“In the stock market, the most important organ is the stomach. It's not the brain.”
— Peter Lynch
What an Auction Market Is
The stock market represents collective thinking with broader reach and more effective participation than politics. Its materialistic focus makes it feel less relevant, but the greater commitment and consequences for those who take part make it an impactful tool for organized behavior.
I’ve traded stocks, commodities, currencies, funds, and options for 40 years. I’ve studied accounting, macro- and microeconomics, and analyzed stock movements in detail. I even applied for a job as a stock analyst, which I’m lucky I didn’t get. It’s a field that’s simultaneously frustrating, interesting, boring, and elusive. You often feel you’re gaining insight only to have it blow away.
What makes the trading field boring is the people, as there really aren’t any. Everything is hidden behind the data. The only people you’re likely to encounter are brokers who have neither skin in the game, nor opinions worth listening to.
The data is boring if you only see noise, but there are signals of significance. Unfortunately, they’re historical correlations with little power of prediction. We know many things that move markets—too many in fact—but everyone’s predictions are already folded into the prices that we see.
What makes it interesting is the flow of information, both where it comes from and how fast it travels. On one hand, it feels like everything is noise. On the other hand, anything can be significant. The only way to test any idea is through prediction and back-testing. That is, taking ideas that seemed to explain one situation and applying them to others. This is where insight usually fails. It’s also where analysts, the public, the market, and most experts also fail.
The reasons markets are unpredictable make the problem interesting. One reason is that markets are predictive by nature. Markets assign things a future value, not a present value. As a result, even a perfect analysis of the present is irrelevant. Everyone bases their actions on various uncertain predictions for the future.
The question becomes what possibilities are people weighing, what expectations do they have, how certain are they of each, and over what time frames do they expect these outcomes to manifest? The amount you’re willing to invest in a house today will be different if you feel you’ll need to sell it in one year versus selling it in 30 years.
While all markets advertise a current price for items, they also have unadvertised prices for the same products held for different lengths of time. Each duration of investment essentially defines different products. Different future expectations of risk and return, and other impactful variables, are wrapped into the current price but cannot be extracted from it.
Is This Real Democracy?
“In the short run, the market is a voting machine. In the long run, it is a weighing machine.”
— Benjamin Graham
Public auction markets are more democratic than anything else we’re involved with, as everyone’s money is the same. You may be negotiating with a pauper or a prince, and you’d never know, and it wouldn’t matter. There is something appealing in this, as it’s only the data that matters.
A second reason auction markets are interesting and unpredictable is that there is no single measure of future value. There are many measures and each depends on the situations of those taking part. For example, investing small amounts of expendable money has little consequence, so people accept higher risks, while investing large amounts of borrowed money causes people to be risk averse. The same people may bargain for the same products, but weigh information entirely differently.
The third reason markets are unpredictable is human nature. We derisively refer to fear and greed as prime motivating forces, unless they’re our own, in which case they make perfect and reasonable sense. Rather than deprecating people’s emotions, the better insight is to recognize that people evaluate opportunity and risk in warm and fuzzy ways. This makes markets psychologically interesting. It’s also what makes markets a unique laboratory for understanding how people think.
If you’re interested in auction markets and you’re interested in your own personal growth, schedule a free call and let’s talk about how you can use your interest in one to further your progress in the other.
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