Waiting for the market to make sense.

There seems to be an ever increasing chatter about how the market is going to revert to the mean or it is broken or it is undervalued.  Whatever it is let me remind you of two important ideas that are found in about any book you will ever read around finance and investing.

The market can stay irrational longer than you can stay solvent and the market’s goal is to extract the most money from the largest group of people. 

If I could change the first quote it would say: The market is almost always irrational but when it is rational it pays you enough to forget.

Obviously not an easy sell if you running money.  But that does not mean you can not be profitable. In fact, it means the exact opposite.  The market gives everyone a chance to win but how much and what you did leading up to that point is the difference.

I would change the second quote to read:  The goal of a market is to be healthy, when it is searching for participation equilibrium much money changes hands often to the few that are prepared.

There are many unnatural things that happen to a market.  But underlying it wants to find participation equilibrium.  It means cutting out the weakest leading the strong lower and allowing the few to pull everything higher.  The problem is cycles are getting shorter and power is not as concentrated. If you are confused, imagine how confused the market must be.

Do I think it is important to have those conversations from the start of the post?  Yes.  But they should be focused on what to do.  If the market does x I will look to do y or z and will be more focused on doing z but if m happens I will look more closely at y.

People focus too much on the “why’s”, it is purely to find some comfort.  “Why” is the cruelest women and you keep going back because she keeps you just comfortable enough, especially when markets are trying to find participation equilibrium.  The search for comfort is brought on by uncertainty and insecurity.  It is not easy of course, but is it possible to really ever start living until you are ok with dying?  I am not comparing trading to life and death.  However, being alive means we can die much like risking money means we can lose.

Conclusion

Money is made by reacting to change.  Reacting means anticipation.  The purpose of talking about current conditions is to formulate scenarios for anticipation.  We never know how long anticipation lasts. Don’t ever let anticipation get in the way of what is currently happening.  If you need to answer why, find out why you have that need and if you still have to have a reason keep it simple.  Knowing why means you know every participant along with their intentions and goals.  That is when it all makes sense. When it doesn’t, act accordingly.

We would really appreciate your feedback, if you like, hate, or think we are full of crap. Please leave a comment, a voice mail (312) 725-9121, email info @ traderhabits (dot) com or twitterstocktwitsyoutube and facebookSubscribe to Traderhabits by email or to newsletter.

  • Guest

    Pure Mark Douglas: “Knowing why would mean simultaneous awareness  of what all players are doing and want to do.” In his book “Trading in the Zone,” Douglas teaches that the more you realize what it would really take to “understand” the markets, the more time you will devote to more profitable things.

  • Jaysel1

    I do think the market is a metaphor for life and death. We are so remote from death in our advanced post modern singularity approaching lives we need to experience risk in the way that we were designed. AS humans unique among all animals we were designed to compensate for amazing physical shortcomings by taking on great risk.

    • A philosophy type, I like it.  Thank you for taking the time to comment. 

  • Pawel Nazarewicz

    Great post.

6 Responses to Waiting for the market to make sense.

  1. Guest says:

    Pure Mark Douglas: “Knowing why would mean simultaneous awareness  of what all players are doing and want to do.” In his book “Trading in the Zone,” Douglas teaches that the more you realize what it would really take to “understand” the markets, the more time you will devote to more profitable things.

  2. Jaysel1 says:

    I do think the market is a metaphor for life and death. We are so remote from death in our advanced post modern singularity approaching lives we need to experience risk in the way that we were designed. AS humans unique among all animals we were designed to compensate for amazing physical shortcomings by taking on great risk.

  3. Pawel Nazarewicz says:

    Great post.

The services and materials provided should not to be interpreted as investment advice, an endorsement of any security, commodity, future, or personal investment advice, or an offer to buy, sell, hold or trade futures, options or commodity interests or a recommendation to buy, sell, hold or trade futures, options or commodity interests. You assume the entire cost and risk of investing and are solely responsible for any and all gains and losses, financial, emotional, or otherwise, experienced, suffered, or incurred by you.

Read previous post:
Misplaced focus.

One of my best friends from high school thought he was Deion Sanders.  After playing football together for many years...

Close