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Rule# 1: Mr. Market is always right...

Recs

14

February 27, 2010 – Comments (12) | RELATED TICKERS: MR , MAR , KT

Are you one of the people who frequently forget this first and the most important rule?

If you are not sure and would like to find out, please take a quick self test below (tailored for CAPS members):

1. Do you find yourself 300+ points down on a red-thumb call you made, and you are still 100% sure it was an excellent call, but think the market has been just too irrational lately?

2. Do you have a lot of these calls?

3. Do you blame the market a lot for your bad calls and/or your score?

4. Are you one of the bloggers who post "This is the Top" kind of posts every 3-4 weeks (and you started with these posts back in March of 2009)?

5. Are you one of the people who get excited when they see these "Top" kind of posts and your coments on these posts usually go something like this: "Totally agree. +1 rec from me."? 

6. Are you one of the people who shorted DTG at $5, then again at $10, then again at $20, but now, when you shorted it at $30, you are highly confident this will be the first time you'll make points on your DTG call?

If you answered YES to any of these questions, you need to hear Rule# 1 again:

MR. MARKET IS ALWAYS RIGHT. 

Remember it. It's an important rule. Following this simple rule, even though it might seem hard at times, will definitely make you a happier person. Your score might improve too.

Try it. You have nothing to lose. It is a proven fact that the people who follow this rule divorce less often and are less likely to yell at strangers. Chose to be happy. 

p.s.

Next time, we'll cover the Rule# 2: DON'T FALL IN LOVE WITH YOUR CALL (even if it is an Ultra ETF).

12 Comments – Post Your Own

#1) On February 27, 2010 at 11:27 PM, chk999 (99.97) wrote:

MR. MARKET IS ALWAYS RIGHT.

Except when he isn't. GE was priced at 5 something in March and is 16 something now. Which price is correct?

F was priced at 1 something in March and is now 11 something. Which price is correct?

Sun Microsystems hit a (split adjusted) price of 233 a share at the height of the dot com bubble. It was sold to Oracle for 9 something a share in 2009. At the low it was a dollar something. Which price was right?

The market is mostly efficient and the price is usually a reasonable one, but there is a large difference between usually right and always right.

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#2) On February 27, 2010 at 11:44 PM, dragonLZ (99.41) wrote:

chk, when GE was $5, Mr. Market was right. Now, when GE is $16, Mr. Market is right again. It's that simple.  :)

The point I was trying to make is: Don't argue with the market. If you made a wrong call, don't blame the market for being irrational.

My post is a reminder for people who said at $8 GE will go down to $2, and then said it again when GE hit $10, then $12...

p.s. I know, it sounds like I'm only targeting bears with this post, but it applies to bulls too.   

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#3) On February 28, 2010 at 12:11 AM, Starfirenv (< 20) wrote:

To me "right" means honest, rational and free of manipulation. This Mr Market is more like parents being "right" with their kids because they are the parents and they said so. Does Plunge Protection or HFT make it righter or less right? Cute use of ticker symbols but this post is, as my teen daughter would say, hella lame- but not your worst IMO. +1 rec for chk999.
  "It is a proven fact that the people who follow this rule divorce less often and are less likely to yell at strangers. Chose to be happy." What?  

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#4) On February 28, 2010 at 1:03 AM, Tastylunch (29.29) wrote:

MR. MARKET IS ALWAYS RIGHT. 

No that's wrong. that's called Efficient Market Hypothesis which is a load of hooey. CHK999 is correct. No serious investor or trader thinks the market is always right. If they did no one would buy/sell anything.

and media stocks couldn't ever be hot in Mr market is always right world because they'd always be right priced. :)

I think the rule you are actually thinking of is a very old one called "don't fight the Tape"

http://www.answers.com/topic/don-t-fight-the-tape

Don't trade against the market trend. If stocks are falling, as reported on the Broad Tape , some analysts say it would be foolish to buy aggressively. Similarly, it would be fighting the tape to sell short during a market rally.

don't reinvent the wheel here Dragon, the original version works just fine

anyway I wouldn't read too much into people who have +500 bleeders or whatevers in their ports. We may be gamers after all be just letting 'em all run since CAPS give us no incentive to close losing picks. ;)

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#5) On February 28, 2010 at 2:14 AM, checklist34 (99.72) wrote:

hmmmm. I rec'd this, and I enjoyed the crap out of the post, truly.

