The compass and the navigator
Key Markets report for Monday, 27 July 2026
In “Human Action: A Treatise on Economics, Ludwig von Mises wrote as follows:
“Thus we are led to the insight that dealing with the uncertain conditions of the unknown future—that is, speculation—is inherent in every action, and that profit and loss are necessary features of acting which cannot be conjured away by any wishful thinking.”
This is one of life’s universals; practically every worthy endeavor we undertake in life departs from a decision that is, in essence, speculative. Buying a house; going to war; acquiring a new skill… It all involves speculation and often, our perception of trends affect our decisions.
Trends and the school of life
For a long time now, the experience of trend following struck me as a very valid school of life in general. Advancing in life, achieving any positive departure from the status quo depends on the quality of our decisions and our commitment to those decisions. What we think, feel, discuss or imagine makes little difference; it is the decisions that count: the ones we actually take and execute.
Decisions are life-changers in ways we can seldom predict. They often lead to unforeseen consequences and at times, outcomes that are opposite to those we intended or desired. Regardless, taking those risks is integral to every departure from the status quo, which is itself not a fixed position but usually a state of gradual but steady decay.
As with trend following, advances in life tend to be won not in a straight line but in discrete, sudden leaps where things happen all of a sudden and “seemingly out of nowhere,” followed by long stretches of time marked by a sort of, “one step forward, two steps back” footwork that can seem interminable and exasperating.
Those discouraging flat patches are a test of determination and perseverance. They tend to eliminate those who are less than committed, disciplined and patient in their pursuits. In a way, the sudden leaps forward are rewards for the risks taken and efforts expended in the face of uncertainty. I believe this is all rather straightforward and most of us can identify with that characterization of life. What’s a lot less straightforward is the way we arrive at the decisions to venture and take risks.
The inner works
Particularly with respect to any speculative endeavor, our decisions stem from our conscious theorizing about our situation, weighing the risks, the pros, the cons, the anticipated consequences of our actions, and so on. It’s important to note that our conscious deliberation and even our internal monologues, the thoughts we think only to ourselves, are always formed in language, and this is where things get slippery.
While our internal monologue largely defines our relationship to the outside world, that monologue is predominantly the product of our brain’s language-heavy left hemisphere which has certain important handicaps when it comes to speculative decision making.
The discovery of the differences between the left hemisphere (LH) and the right hemisphere (RH) of the brain has been the single greatest advance in neuropsychology in over 50 years. These differences are relevant to every aspect of human experience and an understanding of these differences has even become part of our popular culture: it’s the contrast between the rigid, rule-abiding LH vs. the artsy, freewheeling RH.
But Dr. Iain McGilchrist, arguably the world’s greatest authority in this domain, maintains that almost everything we thought we knew about this dichotomy is wrong. In his book, “Master and his Emissary,” he covers the differences between the two hemispheres in painstaking detail. Here are only a few examples relevant to decision making:
LH tends to rely heavily on logic, even if its logic could be highly flawed
LH deals with individual bits of information in isolation, ignoring the broader reality. In this it creates a self-reflexive virtual world which is decontextualized and mechanistic.
LH tends to focus on single solutions that seem like the best fit to what it already knows and latches onto it. Any discrepancies that fall outside its pre-existing conceptions tend to get ignored or rejected.
LH has difficulty disengaging: once it’s contrived a pattern in its thinking it tends to keep with it and resist any changes that are at odds with its internal logic. Anomalies are ignored, not highlighted.
LH is obsessed with being right and being in control. It abhors uncertainty.
LH is quick to draw conclusions from limited information and then stubbornly insist on their correctness.
This is clearly not the optimal circuitry for making decisions in the face of uncertainty. I know, someone will object: then how come we survived and thrived during most of these past 200,000 years or so? I am not questioning our ability to navigate the natural world which has been stable during most of our evolutionary past. I am questioning our ability to navigate the financial markets which are much more unpredictable.
Making our way in this abstract environment of heightened uncertainty obliges us to rely on theoretical models and conscious theorizing about the way things work or should work. The problem is that our conscious theorizing is almost entirely dependent on our LH circuitry which, at the same time, is very prone to error and as reluctant to acknowledge it.
Reign of error
In his bestseller, “How the Mind Works,” Steven Pinker cites empirical research that shows just how easily we go off the rails when conceptualizing certain types of problems. For example, when college students were asked to describe the trajectory of a ball shot out of a curved tube, a “depressingly large minority” of students, including many who studied physics, guessed that the ball would continue in a curving path, and were even quite prepared to provide scientific explanation for this.
Other researchers asked similar questions about the motion of spinning tops, wheels rolling down ramps, colliding balls, or solid objects displacing water. They found that even physics professors often got their answers wrong unless they were allowed to fiddle with equations on paper. Pinker noted that cognitive misconceptions run deep and that errors tend to arise from “conscious theorizing.”
But when it comes to the motion of physical objects in space, we can rely on objective reality and mathematical formulae to test our theories. With financial markets and economics, theories are basically all we have and it should therefore come as no surprise that our top experts in this domain have a less than 50/50 track record for successful forecasting and that professional money managers have such a strong tendency to underperform.
One might ask, how is trend following any different in that sense? It is very different because trend followers sidestep trying to interpret markets, theorize about the conditions or forecast future events. Trend following is strictly about reacting to market price fluctuations whether economic theory or fundamentals data support it or not.
The compass and the navigator
This newsletter evolved over the years, from sharing strictly the trading signals with zero commentary on world events. It was meant to be simply a market compass. However, as it was becoming increasingly clearer that we’ve entered an unprecedented period of political, economic and social transition, the role of the navigator may be more important, including the navigator’s awareness of his/her own limitations and flaws.
The compass should be the foundation of our decision making, but experience, and a certain breadth and depth of knowledge, perceptiveness and subtle judgment may be as important. In that sense, I hope that the commentaries in these reports provide an added value - it’s something I’m never too sure about.
To learn more about TrendCompass reports please check our main TrendCompass web page. We encourage you to also have a read through our TrendCompass User Manual page. For U.S. investors: an investable, fully managed portfolio based on I-System TrendFollowing is available from our partner advisory (more about it here).
Today’s trading signals
With Friday’s closing prices we have the following changes for the Key Markets portfolio:
