INvestor/traders as Market Shamans

NG posts in the comment section about what to follow to divine stock market movement--on what basis are we to judge. It always feels to me that we are shaman-like in our quest for determining stock market direction. Our tools are our talismans: we shake, rattle and roll the various chicken bones; we raise our moistened finger to see which way the wind blows; and we gaze wistfully to the horizon to see whether the clouds are fair or foul. And, we look thoughtfully upon the past and what the ancients said and thought. As strange metaphor, but and apt one I think.

I think that Carlos Casteneda smoked peyote and then walked in the desert with his eyes crossed to find "truth" somewhere in the overlapping vision. The complexity of the layering of divination trappings (TICK, technicals, fundamentals, futures, insider buying/selling) has the capacity to produce conflicting signals leaving one standing in the desert with one's eyes hurting and throat parched. A chicken bone or two might poke a hole in one's pocket and poke some tender areas. I'm not saying they are not useful (and to be clear, I've no idea how to use some of that stuff!), but at some point one saturates oneself with so much information that it is an overload and many not produce clear signals for action. In a sense, some of the tools to me (and I've a high degree of tolerance of unclarity!) become so esoteric that their usefulness becomes diminished. And these tools are SO appealing to my inner information magpie.

In the end, I have to come back to my being a sectarian and a fundamentalist(oh, but with a bagful of talismans). I believe that money, like water, seeks its own level though there may be wide swathes of disparity for uncertain durations. I'd like to think that in our consideration of asset classes and assets within classes, we are always trying to evaluate

• intrinsic value: what is the value based on objective measures (cash flow, earnings, etc)
  
• relative value: what is this asset's value relative to the valuation of other asset classes (the overvaluation of bonds in the flight to quality is an example of this). It can also be the value of a stock in the same sector as other stocks.
• extrinsic value: what value has the market place conferred upon this asset and why is there a premium (again, bonds and the flight to quality--with quality/safety being the reasons for the premium)
  

When relative and or extrinsic values become extended among asset classes or between intrinsic value, whether gold, dotcom stocks, commodities, bonds, real estate, rare cars, then speculative excess hits a climax--and then the denouement follows--though probably for just a short period. Isn't that really the story of investing and making choices among asset classes? It likely reads like a bodice tearing, romantic cheap novel--but the market is based on emotion, and emotions always involve bodice tearing and secret if not illicit yearnings!

I think that the well-grounded successful investor can identify intrinsic v. extrinsic value AND he/she can evaluate the level of risk that lies in the valuation distance between the two. I don't hold myself out as being in that camp (I'm still in the woodshed). From that evaluation s/he can make a considered decision regarding risk/reward. And risk reward always exists in the context of a time horizon. Value, time and risk--these are the contexts that a well-grounded investor minds well.

Here's a great example of intrinsic v. extrinsic valuations: Beanie babies. I could never understand the phenomena of beanie babies. How could a bean bag animal that fit in your hand command $1200 or some other ridiculous price. It's intrinsic value was $5. Its extrinsic value was based on the fickle fancy of the public. That dynamic never ends very well unless you bought at $5-100.

To my mind, when the extrinsic value becomes inflated beyond reason from the intrinsic value, you'd best be quick or your money will be dead (presuming you are playing in extrinsic values). I still believe in equilibrium or fair value--and like the "average" line that gets drawn among a scatter of points--it can be near or far to other points. So at any point in time, the market price is the extrinsic value (meaning it is set by the fickle fancy of speculators) and that value (hope, greed infused value) may have a large or small standard deviation above or below the fair value. Though as I write, I realize that fair value is still an ephemeral concept and subject to whim/fancy regarding methodologies used to determine fair value--and that "fair", like beauty, is determined in the eyes of the beholder! Always there is quicksand to step in!


To stay grounded, I believe in the power of the economic cycle and the the ebb and flow of money from sectors that will experience marginally improving fundamentals (meaning the sector has peaked and priced to perfection) in the future to sectors who have declined from their peak and will experience greatly improving fundamentals. I believe that is how money finds its own level. And I believe that trends go further for longer than one expects, though I have to fight my incredulity--and I've not found a good way to win that fight. Perhaps participating in the frolic with an appropriate hedge would be a good neutral territory that allows one to enjoy the upside but prevents one from waking up naked in a strangers front yard.

I believe as investors/traders we are market shamans. We've our particular talismans that we use because in them we have confidence in their ability to peel back the curtain of the future and allow us to make a current judgment in order to participate profitably in that future. Accordingly, I try to be mindful of understanding that my talisman's may not be the same as another's talismans. Moreover, 'different' does not confer 'better' or 'worse.' Ultimately you have to have talismans that grant you success--and that is the journey that each investor needs to undertake. And hopefully it doesn't involve our smoking peyote, crossing our eyes, and walking in the hot desert.