Page 463 - THE MARKET WHISPERER

THE MARKET WHISPERER 45 9

illogic can be perfectly logical, or as they say, “When the sun shines on
Wall Street, open your umbrella.”

In The General Theory of Employment, Interest and Money written in
1936, John Maynard Keynes stated: “There is nothing as disastrous as a
rational investment policy in an irrational world.” Translating that into
the language of stock traders, it means that if others invest unsuccessfully
based on logic, hoping to achieve a correlation between share prices
which they perceive as illogical and fundamental data which they perceive
as logical, then the more they fail, the greater are my opportunities for
success.

SMART What would you prefer: a certain profit of $1,000 or an 80%
MONEY chance of earning $1,500… which carries a 20% chance of
earning nothing?

By way of explaining my claim, let me present for example a company
that reports on better-than-expected earnings. The fundamental prediction
is that the share price will rise, but as happens so often, it actually falls.

The reason might be very simple: a large investment fund may have

decided that it has earned enough on the stock, decided to sell, and used

the high volume of buyers to its advantage. The fundamental investor will

relate to the dropping price as “illogical” and will buy it “on the cheap,”

while the professional trader perceives the drop in price as very logical

(the will of the market) and tries to profit from the lows with a short trade.

Anyone who does not know that the dropping price is the outcome of a
fund selling will perceive the process as illogical. But can we say that the
market behaves illogically? Conclusion: if you hold an economics degree,
your chances of losing have just gone up a lot.

How do fundamental investors cope with loss? Generally by doubling the

investment, based on the premises that they are right and that eventually

the logical process will lead to success. As with the casino, so with the stock

market: a losing gambler doubles the gamble, hoping (usually in vain) to

beat the casino. The more the gambler loses, the higher the gamble rises.

At some point the gambler will reach the maximum capital limit (or the
limit at the table). And the casino? The casino wins, of course. Fundamental
investors will claim it is worth taking the risk, since in the long term prices
adapt themselves to logical values. Concerning that, Keynes had a killer
response: “In the long run, we are all dead.”