Patterns and Work

Trading is sensing the patterns. It is like poker where you are playing against another person. Attempting to go with the momentum when the price is going up, and not be exposed when it is going down. Playing off the rhythms. The natural feast and famine cycle. 

If you have got a sense that there is a long-term, stable price, then you get an understanding of how buyers and sellers move around that. You are juggling supply and demand, and playing both sides. Good or bad, this too will pass. "Buy when the price is low and sell when the price is high". Be a supplier when there is scarcity, and store up when there is abundance. 

You have to have a sense that there is a long-term price, but you don't really care what the thing is. You are making money by playing off the relationship between price and long-term value. 

If you are really brave, you can trade something where the long-term price is zero. Where there is no value, there are just people willing to buy. Until there aren’t. Trading musical chairs. 

With investing, you are not dependent on a buyer of the vehicle until/unless you sell... you are dependent on what work the vehicle does. Trading is about the patterns, investing is about the work.

Natural Rhythms

I am not Playing

I don’t like the term “playing the markets”, but even I have to admit that it is possible to hype it up and play it as a game. Throw in some American Football Style commentary and every bump and drop can be dramatized. It is true that you can trade anything with a pulse. It is also true, that while some people believe it is 50/50 whether an active investor making conscious decisions can beat the market (pre fees), it is far far easier to lose money than it is to make money. It is incredibly easy to make stupid decisions and lose money fast. The equivalent of going on tilt in poker. Which normally means trying too hard to make money too fast. That is “playing the markets”. The best way to play that game is to be patient, and avoid being stupid. Feed off the mistakes of others. Investing is different. Investing is slow. Investing is getting your money a job, and reinvesting its salary rather than spending it. Investing is the win-win daily practice of creating mutually positive futures. Investing is channeling resources to the solving of problems.

Investing isn't Win-Lose

Do Good Work

There is nothing more Free Market than failure. Bail-outs etc. are “third way” interventions where Government steps in. Particularly bad if they only step in when there is failure, and do not share in the up-side. A danger of basing your investment philosophy on a dance around what something is worth, rather than what it does, is that price and value can disconnect massively. It is particularly dangerous if you “bet” more than 100%, or are naked (have a position in something you do not own). You can trade anything with a pulse, the underlying thing does not matter as much as the person (legal or real) you are buying/selling from/to. You can leverage up a horrible asset to make great profits (until things go wrong). Investment is different. A basic principle of fundamental investing is that what you do matters. It is not gambling. It is capital allocation and problem solving. Shifting resources to where they are doing good work, and continuing to do good work over long periods of time. No one can force you to sell if the business is strong enough to carry on doing its work.

Behaviour Penalty

If something is free, you are not the client. You are the product. The same is true with the Stock Market. You don’t “play” the Stock Market. It is not a game. It is true that Traders can trade anything with a pulse with no regard to what it refers to. The “fundamentals are free”, because the product is the other people who are trading. If you are “playing”, you are playing against some of the most sophisticated and resourced poker players alive. Investing is different. There, the fundamentals matter. You are buying a slice of ownership in an underlying business. You can’t get played if you have a long-term horizon. Then what matters is the quality of the offering, culture, management, and people in delivering their problem solving. What matters is the strength of the company to endure through difficult times. To emerge. In a dynamic world where they have to respond to a changing environment. You don’t have to respond. You can sit on your hands. The “Investor Behaviour Penalty” is a well-studied phenomenon where the average investor underperforms the thing they are invested in, by second guessing and buying in and selling out at the wrong times. Sometimes, the best thing to do is nothing.

Don't let the smile fool you