The Fun House Mirror
RedTiger
Posts: 5,608 ✭
The Fun House Mirror is the title of this weeks blog entry (signature link to see my trades for the week).
I found a quote from Bill Miller (ex Legg Mason fund manager), and it is a powerful metaphor for why people have such varying opinions:
>> Bill Miller wrote
"The market does reflect the available information, as the professors tell us. But just as the fun house mirrors don't always accurately reflect your weight, the markets don't always accurately reflect that information. Usually they are too pessimistic when it's bad, and too optimistic when it's good."
"I often remind our analysts that 100% of the information you have about a company represents the past, and 100% of a stock's valuation depends on the future."
>>
Of course, each of us has a different perspective, a different angle for viewing the mirror. The two quotes explain a lot to me. For every buyer there is a seller. Most of the buyers believe it is going up, the sellers believe down. They are seeing the mirror from different angles.
What I tell every novice is to find a method that works for you. There are a thousand ways to make money in the markets (also two thousand ways to lose). However, what works for me, may not work for someone else, and vice-versa. Again, the mirror of our own personalities, our own habits will tend to make some of gravitate towards certain types of trading and investing, certain strategies and tactics. While other people will find another way. I found that keeping a trading journal to be an extremely useful tool in finding things out, learning things, typing up interesting observations. Since I started my public trading blog about eight year ago, my trading has changed so much, my risk adjusted profits so much higher than before.
I found a quote from Bill Miller (ex Legg Mason fund manager), and it is a powerful metaphor for why people have such varying opinions:
>> Bill Miller wrote
"The market does reflect the available information, as the professors tell us. But just as the fun house mirrors don't always accurately reflect your weight, the markets don't always accurately reflect that information. Usually they are too pessimistic when it's bad, and too optimistic when it's good."
"I often remind our analysts that 100% of the information you have about a company represents the past, and 100% of a stock's valuation depends on the future."
>>
Of course, each of us has a different perspective, a different angle for viewing the mirror. The two quotes explain a lot to me. For every buyer there is a seller. Most of the buyers believe it is going up, the sellers believe down. They are seeing the mirror from different angles.
What I tell every novice is to find a method that works for you. There are a thousand ways to make money in the markets (also two thousand ways to lose). However, what works for me, may not work for someone else, and vice-versa. Again, the mirror of our own personalities, our own habits will tend to make some of gravitate towards certain types of trading and investing, certain strategies and tactics. While other people will find another way. I found that keeping a trading journal to be an extremely useful tool in finding things out, learning things, typing up interesting observations. Since I started my public trading blog about eight year ago, my trading has changed so much, my risk adjusted profits so much higher than before.
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Comments
Knowledge is the enemy of fear
<< <i>For every buyer there is a seller. Most of the buyers believe it is going up, the sellers believe down. >>
Sellers cash out for a number of reasons. Buy a house, pay for college, redistribute assets or to settle an estate. In this tepid economy, many sell shares to cover household expenses.
Expecting a market decline is only one of the reasons.
<< <i>Many good points in your post.
<< <i>For every buyer there is a seller. Most of the buyers believe it is going up, the sellers believe down. >>
Sellers cash out for a number of reasons. Buy a house, pay for college, redistribute assets or to settle an estate. In this tepid economy, many sell shares to cover household expenses.
Expecting a market decline is only one of the reasons. >>
The exact market isn't mentioned, but I'd wager a very strong guess that the % of sellers selling strictly to fund the scenarios mentioned above is very, very small. I'd say expecting a market decline is the overwhelming reason why sellers sell, on a volume basis.
<< <i>Many good points in your post.
<< <i>For every buyer there is a seller. Most of the buyers believe it is going up, the sellers believe down. >>
Sellers cash out for a number of reasons. Buy a house, pay for college, redistribute assets or to settle an estate. In this tepid economy, many sell shares to cover household expenses.
Expecting a market decline is only one of the reasons. >>
True, that's why I used the adjective most. For stocks, the long term holders cashing out for retirement or a major purchase are a low percentage of the long term sellers. Most sellers are mutual fund managers or hedge managers selling because they think there is a better place for their money. Usually the mutual fund managers are selling to buy another stock. The hedge fund managers might be moving to another asset class or perhaps going from long to short. Most stock mutual fund managers have very little latitude as to their market timing. They follow the tides of the small fish that tend to have their money in mutual funds.
It is the hedge fund managers which seem to have become larger players during the past 10 or 15 years, that might go from long to short, or move their money around from stocks to bonds or gold or currencies or cash. I don't know how accurate my observation is, but hedge fund managers rarely got much press back in the day, and now at times take center stage. One hedge fund manager making bearish comments caused a "Granville" style decline. Old timers will remember Joe Granville as an influential stock market timer back in the day. When he flashed a major sell signal on his hotline the market responded. David Tepper runs the Appaloosa hedge fund (top dollar profits in 2013), and his tepid comments caused a one day market decline in 2014.
In any case, most of the reported volume is of the extremely short term variety, but even filtering out the day traders and the flash traders, I'd say that small timers cashing out to pay for college, buy stuff or live on are in the 2% range.
that they have actually helped the little guy in long only mutual funds by trying to play catch up and window dress.
I give away money. I collect money.
I don’t love money . I do love the Lord God.