My Market Beliefs

I will start with a quote 

"You do not trade the markets. You can only trade your belief of the markets" - Van K. Tharpe

(Possibly more about his books in later posts.)

Anyway it's an interesting concept and I thought I would state some of mine to give the reader an introduction to myself and my investing beliefs for the moment at least, they are constantly evolving!

• Markets on the whole are efficient. That is to say the share price is a fair reflection of all the information that is known for that compnay.Of course I said on the whole! There are times when the price can significantly deviate from the fair or intrinsic value. These can be periods of high emotions such as fear (e.g. financial crisis) and greed (dot.com boom). The mark of a talented investor is to recognise these moments, fight the emotions and go against the crowd (I certainly do not claim to be describing myself!).

• Forecasting is a fools errand, especially in the world of macreconomics. Studies show we are just terrible at predicting the future as we are prone to overoptimism, overconfidence and extrapolate short term events into the future. Everytime the Bank of England/Riksbank give an interest rate or inflation prognosis its probably no more accurate than the toss of a coin!

• Portfolio management and position sizing are the foundation of all sound investing strategies. Spreading your risks/returns over several asset classes (such as cash, stocks, bonds) is far more important than finding that one magical stock that will increase in value by 100% (although we all want one of those!). Once your allocations have been defined then position sizes will control how much you invest in one company (the norm seems to be 1-4%).

• Every trade is a battle to control and understand the emotional contribution to the decision making process. If you let the emotions override then you will end up buying high (when everything feels deceptively positive) and selling low (when the negative feelings come) - a sure way to get crushed in the markets! It's not easy, I'm still trying to work it out myself but some traders approach the problem by formaluting a plan before they start the trade and then stick to it whatever inbetween.

• What moves share prices is the revelation of new information to the market that was previously unknown. This is why insider trading or a particular insight can be so valuable. Examples of this include unexpected earnings (higher or lower),  merger news or even CEO matters; some of these may be referred to black swan events. However, this reactiuon to new information can be used to our advantage. If there are very high expectations in a company (this usualy results in a high p/e ratio) then future earnings growth is 'baked' into the share price. Higher than expected earnings will rarely shift the price much, it's already flying high. However, lower than expected earnings will come as a shock and the price will drop when the news is digested by the market.