Question:
I really enjoy your comments, and I hate to say I’m that trader who fails to do everything you say. My question is this: if stock trading is a zero-sum game, why do people panic if some guru sells a million shares of a particular stock? Wasn’t there someone on the other side to buy it up?
Jiny from Rational PA
Answer:
Jiny, your statement that you are” that trader who fails to do everything you say …” reminds me of a student I once had who told me after I gave him a “C” on his paper, “ I don’t understand. I did everything you told me I should do.” I responded, “That is the problem.” That student mechanically wrote his assignment, carefully adhering to the idea that if he included in the paper all I had taught him about the process, he would succeed. His paper lacked a voice, focus, imagination, and depth because he saw the assignment as just about the process. As a trader, success is not “just about the process”; it is about the choices you make inside the process that will lead you to success or failure. So, please don’t view what I have to say as the means to your end. Consider what I say as part of your overall learning process, but move past my advice to create your own particular approach to trading.
As to your question, it is true that trading is a zero-sum game, but what does that have to do with panic if a seller divests huge holdings in one transaction? True, the buyer(s) on the other side of the transaction balance(s) the equation (rational), but those outside of the particular transaction do not see the transaction in rational terms. What the outsider sees (a large sell) causes irrational thinking, which is the core of panic. Did the seller sell because he needed the money, or did he sell because the company is about to collapse? Either could be true, but only one should prompt others to sell.
My point is, don’t apply rational thinking to an irrational market, and despite what theoreticians, analysts, market gurus, or pundits say, stock markets are irrational.
Trade in the day; invest in your life …
