Logic Defying

Time and again, I get to encounter people from different backgrounds with one thing in common: the stock market. It is safe to say that these people have been hurting since late last year. They were all expecting that the first quarter was going to give them an opportunity to make money as like every first quarter of every year. Unfortunately, they weren't expecting the lingering credit crunch in the US to last this long.

Lately, I have had a healthy discussion of the goings on in the market with my boss. Without naming names, he just couldn't understand why a certain company involved in the energy sector and infrastructures could be dropping to lower levels. Summing up what he said, the current price action defies logic when the financial numbers show a sound cashflow. Obviously you can see where this is going, a debate between a hardcore fundamentalist and a purist technical analyst. After hearing his logic defying question, I gave him an answer that anyone can understand easily. When the number of people who want to sell outweigh those who want to buy, expect prices to drop, regardless if the financial numbers say it's doing good. I think he found the answer a little too simple to digest.

Sometimes, the answer to certain questions are really simple. Unfortunately, many people cannot accept simple answers as they feel they need to be sophisticated when gathering information. Isn't it that the simple law of economics dictate that when demand is greater than supply, the price will rise? The same goes that when demand is less than supply, the price will fall. That is a simple but absolute truth about how prices move. Yet many cannot accept this.

As a trader, I put my complete faith in the 3 tenets of technical analysis. What I have described above already is a good example of the first tenet that says price discounts everything. No one can be better than the price. Anytime anyone wants to contest this, they are welcome to disprove it by following what the financial numbers say. However, be warned that once you have bought into a stock with a good FS yet the price keeps dropping, expect the price to be telling you, "Thank you for contributing to the winner's fund". The winner being someone else other than you.

This first tenet should also dictate our self discipline as to when we should be pulling the trigger to execute our orders. A disciplined trader would cut his losses once it reaches a lower price that is within his tolerance level (or a higher price if they are doing some short covering). Typical investors don't do this. It defies their logic to consummate a paper loss into real losses. They decide to just hold on to their losing position until it recovers, whenever that is. No one even knows if it will ever recover if the price has gone off the deep end. If we were conscious about computing for the time wasted while holding on to losing stocks, we would say we should consider the interest you would have gained if that same money was kept in the bank after cutting the loss. That's why I don't want to be called an investor, because it is equated to getting stuck with a loser. Of course, I'm only talking about my own personal style. I'm not knocking those whose style differs from mine.

One last thing on this topic, sometimes we have to consider what is our objective? Are you in it to be sophisticated, to be the star of the party, or are you in it to make money? Think about it.