


Investors need to be wary of conspiracy theories and deep foolishness

Barry Ritholtz

I spill a lot of words on the various ways people let their own wetware get in the way of their capital. For most people, their behaviour is much more important than the stocks they pick or the managers they hire. The watchwords I repeat over and over are: eliminate noise; manage your emotions; watch your costs; understand what you own and why you own it.

Lately, I have been seeing the uniquely foolish opposite of this behaviour: the belief that investors are being cheated by a cabal of market professionals who share a nefarious intent. We've seen this before. It used to be the market-makers who were at the heart of this conspiracy; then it was the high-frequency traders; now it's the crypto-traders.

Of course, in every trade, as in politics, there are people on both sides. But the bull and bear sides of any market position - or the pros and cons on political issues - is not the same as a deep conspiracy operating in the shadows. That anyone needs to explain this difference in this day and age is quite astonishing.

"Investors should spend their mental energy where it is most useful. I try not to worry about the Deep State, Deep Capture or Deep Throat," writes Barry Ritholtz. Michael Nagle

Despite having been debunked before, some conspiracy theories seem to come around again and again. Just to cite a few:

Deep State: A shadowy group controls the government, executing its own agenda against the wishes of duly elected officials and the broader populace;


Deep Capture: A shadowy group of media and financial players does the bidding of Wall Street, simultaneously protecting short sellers while also preventing the market from crashing;

Deep Throat: There are shadowy secret informants with compelling and overwhelming evidence that will either bring down the president (or the market) or send his opponents (or the bears) into the wilderness, never to be heard from again.

Only one of the above has been proven to be true, at least in the past: former FBI associate director Mark Felt was the person who revealed the illegal actions of the Nixon administration to reporters at the Washington Post. They had identified him as their source in their 1974 book "All the President's Men", but they did not reveal his name or his job - that didn't happen until he agreed to discuss his role in a 2005 magazine article.

What makes the Watergate scandal's Deep Throat so remarkable is how rare these things actually are.

But conspiracy theories remain a powerful draw. They allow some people to explain things that seem beyond their comprehension. Few people want to admit ignorance, and even fewer care to admit a lack of intelligence. Enter the shadowy cabal (often with a side of anti-Semitism thrown in) to rationalise whatever seems to be going wrong. Whether it is an investigation into possible collusion with Russia by Trump's election campaign or the accusation of market manipulation, the search for an easy way to explain unsettling events that are beyond our grasp is a very human foible.

But however rare they may be, conspiracy theories spring to life because every once in a rare while real conspiracies do happen. I was reminded of this recently after finishing Ryan Holiday's delightful book, "Conspiracy: Peter Thiel, Hulk Hogan, Gawker, and the Anatomy of Intrigue." The book is ostensibly about the legal battle between Nick Denton and his media property Gawker, and tech billionaire Peter Thiel, who secretly bankrolled pro wrestler Hulk Hogan's invasion-of-privacy lawsuit against Gawker. Ultimately, the Thiel/Hogan conspiracy, which was in no way theoretical, proved to be better financed and smarter than the fatuous and overly confident Gawker team.

In "Conspiracy", the legal battle is what filmmaker Alfred Hitchcock used to call the "MacGuffin". It is a plot device, an object or goal that is irrelevant, other than to act as the motivation for the characters' actions in a film. Think "The Maltese Falcon" - the object of desire that drives the plot forward.

Among the surprises Holiday shares with us was just how hard it is to plan, formulate and execute a conspiracy in secret. To create a genuine and effective conspiracy requires more than just enormous resources and an agenda; it requires a level of commitment and discipline that almost everyone lacks. Holiday describes how only two people knew about the conspiracy at the heart of Gawker case. Despite this, it still got out and became public. Notice how infrequently we get conclusive proof of conspiracies the rest of the time?


This is why we know most conspiracy theories are nonsense: Watergate/Deep Throat and Thiel/Gawker are notable because they are the exceptions.

There are some obvious problems for investors who enjoy blaming conspiracies for their own failures: aside from being intellectually lazy, it reflects an unwillingness or inability to admit error, and a refusal to take responsibility for their own actions.

As venture investor Morgan Housel explains, "Confirmation is in much higher demand than information." This is especially true for those who may be under water in trades that did not work out.

Investors should spend their mental energy where it is most useful. I try not to worry about the Deep State, Deep Capture or Deep Throat. My personal priority is to avoid getting entangled in Deep Foolishness. You should, too.





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