GZ,
This is usually the case, since the market is always right in the
final analysis of things.
It's always interesting to see this little pseudo-aphorism pop up.
AT BEST, the market is neither right nor wrong. The market is the
market, i.e., it is a price in time and nothing more. The market,
however, does have participants. These participants are spread across
a spectrum of "rightness" and "wrongness" from extremely right to
extremely wrong and everywhere in between. At any given moment in
time, the participants, collectively, are either net right or net
wrong vis-…-vis the future, using whatever time scale one wants.
In other words, one can't say that the market is always right if its
participants as a whole are frequently wrong. If this were not true,
the market would stabilize at one price, everyone would be right (or
wrong, if you prefer), and no one would make (or lose) any money!
In order to properly consider the forward guidance that the market is
telegraphing, the question then becomes: what is the market's
collective, capital-weighted, average intelligence and can I use this
info to help my investing and speculation?
The market is made up of a finite number or participants, both human
and software-based (as I understand it, there are also some monkeys
involved). Each of these participants has a supply of capital, plus
leverage, which is either held in reserve or committed. The human
participants would have, on average, an IQ of about 100, maybe a bit
higher or lower, but also bring experience and intuition to the table.
The software-based participants are undoubtedly smarter than their
human counterparts, simply because they have been restricted to a
particular knowledge domain (economic analysis & trading) and have
been tuned and optimized over several generations, to date. The
software is several orders of magnitude faster than humans. Also,
certain software players could even be said to have "experience".
Software's very substantial weaknesses are a total lack of intuition
and complete oblivion to anything beyond their input set, critical
information which is often needed for the next trade. For most
scenarios, this software has a much higher comparable "trading" IQ
than its human competitors. That IQ number, given the speed of
execution, is very likely off the human scale. Thus the tendency to
allocate more and more capital to software trading.
Thus, I have come to the following tentative conclusions in relation
to what the market "knows", circa 1997:
1) Does the market predict the future reliably? - yes, on average, but
at certain junctures, it can be very, very wrong because its
participants can be wrong, mostly because no one knows what the
future will bring, the inputs are misinterpreted, or the inputs
are hidden, missing, or corrupted.
2) Is the market smarter than me? - yes, on average. But when it's
not, unless I have enough capital to bring my capital-weighted
intelligence up to the market's net level, my logical assessment of
the market does me little good and potentially a great deal of
harm.
3) Is the market faster than me? - yes, without qualification.
4) Is the market getting "smarter"? - yes, within limits.
5) Is the market infallible? - absolutely not. In fact, due to
automation, the chance of wholesale failure is very likely
increasing (Y2K anyone?)
6) Can I BEAT the market? - maybe, if I can comprehend the big picture
before the market eventually interpolates it from its usual inputs.
Additionally, I believe one's chances are a bit better by staying
out of the highly automated areas, including domestic indexes, high
cap stocks, and options, concentrating on unnoticed stocks with
above average prospects. Then, of course, there's insider
information. :-D |
