Newsletter
March 31, 2007
Imaginative Character
Market & Sector Review
Castle's in the Air
Largest Changes In Raw Numbers (21 Days)
This Week's Economic Reports
Imaginative Character
Actions are compulsive if the motivation for them arises out of one's need to avoid a falsely perceived pain. From Dr. Karen Horney, Neurosis and Human Growth (New York, W.W. Norton & Company, Inc., 1950)
"When we call a drive compulsive we mean the opposite of spontaneous wishes or strivings. The latter are an expression of the real self; the former, are determined by the inner necessities of the neurotic structure. The individual must abide by them regardless of his real wishes, feelings, or interests lest he incur anxiety, feel torn by conflicts, be overwhelmed by guilt feelings, feel rejected by others, etc. In other words, the difference between spontaneous and compulsive is one between "I want" and "I must" in order to avoid some danger."
In spite of our conscious intent, often we are driven by inner motivations, which arise from subconsciously held values and fears we aren't aware of. We are compelled to act in order to keep intact our idealized self-image. The key indicator that "Imaginative Character" is at work is when we act completely with disregard to our best interests.
For example when we say "the market has to go up" what we are really saying is, "I have to be right." This is imagination working overtime! This is perhaps the worst business to be in, if "you have to be right!" If I really "knew" the market had to go up, there would be no need for an exit strategy, for stops, now would there be? This is a simple recipe for disaster! Each week I give an assessment of where I believe the market is headed with the information I have at hand. The cautions I often talk about are simply my asking myself, "but what if I'm wrong." The next time you hear yourself, or someone else pounding the table, "this market has to go up" step back and ask yourself - what if I am or they are wrong. The market does not have to do anything, especially what you and I may expect. The "Holy Grail" is in knowing and understanding that there is no "Holy Grail."
Imagination is a wonderful gift. It allows us to project ourselves into the future and mentally rearrange elements of reality for the purpose of setting goals, making them feel viable. Imagination is also a wonderful gift for creative purposes. When the object of our actions, however becomes that which is purely imaginary, then imagination becomes a destructive force.
Market & Sector Review
Castle's in the Air
John Maynard Keynes gained fame in the depression years for his ideas for stimulating the economy. In his book "The General Theory of Employment, Interest, and Money", Keynes devoted an entire chapter to the stock market and the importance of investor expectations. Little known, even amongst Keynes fans is that he often played the market from his bed for a half an hour each morning. His leisurely method earned him several million pounds and a ten fold increase in the market value of the endowment of his college, King's College, Cambridge.
In his opinion, professional investors prefer to put forth their energies not estimating intrinsic values, but rather analyzing how the crowd of investors is likely to behave in the future, and how during periods of optimism, they tend to build their hopes into what Keynes called "Castles in the Air". The professional investor attempts to beat the gun by estimating what investment situations are most susceptible to the public building their castles in the air and then buying before the crowd. Does the internet of the 1990's ring a bell? Was that what the public was doing at the end of the cycle? Building castle's in the air!
Keynes in essence applied psychological principles rather than financial evaluation to the study of the stock market. He wrote, "It is not sensible to pay 25 for an investment of which you believe the prospective yield to justify a value of 30, if you also believe that the market will value it at 20 three months hence." Keynes noted that no one knows for sure what will influence the future earnings and prospects for a company or a sector. As far as the stock market was concerned he was not concerned with making superior long term forecasts, instead he concentrated on seeing changes in the conventional basis of valuation a short time ahead of the general public.
The stock market he states is analogous to entering a beauty judging contest where one must select the six prettiest faces out of a hundred, with the prize going to the person whose selections most nearly conform to the group as a whole. The smart player recognizes that personal criteria of beauty are irrelevant in determining the contest winner. The best strategy is to select those faces the other players are likely to fancy. The logic tends to snowball; after all, the other players are likely to play the game, with at least as keen a perception. The optimal strategy, therefore, is not to pick those faces the player thinks are prettiest or those that the other players are likely to think the prettiest, but rather to predict what the average opinion is likely to be about what the average opinion will be. I know it sounds a bit confusing, just think about it for a minute or two.
An investment is worth a certain price because you expect to sell it to someone else at a higher price. The new buyer likewise expects to sell it to someone else at an even higher price. P.T. Barnum would have put it this way; A sucker is born every minute - and he exists to buy your investments at a higher price than you paid. Any price will do as long as others may be willing to pay more. There is no other reason, only mass psychology. What the smart investor attempts to do is get in before the "greater fool" theory begins its march.
The theory of mass psychology has many advocates in both the financial and academic worlds. Robert Shiller, the Yale economist, in his best selling book "Irrational Exuberance", argues that the mania in Internet and high-tech stocks in the late 1990s can be explained only in terms of mass psychology. Psychologist Daniel Kahneman won the Nobel Prize in Economics in 2002 for his seminal contributions to the field of "behavioral finance".
The next mania will come, be aware of it, profit from it but get out early enough to hang on to most of the gains. Do not be greedy! Do not become a builder of "Castles in the Air", but do try and anticipate them.
Res tantum valet quantum vendi potest.
A thing is worth only what someone else will pay for it!
Largest Changes In Raw Numbers (21 Days)
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This Week's Economic Reports
Have A Great Week!
Bill
Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.
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