“Ransom Stoddard: You’re not going to use the story, Mr. Scott?
Maxwell Scott: No, sir. This is the West, sir. When the legend becomes fact, print the legend.”
- Ending of the movie "The Man Who Shot Liberty Valance"
If we had to apply this dialogue to investment markets, "when the market narrative becomes fact, print the narrative." Stories dominate the market, facts less so. Narratives concerning employment, inflation, Fed policy all dominate discussion because they provide respectability and plausibility for both the sender and receiver of the message. In a confused world, a good narrative will provide comfort as an explanation that makes sense. For the messenger, telling a story will make you a more attractive talking head than just focusing on the details in facts. Facts that do not fit the narrative make investors uncomfortable and throw investors into a state of uncertainty.
The goal of quant or data driven analysis is to provide an alternative to narrative-based investing. The difference between fact-based data and narrative is the wedge that quants want to exploit. Data driven funds will reach different portfolio choices. Of course, data and narrative can be aligned. In that case, there is limited opportunity for alpha.
Follow the facts not the narrative. Nevertheless, even the fact-based story has to be converted into the narrative. The difference is whether the investor starts with facts to develop a narrative or starts with a narrative and then looks for facts.
Thoughts on narrative
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