Thinking about the stock market

Time does matter

How’s your algebra?  You know . . .  x + y = z.  If you know one factor, you know a bit but cannot solve the equation.  If you know two, you can probably figure out everything about it. Apparently, the news media and many investors believe that this is all there is to figuring out the stock or bond market. Pundits are prone to reduce their explanation of the markets in just such simple terms.  I probably should just let it go, but I continue to be confounded by the way, at the end of the day, the media explains how that day’s events have shaped the market. I understand that we human beings have a strong and undeniable desire to establish a cause-and-effect relationship between two things especially when we perceive that one affects our life. For example, we truly want to believe that what goes on in Washington or somewhere else around the world will help make sense of the daily gyrations of the financial markets. True news flash: the markets are much more random than that. The truth is that in the short-term, certainly in a period of less than a year, political, fundamental, and even economic data have very little to say about what goes on in the market from one day to the next.  There are exceptions, but they are rare.

Part of this conundrum is grounded in our perception of time, or perhaps the lack of a clear perception of market time. Dr. Alexander Elder cautions that the we need to first become aware that market time is much slower than our own.  When they hear the daily news, I fear that few people stop to consider that the market moves in multiple time-frames.  It moves simultaneously over years, months, weeks, days, and even hours and minutes–often in contradictory directions from one time frame to another.  The trend of the market may be up on a monthly and weekly basis, but down today. Or vice-versa.

What the news commentators miss is the context of the daily moves as they play out in longer time frames.  I believe that one should start with a longer view to gain strategic perspective, and then analyze a shorter time frame to figure out what you are going to do within it.

Many advisors will coach their clients toward becoming a long term investor–with a view toward years. One has to ask what “long term” really means.  Usually to the advisor it is an admonition to be patient with what can become severe drawdowns. The chief advantage of the long term view is that it eliminates the need to pay attention to the daily news. Because the markets have a bias to increase over long time periods, you could see rather large gains over long periods of time–but not always.

At the other end of the time spectrum is the day-trader.  Actually the title is a misnomer because a true day-trader has an expected duration of holding an investment measured in minutes or hours, not even an entire day.  Most day-traders end the trading day in cash. The folks who do this see many opportunities, because the market can move up and down very quickly. However, trading costs can mount up and eat away at return. It also requires a vigilance and dedication to investing that few people can maintain.

A middle ground is what the investing industry calls swing-trading.  The expected duration of a holding using this time perspective is usually days or weeks.  There are lots of opportunities offered to the swing trader, and he or she can match the opportunities with reasonable risk controls. The downside to this type of trading is that you can easily miss big trends by getting in too late and / or out too soon. It is possible to produce outstanding returns using a trading strategy, but that depends on the quality of  your trading system.

One step in goal-setting is to have a proper time dimension for each of your goals. Consider the goals of your investing and match the time-frame of your investing with the goal. For most people, this will mean tuning out the daily market report. But if you do listen to it, be sure to stop and place it in the proper context. It is also vitally important to consider the time-frame when you look at quarterly reports or monthly statements from the custodian of your funds.  Too many investors tend to make knee-jerk reactions based on a time-frame that is totally disconnected from their true investing goals.

Leave me a comment or question. I would love to know your thoughts on this.