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The Indians Are Gathering Wood

InvestorEducation / Learn to Trade Nov 04, 2009 - 05:17 PM GMT

By: Charles_Maley


History will be kind to me, for I intend to write it – WINSTON CHURCHILL

Have you ever noticed that all the Wall Street firms are within pennies of each other when forecasting earnings? Have you ever noticed that they are all wrong (and occasionally right) at the same time? I doubt seriously if this is coincidence. It is more likely, that because they spend a lot of time speaking with each other, and reading the same numbers, they come to the same conclusions. It’s a variation on the old “circular argument” in philosophy.

Webster defines the circular argument as “a logical fallacy in which the proposition to be proved is assumed implicitly or explicitly in the premises.” In other words, it’s absurd reasoning that argues A is the case on the grounds that B is the case, and that B is the case on the grounds that A is the case.

“Why do you believe in Wall Street Analysts?” asked the skeptic.

“Well, because they are the smartest guys and gals, from the best business schools in the world,” answered the investor.

“So why do you believe that they are the best business schools in the world?” asked the skeptic.

“Because The Wall Street analysts say they’re the best,” answered the investor.

In any event, I read this joke over the weekend that reminded me of Wall Street, and how the Irrational pull of the circular argument can have a great influence on Wall Street thinking.

A group of Indians gathered around the chief and asked if they were going to have a cold winter. Being a modern day Indian, and not aware of ancient secrets, the chief had no idea. In order to save face however, he advised the tribe to gather wood and prepare for a cold winter.

A few days later the Indian decides to seek some help from the National Weather Service, and was told by a meteorologist that “indeed they were expecting a cold winter.” The Indian then advised the tribe to gather even more wood.

After a few weeks, the Indian felt like he should check in with the National Weather Service to make sure everything was on course, “Does it still look like a cold winter?” asked the Indian. “It sure does,” said the meteorologist, “in fact, it looks like a VERY cold winter ahead.” The Indian then advised the tribe to gather every piece of scrap wood in sight.

Finally with winter right around the corner, the Indian checked in one more time. “Does it still look like a cold winter,” he asked. “You bet,” said the meteorologist, “in fact, we are expecting one of the coldest winters on record.”

“Really,” said the Indian, “how can you be so sure?”

“Because the Indians are collecting wood like crazy!” said the meteorologist.

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Charles Maley
Charles has been in the financial arena since 1980. Charles is a Partner of Angus Jackson Partners, Inc. where he is currently building a track record trading the concepts that has taken thirty years to learn. He uses multiple trading systems to trade over 65 markets with multiple risk management strategies. More importantly he manages the programs in the “Real World”, adjusting for the surprises of inevitable change and random events. Charles keeps a Blog on the concepts, observations, and intuitions that can help all traders become better traders.

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