Yesterday, a friend of mine asked me to explain the stock market. She told me, “I just don’t get it.” She couldn’t understand how participants defined “value.” She suggested market value was simply a matter of perception, that markets had no real value. And the fact that markets only had perceived value meant the whole idea of trading and investing made no sense, that the concept itself was simply another way for those with lots of money to get money from those who want lots of money.
I understand this perception, and I told her that it would be hard to argue against her thinking, but I would anyway.
The fact is that the market is rigged. In its current form, it favors those with money and inside information. It is a pit of gambling that takes money from the unwise and the unsuspecting. Fear and greed are often the impetus behind a game that produces more losers than winners. The market is the ultimate human theater for acting out the Darwinian principle – only the strongest survive.
Yes, all of that is reality, but if you know this going in, you can act like the hyena around the lion – watch, track, wait, and eat. If you understand this, you can learn to hunt like the lion, and when you learn the characteristics of the hunting lion, you can start doing some tracking of your own. This metaphor seems a bit off, but I think you get the point – just because it is hard to win in the market does not mean you cannot win. You can win if you learn what drives markets, how the big money (lions) plays the market game, and how you can take advantage of the excess opportunity that is always present in the market. You see, even as the big money owns the game, the game is so large and so diverse that opportunity abounds for everyone, lion and hyena alike.
I explained to my friend that understanding the fundamentals of a market, as well as the broad market itself, brings one closer to true value, as opposed to perceived value. I told her that when greed rules or fear dominates, fundamental value gives way to perceived value, and this gives rise to a more dangerous and volatile environment, but when greed tempers and fear subsides, perceived value tends to give way to true value. When this condition exists, the market is about as fair as it will ever get, and in these times, it is ripe for picking.
We are currently seeing a market where greed is tempered and fear is subsiding. In this market, truer value means better choices, and better choices means better odds, and better odds means more winning. So, yes, my friend’s cynical perspective is fairly accurate, at least for certain phases of the market cycle. Then again (my poor metaphor aside), my perspective is accurate as well. The way to make money in the market is to work hard, learn everything you can learn, and then pay close attention to what is really going on in “the jungle.” If you do this, you can learn to track the big money flow, which means you will eat, which means you will not only survive, you just might prosper.
Trade in the day; invest in your life …
