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NW wrote:
NW: "...The market is teaching those who just made money by technical
analysis and trend
following that what they do no longer works. The market is also trying to
reclaim the profits of
these traders. In a theoretically perfect free market, all players must
eventually be returned to an
economic zero profit. The market will do what it has to do to see that as
many as possible make as
little as possible." Economically,
Norman
Someone [ I lost the actual name] replied:
"...Do not really understand this. It just begs the question why? The
market does not "see" us. It
goes where it wants. The individual will do what he/she has to do to make
or lose money."
I thought an analogy might help you out here. I'll give it a shot. Most
RT'ers should just skip this or
hit delete.
True, the market does not see "you." The market doesn't even know "you."
SO, how does the
market do "what it has to do to see that as many as possible make as little
as possible."
Let's look at a secular example. One lesson we did not learn in school is
that a free market loathes a
huge profit, and will - overtime- creatively destroy that unusually large
profit. Consider the huge
profits in DRAM chips that occurred only two years ago. Micron Technology
quadrupled during
that bull market. At Micron Technology 's peak in price, Jeff Vinik stated
on Wall Street Week that
if he had 64 billion dollars more to spend, he would still buy more
technology stocks.
The free market, however, was already saying otherwise. A free market is
simply the collective
activity of free and rational minds. Many other free individuals observed
those DRAM profits and
geared up to cash in. From Japan to Taiwan to Texas, companies CEO's
financed huge capital
outlays in hopes of bringing vast new quantities of DRAM memory to market.
These entrepreneurs
sought to garner their share of those huge profits.
At that same point in time, other free market participants understood that
supply would one day
overwhelm demand. These entrepreneurs began selling Micron Technology. Over
the ensuing
months, MU slipped from the 90's down to the area around 20 dollars per
share, even though MU's
earnings were still rising! And technical charts still looked great at the
top.
This "creative destruction" process can be seen throughout a free economy.
The process recently
struck the Internet stocks, in the 80's it shaped the WordProcessing and
Spreadsheet wars, and
indeed every corner of the PC revolution. Creative destruction in a free
market can also be seen as a
process of reallocation of capital to where it is needed most. Large
profits signal entrepreneurs to
allocate precious capital to where it is needed. That is, DRAM chip profit
margins were high in the
first place, only because demand had, for the moment, seriously outstripped
supply.
Free entrepreneurs, free minds react rationally, to such strong market
signals, and properly re-allocate capital from the production of low margin
goods, to where capital is needed- in the
production of high margin goods.
So what has this to do with your trading? Daily, hourly, minute by minute,
entrepreneurs re-allocate capital in the commodity market, in the stock and
financial markets. The major players are
reacting rationally to the dynamic signals which they perceive emanating
from the marketplace. A
rational reaction is not always the correct reaction. Some win, some loose.
The largest players,
having the most to loose, usually employ the greatest resources to read
these market signals best. If
these major players can't read these signals adeptly, then they will not
sit among the largest players
for long. At least not in a free market.
Day by day, and tick by tick, these major players set the trend and tone of
the market.
Suppose the speculator, or small investor, wishes to second guess the major
player's move. How
would you now like to go one on one with Michael Jordan?
Or, from Michael Jordan's view, when Michael reads the floor, he spots an
"inefficient allocation
of precious resource." Or, in jock talk, the floor is unbalanced, and
Michael strikes quick and hard
at the perceived inefficiency. If he executes correctly, Michael profits
handsomely. Perhaps another
MVP award. Michael is acting just as The CEO entrepreneurs in the example
of Micron
Technology and the DRAM market. Both CEO and Michael, the key players, know
their market
intimately. They can move almost, with their eyes closed... intuitively.
In sports analogy, the market place, is made up, of 10 players, and back
benchers, and coaches each
looking for the best allocation of their resources, while seizing upon the
other team's inefficiencies.
[Targeting areas to garner high profits].
