Transitioning from a Societal Paradigm to that of a Market Paradigm

“If you think you have discovered a great truth and it is not a paradox, I suspect you may be deceiving yourself.”

From an early age society, through our parents and our other experiences interacting with our social environment, teaches us fundamental principles to be able to survive and prosper in society. I call this the societal paradigm. Without these skills we are in danger of underachieving our full potential and, in extreme cases, without these skills, we could even die! As vital as these lifelong skills are for survival in society, they provide little or no assistance to our endeavors in the market.

The societal paradigm is time-grown and is programmed into nearly all individuals, particularly those from capitalist societies and communities, by just being a part of society.

Deploying one’s societal paradigm when trading the market will ensure that an individual remains ‘below the line’ and remains incompetent with respect to trading (this will be discussed in a future blog posting). To make the paradigm shift to that of thinking with a market paradigm, becoming empathetic with the market, and hence moving ‘above the line’ to trading competence, the individual requires a model or framework on which to base his/her new thinking.

Let me state that very few active investors arrive at the market with the correct paradigm. Like most things in life achieving the correct paradigm requires a commitment to a learning process. But before you step into such a process many of you will need to admit that your current thinking is not conducive to being profitable in the market. Admitting this will be the first step to embarking on a journey.

A paradox is a proposition that is contrary to commonly accepted opinion but in reality expresses a possible truth.

There are many examples of the differences between a societal and a market paradigm. This week we’ll touch on just three of many paradoxical examples. The degree to which your current paradigm disagrees with these examples indicates the degree to which you need to change your thinking to achieve consistent out performance of the market benchmarks.

The propositions will seem absurd or contradictory to you and hence are paradoxes.

Societal Paradigm: Has to buy at a bargain or discount Vs Market Paradigm- Can buy high and sell higher.

Ever been to a Myer stock take sale and watched the hordes line up to save $10 on a shirt? People will sleep overnight in the cold just so they have the first opportunity to save a couple of dollars on a pair of shoes.

This same attitude in the market will have you buying stocks that are perceived as being cheap. This can be suicidal for a portfolio. I regularly appear on Sky Business News where the investing public has the opportunity to call and ask for the panel’s thoughts on a particular stock. I would say that over 90% of the calls the panel receives come from people asking if they should be buying or holding falling stocks because they perceive them as being cheap. Stocks like Babcock and Brown, Centro, MFS, Allco, and many others were cheap at some point but now are worth, in most cases, nothing. What you want to be doing is buying rising stocks. Sometimes this will require you to buy stocks that have achieved a new all-time high. You should be aiming to buy high and sell higher.

Societal Paradigm: Must be right most of the time Vs Market Paradigm – Can be wrong most of the time.

In society, people will make a point of being right. Some will argue that they are right to the point that they are prepared to lose friendships. Others are prepared to harm people because they believe they are right. World Wars have started because the powers that be needed to be right.

Inexperienced investors perceive a profitable trade as being right and a loss trade as being wrong, whilst an experienced trader will think in terms of probabilities – not in terms of winning and losing on individual trades. It’s no wonder that people fail in probabilistic environments until they gain an understanding of the probabilities of that environment and then learn to execute their ‘probabilistic EDGE’ in that environment.

Societal Paradigm: Expects a deal to go in his/ her favour Vs Market Paradigm- Expects something to happen.

In society, we enter into arrangements and agreements every day. We make decisions with the information we have at hand and on the assumption that we will be right. We expect that things will go our way because we are familiar with the environment and the majority of the time the variables at play.

This is not possible in the market as there are simply too many variables for each one of us to signal handily compute. Have you ever thought about the variables in the market? They are somewhat endless if you think that every investor and trader is a variable. Expecting a deal to go your way in the market is akin to opening a trade and expecting only a profit. A trader expects the unexpected to happen and reacts accordingly using risk management rules that handle any outcome.

Using a mechanical trading system with a positive ‘edge’ will cut the learning curve in time and effort and greatly increase the probability of reaching the level of trading competence.

I will continue this subject over the next three weeks and further outline the societal Vs market paradigms.