But, to me the market is like a giant pack of drunken bipolar methed up monkeys.

A raving pack of bipolar monkeys.  Some days (or weeks or months or even a year) the monkeys are sad.  Some days or weeks or months or even a decade the monkeys are happy.  Some days they are extremely sad.  Some days they are giddy.  

I view the market as a gigantic mess that chaotically (via bipolar monkeys and their general tendency to act in unison) rushes whatever way their mood blows.  And not for a reason.  The headlines and the chartists are playing catchup, not telling us why or predicting anything.  

What you can count on the monkeys to do, even if just for a moment in between depressive and giddy, is be calm and rational.  Just once in a while, but eventually.  Somewhere in between suicidal and a PCP-fueled rampage of glee, the monkeys will occasionally be calm and reasonable.

You bet only on that occasional day when the monkeys are calm and reasonable.  When they are very suicidal you bet that one day, for however brief of a period, they will be reasonable again.  When they are gleeful and rampaging, you bet, very cautiously because the gleeful rampages can last a long time and its hard to make money ont he short side, that eventually they will calm down.

Generally you shouldn't bother betting much, except on dividends, except when the monkeys are really really sad or really really happy.

Pack of bipolar monkeys.  hopping and screaming and hitting and crying and yelping and hollering and laughing and screaming again.  Bi.  Polar.  Monkeys.  No reason in sight.

Still, I think your post contained some brilliant points, just maybe I don't agree with the headline.  ?

rec!

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#6) On February 28, 2010 at 9:09 AM, chk999 (99.97) wrote:

TastyLunch hit this right on the head. Don't fight the tape is good advice going back to Jesse Livermore, but it doesn't prove the EMH. If the EMH is correct then there is no reason for active investing and you should DCA into a low cost index fund. The last year shows the EMH is a load of dingo kidneys.

The correct price for a business is the discounted cash flow that a private owner could pull out of the business and not hurt it. (What Buffett refers to as "owner earnings".) We don't know what this price is, but we can estimate it. That price minus a suitable margin of safety is what we should pay for that business (or a small piece of it.)

+1 rec to checklist34 for a really amusing visual that is all too true.

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#7) On February 28, 2010 at 11:23 AM, alexpaz (28.96) wrote:

And I will go into Rule #3

 DON'T FALL IN LOVE WITH YOURSELF (even if you have made some good calls).

 

This is a BEAR MARKET rally! I'm sticking with that call. 

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#8) On February 28, 2010 at 3:42 PM, dragonLZ (99.41) wrote:

Alexpaz, don't be so hard on yourself or so serious about this CAPS stuff. If you made some good calls, celebrate and love yourself.  :)

Tasty, I didn't mean to reinvent the wheel. I thought I'm stating something everybody knew, but some people just choose to ignore. OK, maybe I did change the name of the rule a little bit...

No serious investor or trader thinks the market is always right. If they did no one would buy/sell anything.

I don't know why nobody gets me. I'm not saying all stocks are priced correctly at all times. I'm just saying sometimes we need to accept we made a wrong call (instead of accusing Mr. Market of being a moron).  

Checklist, I'm glad you liked the post. I liked your monkeys too.

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#9) On February 28, 2010 at 11:08 PM, Tastylunch (29.29) wrote:

dragonLZ

I don't know why nobody gets me. I'm not saying all stocks are priced correctly at all times.

The reason this post caused the confusion is by your usage of "Mr Market". If you didn't know "Mr Market" is a very famous parable created by the legendary Benjamin Graham in the 1930's to describe how inaccurately priced the market can be for value investors in short term movements.  It actually is applied in the exact opposite sense of how you implied it in the title. Checklist basically restated how it works in his monkey manifesto above..

"Trend is your friend" or "Don't fight the tape" are the idioms I believe you actually were driving at.

 I'm just saying sometimes we need to accept we made a wrong call (instead of accusing Mr. Market of being a moron).  

That's true to some extent, it depends on what you are doing investing or trading. certainly when your ruiles are broken no matter what they are you should admit a mistake an move on, but those rules are different for different styles.

e.g. Most winning traders, CANSLIM methods and short sellers cut losses very quickly and most trend follouing strategies never carrying a paper loss of more than 1% of Total portfolio in any one position.

However for GARP, event driven and value investors Mr market is still a moron. If you are a value investor going off liquidation value, if a stock moves against you significantly and nothing has changed in the fundamental valution of it, then you buy even more.

