Opinion is ultimately determined by the feelings, and not by the intellect. ~ Herbert Spencer
I have been a student of the finance and economics for about 5 years as I have noted in previous posts. However, as a student of both economic and financial theory and the markets at the same time, many things have become quite clear to me. That is what this post is about.
TAKE EVERYTHING IN THOSE BOOKS WITH A GRAIN OF SALT… In my experience all they have been good for is definitions and some basic theory. However, what you might find in those books might not even be relevant in today’s markets. You might come across some relationships you never heard of in school unless there is a specific class about a specific instrument. For example, one of my previous institutions of higher learning offered a course on Fixed Income, they probably talked about yield spreads, which are pretty important for a variety of reasons.
Given all of the many disappointments that I incurred in college, the one that bugs me the most is what I learned in the one year I worked on the Street: reading academic papers is a very important habit to have. An indispensable habit as far as getting some knowledge about the real world and theory in one, and much better than just textbook learning in the majority of cases. I do not understand why universities do not require this of students. I suppose you have to start somewhere, and that is what your principle courses are for. The reality is that professors could choose relevant academic papers to be intertwined into most lame duck curriculums that departments already have in place to actually give their students an edge if they wanted to. Also, my intermediate courses were very lacking in mathematics and as irrelevant as it may seem to some, when it comes to having some type of edge in the real world it makes a huge difference. Being able to grasp mathematical relationships is what trading is all about. Whether one chooses to realize it or not is a different story, and may it not bite you in the ass one day… It probably will. Math is everywhere.
So what? You may be asking yourself at this point. Well here goes… If you want to understand why things are happening in the markets you better have not only the principal relationships down between fundamental economic/financial factors, but you better also be able to deduce what’s what. As I said, things are never wholly out of the book in the real world. So you better know the book material, but you need to understand that the real world just doesn’t work like that. Humans are not rational consumers, savers if rates are high, blah blah blah… One has to read yesterday’s financial news a.k.a. financial publications that are published today, in order to get a somewhat decent summary of what happened and why. This is not to say that they are the only way to go.
There are many smart individuals on the web that are nice enough to write blogs and give real useful information about how they see the markets. Whether its on the spot or not is irrelevant. The objective is to learn how to think and to not be a typical drone like all of those so called experts that appear on television and add no value on top of being incorrect or inhumanly vague. Learning how to think is one of the most important lessons that I have gathered from many traders. That is the cornerstone of how you either make it or blow up your account.
Now, there is something to be said for the straight market technician in their market dealings, and that is that they usually do not have an edge because they easily miss market moves waiting for technical “confirmation.” When a lot of the times fundamentals don’t confirm the move in the first place then they take a position with very low probabilities. I’ve seen it firsthand and it is the only reason I feel that I can write about it. Of course, the best approach seems to be a combined use of both fundamental and technical analysis, however that will be for another post.
Therefore, one must do their own homework and attempt to make an educated guess as to why something is happening in the markets, and having a thesis for possible future developments does not hurt either. Note, that you will never really know if you are right or wrong until you are either right or wrong. However, it is very important to have a grasp of any factors that move markets and what it is that creates the disequilibrium in prices because they are always there. The question is which ones will you focus on to determine if a disequilibrium exists, or whether you are even focusing on the right ones in the first place. Thinking outside of the proverbial box is key.
Thanks for reading, and as always comments and suggestions are encouraged.