Aaron N. Tubbs bio photo

Aaron N. Tubbs

Dragon chaser.

Twitter Facebook Google+ LinkedIn Github

I talked a bit about ownership, a lesson I learned from the bank, and then did my best to avoid for a while while recovering.

Another important lesson, on a more technical level, is that of expectations. See, reactions in the markets (be they equity or fixed income) have very little to do with what is actually happening, and everything to do with the deviation from the expectation of what is going to happen. So, in a fictional example, company X is expected by the market to report profit growth of 15%. Instead, it reports profit growth of 14%. Company X’s stock price drops. They still did a good thing and performed well, and had strong profit growth, but because the expectation was even higher, the market eats them.

That’s kind of fucked up, but that’s the way markets work. Everything immediate is based on expectations and the derivation from them, and only in the long term (in theory, anyhow) does the real value have any meaning. Of course, since market activity is not static for long periods of time, it’s really just a chain of reactionary expectation fluctuations.

Or something like that.

Anyhow, the reason this is the case is that markets are run by humans, and humans react to expectations. If there is no expectation, then the reaction is based solely on the event. If there is an expectation, then the reaction is based on the expectation and the deviation from it.

The advantage of writing at least a small number of my thoughts down on my blog are few, though there is one advantage: I can verify that I’ve actually thought on some of this stuff before, with specific regard to the topic of compensation:

In a fit of introspection and computer-aided retrospect, I’m wondering if I’m too focused on direct compensation as a yardstick for performance.