The free market, whether on the basketball court, or the trading floor, or
the corporate boardroom,
creatively punishes the misuse of resources. The same free market
handsomely rewards those
entrepreneurs who reallocate resources quickest to where they are next
needed most.
If the market did not do this it would not be free or rational. If Michael
Jordan does not take the
open lane to the hoop, wouldn't you know something is irrational?
In the real world, however, the game does not end at the buzzer. It goes on
for life.
Last week a RT remarked how wonderfully the stochastics worked on the S&P
last week. Bet it
won't work for long. Free markets and free minds, that is- trading
entrepreneurs- will perceive that
unusual market profit and go for it. As more entrepreneurial traders climb
aboard, that market
inefficiency that provided high profits will no longer work. This is the
way a free market,
comprised of free minds, is supposed to work- and will always work.
Would you watch a game of basketball if the rules were changed as follows?
Each team is
compelled to use a clearly announced and defined set play each time down
the court? Michael
Jordan must announce which side he will advance and from where he shall
take his shot. Of course
not, that is not only a boring game, it would no longer reflect the real
world, the real beat of a free
and rational market.
Don't confuse the dynamics of a free market economy with the dynamics of a
planned economy. A
socialist economy is "planned" this way. And, usually, by the dullest
minds, not entrepreneurial
souls. Hence one of the major reasons for the massive failure of these
so-called "economies."
A free market, over time, must tend toward greater productivity. As a DRAM
chipmaker, would
you attempt to bring to market a less efficient and more expensive product
that is already available?
In a socialist- non free mind- economy you can do just that. Year after
year. For example, in the
years prior to its collapse, the Soviet economy had tended over 70 years
toward such inevitable
inefficiency that the Gross Nation Product of the Soviet Union was LESS
than the input of goods
and resources. In other words. Put in 1 billion dollars worth of timber and
you get out ½ billion
dollars of wood and paper products. One third of the agricultural output
rotted in transport alone.
Remember, free minds, entrepreneurial minds, were never allowed to act upon
and attack
inefficiencies.
By contrast, a free marketplace is dynamic, alive, rational, and executing
like a myriad of Michael
Jordans on a court, tic by tic, always seeking the best allocation of
capital. A system that worked
today, may not work for long, because other entrepreneurial traders will
also use their own "tools"
to read the market's signals. And, soon enough, the market inefficiency
that was providing unusual
profits will be brought to a low- usually not zero- but a low profit level
once more.
Unless you are exceptional, in a free market, the holy grail keeps moving
around from hand to hand and changing its colors! And the holy grail does
not have to know who you are.
So, a free market does not have to "know" you personally and individually,
to accomplish what
Norman wisely stated, "return you to zero profit." Or near zero profit,
since that is the natural order
of a free market.
In the face of these massive, creatively destructive forces, how do the
exceptional entrepreneurs
like, Michael Jordan, persist so long? Someone once quipped, "Dean Smith is
the only man alive
who could keep Michael Jordan under 20 points per game."
About that remark, Michael replied, "Yes, but Dean Smith taught me the
fundamentals, and made
me a complete player. I had to work on different parts of my game, and then
I had that foundation to
work from."
Fundamentals like technique, discipline, self knowledge, vision.
Perhaps, the fundamental question here is no longer whether the market
knows who you are, but do
you know who you are?
What technique, discipline, self knowledge, vision do you bring to the
game? When you find
yourself standing on the foul line, 3 seconds to go, and the score is tied.
How do you execute, with
grace, under real pressure when you want to win? Or, how do you execute,
with grace, when your
trading system has lost 3 in a row, and now gives you yet another strong
buy or sell signal? Do you
change strategy? Hold with the tools that got you this far?
I hope by using these analogies to sports and the real world, that you
might draw some helpful
conclusions as to what you are up against, what kind of a real game you are
walking into.
Sorry for the long winded discussion. Good luck and enjoy the journey,
Jim Miller
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