more people hear from you, the clearer you are in your communication, the more likely it is that you’ll give people a sense of stability and direction—two things that are essential in a crisis.
For in doing so, you’ll be building the one thing that a market can’t replicate:
Trust.
A Preview of Friday's Curated Content:
A Timeless story
We’re all familiar with the scheme that shares the name of Italian-American Charles Ponzi, but he was neither the first nor the last to attempt this particular form for swindle. The economist John Kenneth Galbraith noted “the man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud.” That was indeed the case with Ponzi (a Bostonian), as 50 years earlier, a woman in Boston created the Ladies’ Deposit to help invest money for women. (Link for premium subscribers)
Further reading: Friday's book recommendation
Far from displacing religions, as has been supposed, capitalism became a religion of its own, with money as its deity. This week’s book recommendation reveals how mammon ensnared us and how we can find a more humane, sacramental way of being in the world. (Link available to premium subscribers)
Thanks, and I’ll see you on the internet.
