One of Schopenhauer’s key contributions to philosophy was his belief in the primacy of the Will. In Schopenhauer’s world, the Will proceeds the Intellect/Thought. Schopenhauer’s insight into the primacy of the Will, was of course, a major advance in thought, which I believe greatly influenced Freud’s development of the theory of the unconscious.

The main thrust of thinkers, like Schopenhauer and Freud, is that our conscious thoughts and our rational minds are really only after thoughts. Essentially, most of the time, our conscious mind, or what we think is rational, is merely a set of rationalizations for irrational activities of the Will (I leave out mathematics and science from the discussion here because the rationality of mathematics/science is an incredibly complex issue).

The application of Schopenhauer’s Primacy of the Will, which I believe to be true, to financial markets is quite straightforward. I believe that, in general, the valuation justifications brought forward to explain or predict financial market prices, like stocks, are merely rationalizations, i.e. they are after-thoughts. Complex financial valuations, e.g. EV/EBITDA, are simply a way to rationalize the previous purchase of securities, and there is no way that intellectual valuations can ever serve as the foundation for a purchase, or sale. Incidentally, the secondary nature of valuations is precisely why “Value Investing” is just as unjustified as “Technical Trading.” Both are modern day “snake oil” investment theories, despite the Buffett Halo (as I’m sure most realize, Buffett doesn’t really make his money from value investing, though he ingeniously, as any smart businessman would, seeks to convince others that he does).

The above of course begs the question: If valuation is not the primary driver of financial market prices, than what is? What is the “Financial Will” that proceeds the “Financial Rationalization”? And if one cannot use valuation to justify buys or sells, then what can you use?

These are very difficult questions to answer, and quite frankly I don’t profess to know the answers just yet. In fact, I’ve recently become completely convinced of the “after-thought” nature of valuation.

In future posts, I plan to offer some of the solutions I’ve come up with for the above problems, and hopefully show how they can be used to make money in financial markets.