The inverse is true of trend traders, they lever up as the stock moves with them.

But there are also other types of traders (suchs as the elliot wave crowd) who try to predict trend changes, they often have low accuracy but if they are skilled their wins can be very large.

If you've never read it, Ben Graham's Intelligent Investor and Security Analysis books are very influential books that still shape investing thought today.  They are very dry, but I highly reccommend them.

however like I said, don't read too much into CAPS portfolios. They are not used uniformlly the same ways. I'd be verys urprised e.g. if BravoBevo tardes half of what he picks, given how terrible the bid/ask is on many of his picks. CAPS give players no incentive to recognize losses and every incentive to leave them open. Which is why most people let huge red thumbs losers run in CAPS.

I personally use CAPS as a watchlist and throw all sorts of ideas into to it so I can track them. I've even put some of yours in there before. :) Real life positions and high confidence picks I'll use the dollar sign for (although with my shorts I'm usually in and out faster in real life than CAPS will allow ). But I should note that doesn't necesarily my correctcost basis or even more critical weighting.

In MRLP I wouldn't dare let bleeders go like I do in CAPS.

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#10) On February 28, 2010 at 11:11 PM, rexlove (99.43) wrote:

I gotta agree with dragon here. And in general I think the market as a whole is priced right. You just gotta remember that the market is forward thinking.

"when GE was $5, Mr. Market was right. Now, when GE is $16"

GE was $5 at the time and rightly so. The outlook for the economy as a whole was looking pretty bleak. We came close to the Great Depression #2. If certain measures were not taken we could be looking at a totally different economy right now. Because of the great risk at the time - GE was at $5. Now that the economy has recovered and we are seeing GDP growth - GE at $15 is totally reasonable.  

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#11) On March 01, 2010 at 3:57 PM, dragonLZ (99.41) wrote:

Tasty, thanks for taking the time to explain all of that to me as I didn't know any of that.

However, I still like my rule and my use of Mr. Market reference.

I knew there is a reason I said before "Mr. Market is my friend", as only a crazy person can have a crazy person as a friend.

Thanks again and Good Luck.

p.s. Have you noticed Media is HOT again... :) 

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#12) On March 01, 2010 at 4:27 PM, outoffocus (22.91) wrote:

I agree with Tasty, Chk, and checklist.

Except when he isn't. GE was priced at 5 something in March and is 16 something now. Which price is correct?

Another great example was PALM.  People thought the Pre was going to bring this financially bankrupt company to the promised land. So much so that, that they drove the price all the way up to $18. Look where it is now.

anyway I wouldn't read too much into people who have +500 bleeders or whatevers in their ports. We may be gamers after all be just letting 'em all run since CAPS give us no incentive to close losing picks. ;)

Great point as well.  In CAPS, accuracy is rated higher than points. Regardless of whether your pick is -30 or -300, if you close that pick you take a hit to your overall accuracy. How do you think I've stay above the beanie for so long? I ruined my score a long time ago when I closed a bunch of negative picks, not understanding the rules of the game. So I no longer worry about score anymore.  My main goal is to leverage the information on CAPS to determine what is a truly a good investment and whats speculative.  You, dragon, seem to like speculative stocks and that works for you.  The rest of us may not have that high of a risk tolerance (in our real life portfolios).

But, to me the market is like a giant pack of drunken bipolar methed up monkeys.

A raving pack of bipolar monkeys.  Some days (or weeks or months or even a year) the monkeys are sad.  Some days or weeks or months or even a decade the monkeys are happy.  Some days they are extremely sad.  Some days they are giddy.  

For the last 2-3 years, this has been nothing but a trader's market.  Buy-and-hold investors have been getting reamed through the you-know-what.  You can no longer look at a company's financials and earnings and determine price direction.  Now direction is better predicted through technicals.  To hell with fundamentals. "The market has gone up a while so now its time to go down" or vice versa. "The head and shoulder's pattern touched my arm so not its time for the next leg down". Seems like market price predictions are sounding more like calisthenics. Nothing makes sense anymore.  Would be nice if i could listen to Mr. Market but you think Mr. Market makes sense, he forgets to take his meds and decides to throw a tanturm of some sort. In the meantime I'm trying to figure out whether to buy, sell, or hold. So let the market do what it wants.  I'm going to stick to my convictions. Only in the long run will I know whether my convictions are correct.

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