My MBA students in Risk Management study closely the hazards of conflating coincidence and causation – at best mis-leading, and at worst, acutely dangerous.
But sometimes it’s so delicious, we could only wish it so.
Last Monday, with a focus on the never-ending debate over international accounting standards based on general principles or detailed rules, I made sport of the 43-page employee dress code published in December by Swiss bank UBS (here), believing that professional guidance based on the former is definitely preferred.
And the very next day – mirabile dictu – UBS stood down (here), with a sheepish retreat to “what is important” – evidently still, the modest requirement to dress in the bank’s official colors of black, white and red (here).
This was not the grand capitulation to public opinion shown by The Gap, when it hastily withdrew its misbegotten new logo last October (here). But it makes the important point that normative behavior can be modified by non-coercive societal influence – rather than under the heavier hands of legislatures or law enforcement.
I dare not claim a causal relationship between my digs at UBS and its hasty retrenchment – no more, for that matter, did my criticism of PwC’s loopy new logo (here) stimulate a re-think on its part.
A far better case for the caution not to over-weigh coincidence lay in last week’s storm of activity around the stock price of Apple Inc. On consecutive days, January 17 and 18, CEO Steve Jobs announced an indeterminate medical leave, and the company released estimate-smashing results for 2010 – revenues up 71% and net income up 78%.
The pundits’ cacophony went in all directions, following Apple’s closing the prior Friday at an all-time high of 348. Monday’s US market holiday gave a whole extra day for the uncertainty-mongers to stir the pot.
As they did. The ride began with Tuesday’s early trading down at 326, driving back up to close the day at 340 – if only temporarily. Punters in options saw short-dated 320 puts that had closed Friday at 54 cents explode briefly to $ 5, while those betting on a quick recovery could “buy the dip.”
Then during the week, while the major indices were basically flat, both those positions were trashed; Apple peaked back above 348 on Wednesday, doing for any skittish bears, and then slumped to close at 326 on Friday the 21st, doing the same to itchy-fingered optimists.
It took the week for events to shake out. Apple’s roller coaster fell out of the technology news, supplanted by the board shake-up at HP (here) and Google co-founder Larry Page’s emergence to sole leadership out of the triumvirate with Sergey Brin and Eric Schmidt (here).
On Monday the 24th the stock was back to 337, and as things stand on Tuesday it has cheerily closed above 341, looking again at its pre-tumult high.
From the perspective of long-term Apple investors (a group to which I belong, by the way), viewing a price chart over a year or even a month, the price moves over the week are an inconsequential hiccup. But to those caught in a flurry of zero-sum trades, there were real effects.
How would they have divined the reasons and the lessons?
Just as primitive peoples lit bonfires and beseeched the gods of the solstices to return the sun, mistakenly believing themselves both responsible and successful, athletes maintain their winning streaks through locker-room rituals and lucky amulets. Investors too invoke their models and their charts as if to be convinced that their decisions are guided by design and intelligence rather than the randomness of fortune.
Both those shorting Apple on Jobs’s health news and those who bought the company’s future in the narrow trough are congratulating themselves on their insightfulness and perspicacity. While those taking the opposite (and losing) positions – in both directions – are equally wringing their hands that some undetectable malign external forces – surely not their own fault – conspired to sabotage their investment strategies.
All of which goes to confirm yet again, that a hubristic over-confidence unable to differentiate skill from random luck is a dangerous substitute for the humility to appreciate that the market, like life itself, is too complex to be predictable.
Still, it would be nice if someone from UBS would call up and say, “thank you.”
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When a CEO as prominent as Jobs - the embodiment of the Apple brand - suffers health problems, the concerns of shareholders, consumers and employees can outweigh the desire personal privacy.
Posted by: Apple share price | February 03, 2011 at 03:00 AM