Even the most firmly held beliefs can be disproven and re-theorized.

Take gravity for example. Newton first came up with a conceptual framework of what gravity is in 1798, proposing it to be an attractive force between particles; essentially magnetism, even between non magnetic materials (like magic!).

Einstein then came along in 1915, and showed with his Theory Of Relativity that gravity is due to the curvature in the space-time continuum caused by massive objects.

You would think that the existence and scientific acceptance of a new theory in something as obvious as gravity would cause people to update their views, but… no!

Most people still think of gravity in Newtonian terms, which is largely because schools still teach gravity in Newtonian terms.

Is Einstein’s understanding of gravity what it really is? Chances are no one will ever know, but it is possible, even likely given a long enough time frame, that future physicists will propose new theories of gravity, its nature, and what it is or is not.

The gravity example should illustrate how easy it is for people to hold on to misperceptions.

The human mind, for whatever reason, seems to like to take what it reads, is told, or is taught without question.

This means that we generally do not think or even wonder what the underlying assumptions are. And, if there are any, if those assumptions are relevant and can stand up to rigorous scrutiny.

Moreover, the example raises a serious question: If something as basic as gravity can be misperceived by so many in the general population for more than a 100 years, in the age of the internet no less, how many more misperceptions exist?

Specifically, how many more misperceptions exist in the markets, which are filled with uncertainty and ever changing relationships?

Knowledge is not fixed, and it never has been.

Thinking that knowledge is fixed has the potential to be very dangerous, especially when dealing with risk in dynamic, complex systems, and can lead to one clinging on to theories that no longer work. Needless to say, this is a sure way for a trader/investor to destroy their PnL, or at the very least undergo a deep and prolonged drawdown.

To make matters worse, it is not uncommon in markets to find that theories and strategies that used to work can suddenly reestablish themselves and become viable again.

A good example is the inverse relationship between the performance of growth and value stocks in equity investing. Investing in value stocks tends to do well when investing in growth stocks is going through a run of low performance, and vice versa.

Does this mean that value and/or growth investing is not a viable way of thinking about markets? Not at all, they are viable, but only when the time is right.

In the absence of being able to know in advance when the time will be right, the best we can do is to remember that knowledge is but perspective, and to change the way we think about markets as time and circumstances evolve.

Remember – Einstein!