Monday, May 28, 2012

Blind Men And The Elephant & World War II

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

We began our studies of fundamental analysis, technical analysis and random walk theory over a year ago.  We have learned about each investment strategy, its core beliefs and its suggested methods of profiting in the market.  The proponents of each form of investing not only tout the merits of their preferred method, but also spend almost as much time and effort denigrating the others.  I am reminded of the old parable about a group of blind men and an elephant which is found in Buddhist, Sufi Muslim, Hindu and other religious/philosophical writings.  

Supposedly originating in India centuries ago, the many versions of the basic story focus on either a number of blind men or several men in a completely dark room.  They are introduced to a king's elephant and given the task  of describing it using only the sense of touch.  The catch, of course, is that each individual can explore only one part of the animal and none of the men can touch the same part.  In each version of the parable, the men report to the king the results of their explorations.  The man who felt the leg describes the animal as a pillar; the man who grabbed the tail imagines the elephant as a rope;  the one who explored the trunk reports that the elephant is like a large tree branch.  Conflicting reports are also provided by the individuals who touched the stomach, an ear and a tusk.  The men argue about who is correct.  The king resolves the dispute by explaining that each of them is correct based on what they felt (their individual perspectives); however, none of them is totally correct.

Like the elephant and its many parts, the market has many different investments to offer to investors and speculators.  The investors and speculators also differ in many ways, but are the same in certain respects; each one has a goal, a preferred method of achieving that goal and a time frame within which to do so.  Depending on an investor's focus; how he or she chooses to invest, and the available time for investing, the individual may be correct, given the personal goal.  However, individual success does not necessarily require the blanket exclusion of other investment options or techniques under all other circumstances.

For example, a young person who is putting aside money regularly for retirement will, in all probability, invest with long term capital appreciation in mind, seeking to increase the amount of his or her retirement funds over time.  A person who is looking for a run of small profits may engage in what is called day trading where profits are measured in fractions of a dollar quickly gained.  A person who is nearing retirement may reduce the number of more speculative stocks he or she owns and convert them to more conservative holdings.  This person is giving up the chance for large gains in order to avoid untimely losses.  Someone who has retired may be looking for a reliable income stream to support his or her desired lifestyle.  A retiree may sell some stocks previously held for appreciation and invest the proceeds in stocks paying steady, safe dividends.

Given their divergent goals, does it make any sense for the young day trader to criticize the dividend strategy of the retiree?  Should the technical analyst seeking to predict the projected movement of a stock over the next several months scoff at the multi-year strategy of the long term value investor?

Think of World War II as an analogy for the market.  This global conflict was fought throughout Europe, Africa, Russia, the Far East and the Pacific Islands.  The tactics and equipment used by the opponents were not the same in the Ardennes forests, the African deserts, the City of Stalingrad, the Burmese jungles or the islands dotting the Pacific.  Each side and their armies had the same ultimate goal, victory.  The strategies, tactics and maneuvers with which they went about it depended on who, where, when and how the opposing forces met in combat. In a similar fashion, investors come to the market with the same goal, profit.  As with those armies, the investors' strategies, tactics and investing maneuvers will be based on how they see profits can be made in the time period they have available to them.

In the next blog we will look at the differences between individual investors, the so called amateurs, and Wall Street professionals.

Comments are always welcome.

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