The Reality of Demographics and Institutional Perspective
In order to be successful at position trading you either have to not think at all, because you understand that you can trust the chart because price patterns and trends are created by nature, society and economics, or, think like someone who both has a lot of money, and makes a lot money.
One thing I’ve learned over the years is that the average retail speculative account holder has the entirely wrong mind-set for what they wish to achieve. The average speculative account holder reads a lot of newspapers and blogs, works very hard, but generally doesn’t make a lot of money. The line they are most attracted to decade in and decade out is that “the economy is going down the tubes and by positioning themselves correctly in their account, they are now finally going to prosper”. The fatal flow in this is that they are operating from a pessimistic thesis which is the opposite of that of institutional investors. Many small traders who subscribe to the “inevitable financial Armageddon theory” fail to understand the two golden rules of investing that every student of finance is taught from the beginning: 1. Dollar Cost Averaging, and 2. Compound Interest. This combination does not work on the short side.
This is why it is so important to either have no market opinion, or think like someone who has both big money, and makes big money. If you want to understand market movement think like an insurance company, or better yet like the pension fund arm of an insurance company. A pension fund knows their private sector clients run successful businesses, because they regularly recieve the retirement and savings deposits, which are a percentage of the salaries and bonuses from the employees of these companies. The insurance company knows to the nickel just how much money each company will collectively deposit with them for deployment into the markets every payday — generally every two weeks. They know how much goes into blue chip stocks, into fixed income securities, even into commodities. The insurance company also knows the demographics of its client’s companies — how the majority of the employees in blue chip firms are younger workers, who tend to put a higher percentage of funds into riskier investments such as growth stocks, and how these same employees hope for LOWER prices so they can accumulate more shares.
The pension funds also don’t have the same concerns about the economic health of public institutions, as many individuals do, because the majority of the firm’s clients are private sector companies who service and provide staples for individual consumers. Think of all the office buildings in all of the cities in America. Then think of all of the professionals who work in those buildings, then think of how much 10% of all their paychecks amount to, and you should start to grasp why asset class markets are programmed to move higher. All that money gets deployed on the buy side.
As we can imagine, the pension fund’s reality from dealing with the private sector is much more powerful from a trading perspective than the individual account holder’s reality of reading about public sector problems in newspapers and blogs. The private sector pension fund knows how much cash gets shoveled into 401Ks, IRA’s and ESOPs — Employee Stock Ownership Programs — every payday, while the individual speculative account holder may have never even considered this powerful aspect of markets. The pension funds understand how it is the demographics behind the money flows which create far more cash from rising stock prices than the government printing presses could.
This is why Warren Buffett is so successful, because he is essentially still an insurance guy. He understands the demographics behind money flows. What gave him the confidence to lend Goldman Sachs $5 billion in ‘08, or to buy $54 billion worth Burlington Northern stock in ‘09? He understands how markets actually work. And he understands demographics, dollar cost averaging, and compound interest.
To attend a live, interactive tutorial given by Jay on determining market direction next Wednesday, 2-9-11, go to: Overview of Directional Lines
Jay Norris is the Chief Market Strategist at Clovernest Financial Group and the author of Mastering the Currency Market, McGraw-Hill, 2009. Jay’s second book Mastering Trade Selection and Management, McGraw-Hill 2011, will be in book stores in the Spring.
DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. Any charts shown here represent market conditions at a particular point in time. Such conditions may not be replicated in the future. Past performance is not indicative of future results.