Stories we tell ourselves about market irrationality

One of the dangers of investing on our own is the abstract stories we tell ourselves about market behavior.

Generally, at this point in time, the story is about the market’s “irrational” behavior. There are some stories about how value investing doesn’t work anymore. The investment models and numbers doesn’t map onto the market.

There are also stories about conspiracies and collusion in the currency/futures trading market. This story has always been there but it is being retold the most at this period, because the candlesticks and technical charts doesn’t work the way it used to.

Warren Buffet used to tell stories about a manic depressive person called “Mr Market”. He is a schizo who can buy something at 1 dollar and sell it at 50% loss tomorrow. He would use the story to tell people to be patient and buy and sell with “Mr Market” at the right time.

Generally what we call as “Market” is a collection of people. They can be patient money, they can be impatient money. They can be big money, they can be small money. The different composition of these groups will make up the character of different markets. For example, a US market is different from a Malaysian market, which is again different from a China market.

Whether we use ETFs, CFDs, bonds, equities, property as instruments, again each will have its own different interaction with the market.

It is part of my job to interact with people everyday and find out what is the reality on the ground. Abstract stories and assumed interactions need to be constantly tested against the reality of real life market participants.

It is when we become too enamored with a story that we will take leave of our senses. Instead of seeing reality unfolding, we will stick with a story that is only in our head.

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