Doesn’t Make Sense

Doesn’t Make Sense: Which is wrong, the question or the answer?, by Mark Chussil

Although this post seems superficially about stock-market investments, it really isn’t. It applies equally to virtually any competitive-strategy decision.

On August 18 the Wall Street Journal wondered “Why Are Small Fish Still Biting?” because, the article’s subtitle said, “Small-Cap Surge Doesn’t Make Sense Given Fundamentals.”

I don’t have the answer to why the small fish are biting, why the large fish aren’t biting, or other riddles of the piscine kingdom. I would suggest, though, that the article shows people may be swimming up the wrong coral tree.

The article implies a terrific question: can money be smart if it’s contradicting (as in not-following) the fundamentals? Are the small biting fish somehow wrong? The author suggests that both history and at least one small-cap fund manager would say yes, the fish are wrong. Perhaps the fish are wrong, in the sense that they soon won’t like the taste of what they’ve bitten. That’s not my point, though. My point is to note that the doesn’t-make-sense question assumes that the fundamentals are somehow right. If we presume that the fundamentals are right, then the small biting fish must be wrong. No further evidence required.

I submit that we might more profitably ask different questions, such as these two. One: why are smart (or at least self-interested) people buying in ways contrary to what the fundamentals would suggest? Two: is it always smart, or at least is it smart now, to buy on the fundamentals?

I don’t have the answers to those questions, and in any case, the answers (if there even are answers) is irrelevant to my point. My point is about the questions, not the answers.

The question implied by saying the small-cap surge “doesn’t make sense” is when will the small fish come to their senses and buy on fundamentals. The other questions — why smart people aren’t buying on fundamentals and whether it makes sense to buy on fundamentals — are more likely to generate useful discussion about what’s changing in the market, how buyers make purchase decisions, where our hoary assumptions may mislead us, and so on.

“That is not the right question,” former Intel CEO Andy Grove would say. Time is money and good decision-making is the ultimate competitive (and career) advantage. Before you answer a question, ask yourself if it’s the right question.

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