Tuesday, June 27, 2006

Did Mr. Market Get A Sex Change?

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If you read Bill Bonner's humorous indictment of market analysts you might conclude that rather than being trans-gender, analysts have just been confused about Mr. Market's sexual identity.

Just one more error on their part.

Of course I too try to analyze the markets for my own profit, and hence I'm prone to being wrong quite often. I am secure in my own analytical sexuality - but I'm amused at rumors about Mr. Market's new sexual orientation. But that is not the type of speculation this journal exits to pursue.

If you know you will be wrong almost as often as you are right, why go to the trouble at all?

If you work for a brokerage the reason is simple - that's how you earn your living. Each time you guess in public someone will follow your advice, the resulting sales and purchases of securities results in commissions for your company. You keep your job.

If you are a speculator, you guess according to rules. If by your rules you will discover quickly if you are wrong - the speculation just might make sense. You can then get out with a small loss if you are wrong - and let the profits run if you were right.

A few independent analysts might be worth reading - as long as they do not attract too many followers. Once they become too big they become part of the market psychology - their authority is soon to evaporate.

Like a long run on a craps table in Vegas - they may defy odds for a while - but eventually they will lose. If someone seems to have a winning streak - follow along - but don't over commit.

The speculation rule of the day is a bit more complex than usual:

watch the correlations between your speculations - you do not want one event to severely damage your wealth.

If the advice you get all follows the same investment fashion trends - your speculations may be over correlated.

With sufficient wealth - anything more than 2 or 3 % of you money in one type of investment may be too much.

Big name analysts tend to spout the same ear pleasing advice - this alone should be enough correlation to raise a danger flag.

If Mr. Market is female, expect the nonlinear event.


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