Why is it so? Principles about investing that I have discovered.

Continuing from last week’s blog I have spent much of my time over the last 23 years seeking principles that exist in the market that are consistent with my investing beliefs (see last week).

These are some of the market principles that I have discovered on my investing journey:

• Price trends exist in the market.
• Price momentum builds and continues in a direction causing these price trends.
• Trends occur in the market in many timeframes and in both directions, up and down.
• Trends repeat themselves in very similar patterns but not exactly identically. There are many different types of patterns that repeat and each pattern repeats in large samples.
• Trends are caused for many and varied reasons by many and different variables. The cause of a trend is not necessarily the same for each trend in any given stock or traded instrument. Causes include but are not limited to:
  • Breakout of a previous high/low.
  • Mean reversion from a low/high to a higher/lower price (=mean).
  • Perceived price anomaly as compared to a perceived intrinsic value.
  • Peer price pressure caused by, for example, same sector, perceived similar characteristics (e.g. high yield, defensive, growth), same commodity, same geographical area, etc.
  • News, e.g. gov’t announcements, company announcements, etc.
  • Systematic risk, that is, overall direction of the market caused by geopolitical, natural disasters, terrorism, etc.
• Trends end for any given timeframe when price retraces sufficiently to determine that the trend has ended.
• Trends end for many and varied reasons and the reasons change for nearly every end of trend.

• Trends can be measured over large samples via the movement in price by determining unambiguous criteria that signal when there is a high probability that a trend has started and that a trend has ended, in a particular timeframe.
• Trends can only be measured by price movement.
• It is impossible for any given entity/investor to be aware of all the causes that hold sway in any given moment in any given timeframe for any given stock, commodity or investment instrument.
• It is impossible to know the cause or combined causes of any trend in advance.
• It is not necessary to know the specific cause for any given trend when unambiguous and objective criteria are used to determine the start and end of a trend.
• When trends are measured over large samples it is possible to determine the probabilistic edge for the unambiguous and objective criteria that determine the start and end of the trend.
• The fact that positive probabilistic edges exist prove emphatically that the price trends that exist in financial markets can be exploited from which handsome profits can be generated.
• Repeating investment into and out of these trends using the criteria that define a positive probabilistic edge creates compounding of profits through the re-investment of realised profits into newly identified trends that comply with the probabilistic edge.
• The profits generated can be far greater than alternative investment avenues such as fixed interest, managed (mutual) funds or index funds.

Principles guide decision making. Without principles in any given walk in life, the range of options from which to choose are massively increased to the point of huge confusion and chaos. This results in poor, inefficient and unproductive decision making.

Discover principles in the market that are well founded, founded on what you believe. Do this and your range of options will be narrowed to the point where decision making will become extremely simple, consistent and objective.

Want to know whether your principles are well or ill-founded and whether they match your beliefs? Look at the outcomes that they produce over a large sample of events that test your principles. If the outcomes are positive in context to what your objectives are then you’ll know that your principles are fundamental, unchangeable and timeless truths. These outcomes, and what you do to achieve them, will simply prove what you believe. This leads to trust and surrender on a scale that breeds confidence to overcome fears, uncertainty, doubt and adversity.

The more you discover market principles the more you will think from and operate from the market’s perspective. Your investing goal, therefore, is to discover market principles that are consistent with your beliefs, to create a set of rules based on those principles and then live your investing life by executing according to those rules.