Thanks to Wynn Allen for reinforcing the power of butterfly wings. Fans of chaos theory know the reference. In a chaotic system it is possible for something as seemingly inconsequential as the flap of a butterfly’s wings to ripple and resonate and amplify and cause monstrously consequential hurricanes. Chaos theory doesn’t try to predict the impact of a butterfly flapping east instead of west, but it does attempt to explain the predictability of some systems. The more an expert learns, the more likely they are to know when the rules break down and when any estimate becomes nothing more than a guess. That’s true in weather, investing, and much of life. That’s also where optimists find hope and a source for solutions.
I have great sympathy for weather forecasters. We expect a scientific prediction of the highs and the lows, whether it is going to rain or snow, whether it will be windy or calm. Until the last hundred years the best guesses were the home barometer and sailors’ rules of thumb.
Red sky at night, sailor’s delight,
Red sky at morning, sailors take warning.
It turns out that much of that weather lore eventually has proved to have a scientific explanation. For a while it seemed like the meteorologists would find a reason for everything and they’d be able to eventually publish a year’s weather, just like the Farmer’s Almanac. Such predictability reaches back to when we thought the world was a mechanistic wonder. Know enough about the machine and be able to predict its every movement. The weather doesn’t work that way. Small differences in our understanding of today’s conditions can result in large differences in the forecast for next week. Better data makes for better predictions, which is why east coast weather is easier to predict than west coast weather. A forecaster in Pittsburgh can check thousands of weather stations across a continent. A forecaster in Seattle only has a few ships, planes, and buoys delivering data. But even perfect data isn’t enough. Any forecast beyond five days is basically guesses based on historical climate and climate is currently rewriting history. (Cliff Mass’ excellent weather blog describes many of these aspects.)
Before science the world was mysterious. With science it began to make sense and we extrapolated to expect everything to be predicted. The world seemed deterministic. It was supposed that with knowledge about every particle’s position and momentum it would be possible to predict the future of everything. Free will was gone. As science has advanced, the people at the leading edges of research find the feathered boundaries of the unknown and unexpected. It is sad to see them faulted for their admission of imperfection without being given credit for the vast areas encompassed by the expanded borders. They become the subjects of jokes because an experiment went awry or because last year’s explanation is refuted by this week’s discovery. Scientific honesty and humility is taken as as sign of weakness and incompetence. Maybe that’s because more of the population is learning through the Information Age that the world isn’t as simple as we would like and they want someone to blame. A desire for certainty is one reason for a retreat to dogma.
Rationally we know the world is complex. Mathematically it would appear that any system that is dynamic, non-linear, coupled, and with too many unknowns can not be predicted. We don’t know that a hurricane was caused by a butterfly’s wings, but we also can’t disprove it.
The stock market is complex. Some claim that it is predictable and that it operates on cause and effect, yet it is also recognized that emotions of fear and greed play major roles. My investment philosophy and strategy is based on trusting the trends of product development and revenue growth to be larger than the chaotic variations that tend to operate within shorter periods. Daily, or even quarterly, ups and downs can become insignificant when compared to the years or decades of growth that companies can experience. It is commonly known as Long Term Buy and Hold (LTBH).
Oh well, so much for that strategy. The aberrant behaviour in some stocks, particularly DNDN, run counter to that trend – at least for now. As the company’s technology and revenues have progressed the stock has gone down. Some see influences larger than butterfly wings at work. Conspiracy theorists have an ample supply of causes for the contrary effects. I haven’t seen proof, but I admit that financial deregulation and an SEC that is either lax or overwhelmed could provide motivations and incentives that appeal to unethical or immoral individuals. I doubt that flash crashes are natural. The amount of money being spent to trim milliseconds from trade executions is proof of how far some will legally go to make money without concern for value or consequences. (Check out Wired Magazine’s Raging Bulls article – How Wall Street Got Addicted to Light-Speed Trading.) It isn’t hard to imagine others finding ways that are more devious and less reliant on obvious massive infrastructure. Sadly, such numbers games cripple innovation and solutions just as we need them.
I’d be more philosophical about the stock market if my investments could ride through such turmoil and undue influences (Turtle Investing) but having my stocks fall without other significant sources of revenue means I am selling cheap stock and rapidly diminishing my portfolio. At this rate I have less than a year’s living expenses remaining. (Anyone want to buy my home or hire me?)
And yet I maintain optimism. For every butterfly that caused a hurricane there may be just as many that kept things calm. Butterfly wings can be positive things. That’s one reason why I do things like make videos of local tourist towns (Two Guys Walk Around Langley, Coupeville, Port Townsend), give talks, produce art, participate in at least a half dozen collaborations (unpaid), and write this blog. My world has not been acting as I expect. I thought I had a good plan. I still think I did and do, but I will admit to imperfection. Of course, maybe I just had bad timing. Maybe some butterfly flapped its wings without knowing what it would do to me. Conversely, maybe some small thing I do will have positive consequences far beyond my expectations that maintains and sustains a thriving lifestyle for me. Maybe some other butterfly has already flapped its wings and the good news is rippling my way. It is a chaotic world. There’s no way to know.
My garden attracts hummingbirds. Maybe I should plant something that attracts butterflies.