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Transitioning from a Societal Paradigm to that of a Market Paradigm

July 2, 2009
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“If you think you have discovered a great truth and it is not a paradox, I suspect you may be deceiving yourself.”

– M. Scott Peck, author of popular self-help book, ‘The Road Less Travelled’

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 under achieving our full potential and, in extreme cases, without these skills we could even die! As vital as these life long 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 remain 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 to move ‘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 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 selling 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 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 everyday. 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 handidly 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 probabilities 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.

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Comments

  • mark says:

    Great Article Gary………..
    Buying bargains, fundamental gems,undervalued business, and another one to watch out for is NTA, mmmmm been there and done all that !!!

    …………I had to read hundreds of forums, lose money and potential profits while sitting in “fundamental gems”……………..
    It has taken me literally 5 years plus to get to this stage where i can probably survive and might have a similar amount at the end of the month then i had at the start of the month !!!……..(but no guarantees there)…………

    Now, blokes like you and sky business channel are around giving all this information out for free.That really sucks i reckon…………….

    What i would not have given for a mentor 4 or 5 years ago.A stop loss was like a wet dream back then. Brokers were taking 2 to 4% to buy a stock so i could watch it fall in price. Advisers were getting 2% of the portfolio to lose money and underperform any index you like to name, and top class managed funds like ARGO or MLT just did not seem to get a mention !!!……… Crikey now we even have listed
    “IShares” index funds for whatever market is moving……………….

    Just a suggestion …….
    “can’t you put a link in to a talking box thingy, so i can listen to the article on the computer instead of reading the article” (;> Cheers

  • Victor says:

    My first trade was a short on Allco in early August 2007. What a buzz!

  • Jen Cluse says:

    [mark (visitor)] asked if you could have your articles as spoken text . . .

    If you go buy a cheap Mac (any vintage), then go to iCab.de for a copy of the German built Mac-only browser, iCab (first to past the Acid 2 test, now running in WebKit) it has the ability to speak the text on any page. Mind you, that can be messy, if you strike a messy web site designer’s wordy mess. Gary’s blog is relatively clean, apart from the right hand wall of ads. If you are not visually impaired, you can just drag-select an article, and it will be (well) spoken without interruptions when you go to ViewSpeak All (or hit Cmd-9)

    Thanks, Gary. I’m nearly financial enough to come on board, finally!

    I *do wish I had done my learning curving BC (before collapse) [grimace]

    Cheers

  • Jen (again) says:

    Whoops – sorry – I posted with a well laid out text which included double returns.

    sigh

  • Manuel Andrade says:

    Societal Paradigm: Has to buy at a bargain or discount Vs Market Paradigm- Can buy high and sell higher.
    This is very true! The majority of us, and if you are not educated or looked for the reality, it happened to me…buying cheap most of the times turns up very expensive. The best solution is to buy reasonable on a good price (?)and sell higher. Watch out for the cheap(os) they relly burn!

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