Traders Are Not InvestorsDon Shaughnessy
“Animal Spirits” is a concept that Keynes raised in his 1936 book, The General Theory of Employment, Interest and Money. It refers to the tendency of markets of all types to move based on non-fundamental factors. Market sentiment is the current idea. Crowd psychology.
Looking at the markets as a whole over long periods, we see that there are price level changes that occur that have no basis in financial or business reality but rather are based on how people relate to news, especially surprises, commentary, especially from commentators that are showmen, and internet gossip, especially from frequent commentators. These are the meals animal spirits consume.
Intelligent investors will refrain from wasting their time on this fashion item.
Since this form of material is so ubiquitous and easy to access, markets today seem more driven by news than fundamentals. Fundamentals are liked demographics. In the long run you cannot overcome them.
Reports can appear reasonable, but like graphs that compare incomparable things, they are contextually deficient. “After the fed announced a rate change, markets fell.” “In response to the European banking crisis, markets fell.” “Markets rose with the improvement in the employment report.” All nonsense.
Short term market action is essentially random. “The efficient market hypothesis” But investor behaviour is not so efficient. Investors are emotional.
In longer periods, fundamentals win.
Maybe we can learn from that. Investors who repeatedly hear some news tidbit and see a market move as the result, begin to believe two things. Both likely false in the big picture, but possibly having short term value.
- External events cause price changes in the market
- Analysis of causation in the markets may be possible.
People who want to go here are not investors. They are traders. They are using information that they believe will be interpreted by other market participants in a certain way. They are trading against the other people, they are not investing in the long run potential of the business in question or even of the markets in general. Practically, they would not even need to know the name of the business. Its symbol contains all the information needed. It is a large game with many players. It is a zero-sum game. The winner is the one who defeats his fellow players. Like tennis.
Investing on the other hand is independent of the other players. In the Warren Buffet style, you buy good businesses, in good industries, with competent managers and adequate capital. Then wait. In his view the best time to sell a stock is never.
When playing “the market moves on news” game, every decision must have two parts. When to buy at a price and when to sell at a price. Buffet’s tend to be one decision situations. He only sells if fundamentals change or if someone offers him more than he believes the business is worth.
All investors need to get their time frames straight. If you are accumulating money for a purpose 30 years in the future, news will not matter over that time. If you are playing a short-term game that feels good when you win, then other rules apply. Be sure you know the difference.
Investors are not traders and traders are not investors.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.