Some of us seek truth in our lives, and other seek truth in the market. What do you believe, why do you believe it and what evidence can you point to affirm your stance? In the market data litter the landscape. Evidence, though it grounded in the past, is everywhere you turn. Though the data points in the market’s history are diverse as the people in the world, one thing is true about the market; the presumption that truth exists, when held by enough people, will make the truth real.
Think about the last point above. Truth within the market can be made by the market. Investors can make things true simply through enough investors believing that certain truth exists. Doesn’t that sound a little wacky? Objective truth and the market do not go hand-in-hand. To illustrate this point, let’s look at points of support and resistance. Technical traders or technical analysts will point to levels of price resistance to describe an index or stock’s current upper-level trading range. They will then turn around and speak of the support levels for what they forecast to be the stock’s lower bound range.
Many people think that technical traders are kind of like snake oil salesmen. They talk a good game, but what they speak of is a bunch of nonsense. For one, what they’re point to is not grounded in the reality of financial performance metrics or other more tangible company performance data. I believe your typical technical trader would agree with that statement. Yet, the idea of the reality of financial metrics does matter in this situation.
When speaking about ‘the market’ we are speaking about a ‘collective conscious’ or a ‘hive mind’. Market activity is the manifestation of beliefs through executed trades. When enough investors buy into the belief that certain patterns signify where a resistance and support level are located for an index or stock, then such notions become very real. The market’s belief dictates the market’s truth.
The world of the market is akin to a philosopher king’s weighted democracy. Anyone with dollar can weigh in on what is true or untrue and good or bad, but certain people have more power in deciding what becomes the general consensus (investors with more money).
As a young investor, the ideas expressed above did not set with me. It wasn’t something I even thought about. I was trained in a more classical approach to the market that focused on fundamentals. While training around fundamentals is important and vital to being a good investor, it leaves out the psychological component of the market.
The mind of the market can drive fundamentally expensive assets higher and fundamentally discounted assets lower. The goal for any player in the market is to make a positive return on your investment. To do this you must at some point be correct in your decision-making. This ultimately means understanding the mind of the market. To understand the market’s anointing truth is to be on the path of investor success.