Walk on the Wild Side: Trading the Beast
Roll back to December 31, 2015 and my portfolio of investments was almost in the black after a tumultuous few months and I was ready to exit my positions. I thought to myself, just let it roll a little bit longer into the new year, take a little profit and then happily walk away… Unfortunately, much to my dismay, he markets would not have it this way.
In a matter of hours, my illusion and grandeur of easy money had been shattered as I was blown away by the “Beast” that is the financial markets. Like a wounded animal seething with rage at its tormentor, the value of my investments plummeted as some economic data came out of China which suggested that the manufacturing sector had contracted a little. Nothing significant, but enough to set off a chain of events which I now find myself hopelessly caught up in.
I even tried to be clever and trade my way out of the position, buying at a price which I saw was a historic low based on my own “technical analysis”. I would be a “contrarian” as the Financial Times advised last week in their weekend Money supplement…. That position was quickly swept away as the markets took no prisoners and mercilessly pummelled its participants further into the financial abyss; like a massive shore-breaking wave, where a face full of sand is the gent reward for trying to be clever.
So what have I learnt from all of this chaos? I think I have a few observations. The financial markets themselves are like nothing else. They have a psyche that experiences paranoia, pure hysteria, melancholy and many moods in between. The Beast has a life of its own, independent from all of us, yet we all contribute to this creature’s being by feeding it money and things to trade with. I watch it during the day, seeing it steadily increasing in value, then when I check it later, it has violently fallen again. It is almost like this animal has suffered from whiplash or something. The movements and reaction to seemingly innocuous information are simply astonishing. Furthermore, that “new” information is quickly forgotten as the next news release quickly supplants it.
Everything I have learnt about Finance, where the price of a particular investment reflects all current information and the fundamental value of such investments is reflected in their price, has also been challenged by the last week’s (and even months’) events. Rather, “fundamental value” has been replaced by “market psychology”. Behavourial economics is quickly becoming the new reality, as investors react to new information and assess not just the impact upon prices, but how they think it will affect the markets per se. There is no logic to the relationship between the price of oil plummeting (caused by massive over-supply in the market as a result of the US shale revolution and the impending entry of Iran into the market) and the value of my property investments also falling through the roof. There is no logic to the fact that markets get disappointed when central banks don’t raise interest rates or inject more astronomical sums into the markets by printing more money to feed the system. It’s as if they react like some aggrieved spoilt brat and instigate a mass sell-off just because they didn’t get what they want. In short then, there is often no relationship between price and value. It often simply trades on sentiment.
I really shouldn’t be surprised at this realisation given that markets really just trade on greed and fear. I also reflect on the times when I didn’t care less about events in the markets and thought to myself how grateful I am for not being caught up in such madness. Now I find my moods being somewhat correlated with events over which I have no control. It does make me question whether people who work in Finance (like myself) can ever be really happy when your happiness is often so illusory and temporary. This really isn’t a recipe for inner peace…
As Buddha said in one of his four noble truths, attachment really is a cause of suffering. Liberation then will be a swift exit from this beast, if it will show me the mercy to allow me to do so. Heaven forbid if it doesn’t.