Exploring the Niche of the Private Investor
What can I offer that people don’t have? An opinion? What is it worth? Maybe a perspective or outlook on things ...what is that worth? I suspect these things are worth a lot to people who have less experience, or who have spent less time or resources studying the subject of the volunteered opinion or perspective. Hopefully that’s true. If the reader has a greater experience or more knowledge than I, then they might agree or disagree on that which I present here and say why. In that case a discussion begins, and from it others could learn and gain perspective and experience. If that happens, I myself might gain perspective and experience too, which always helps.
This is getting down to some pretty basic concepts just for now. So what is the market? It’s a place of contest, an arena (remember that), where assets, financial or real, or commitments are traded for a specific price which is constantly changing it's value. The big idea is to access the good side of that changing value to gain and profit from it, or at a lesser target, to gain slowly and in such a way as to hedge and remove the erosion of wealth which comes from state sponsored inflation, or the decline in the value of currency which we hold already, or we will be paid for our labour and services in the future.
So where is the value in all of this? Well firstly one needs capital to trade with, and assets to sell. Secondly one needs to have knowledge that one is assessing the changing valuation at the right time, so that we buy at the lows and sell at the highs. That sounds oh so easy, and everybody who has not traded markets has an opinion on how easy it is to do. Those who do try trading for a living however are usually unsuccessful, and whose who trade/speculate/invest very well are rare individuals who are often highly paid. In fact they are so highly paid that falsification of a successful track record and hyped up marketing of supposed expertise and insight are everywhere to be found, even in a regulated industry.
Ok then. We need to get insight and avoid errors because errors are very expensive and transfer our assets to other traders in the markets.
Let’s look at the building blocks of trading/investing ... the basic requirements:
- Money – takes time and effort to earn
- Knowledge – takes study, research which either take time to do, or take money to buy
- Confidence to trade – takes time to learn, or a track record of previous trades which is the same, or we must pay money to a manager of greater insight to do it for us ....Time and money again.
Now many people who want to trade came to financial markets not because they have money, but because they want to make money, or make more money than they have.
This implies that right at the start they are weak on point number one.
They have arrived at the markets and begin to trade, and find losses coming instead of gains. The need to knowledge is increased in importance, but the money has reduced at the same time. Weaker on the first requirement, and now an elevated need for the second requirement - knowledge - than was previously the case.
The third requirement – confidence to trade – is a similar problem. At first arrival to this trading game, confidence is high, then money gets lost, and knowledge is perceived as lacking in sufficient quantities. A period of study begins and this raises confidence, whereupon more trades are made. If more losses come in response then the third requirement to trade – confidence - is actually reducing at the same time as the first requirement erodes – money – at the same time as the second – knowledge – is perceived as being inadequate to the demands of the situation.
What I'm talking about here is resources. Often people assume capital is the only resource involved. Assume wrongly I would add. You see Wall St as an industry is organized to take the capital away from those lacking in any of the essential resources of trading/speculating/investing. Wall St does it's job ruthlessly, and completely, whenever the novice does not flee fast enough. (Learn to flee effectively!)
Now the problem with resources, like natural resources, is the unavoidable need for them, and the difficulty of getting them. Modern society just can’t work without energy, like eg oil, and the need for it is so absolutely high that wars get fought over creating better access to a source of, in this example, oil.
So we look at the three investment resources and ponder our dilemma.
Knowledge: could be called research, and we can do that given time and effort, but the big traders will have a research department where we have the library, the internet, and “inferior” sources from which we draw the knowledge we need.
Capital: we save, we trade, we accumulate capital, and then we risk it on a trade or investment. But JPM, GS, the funds et al will always have more capital, much more, and can choose to dump a big stake into our asset class, crashing the price (from our point of view) and wipe us out. Someone else will always have more of requirement number one, than ourselves.
Confidence: in the light of the previous two paragraphs, how can a realistic person have confidence in the chances of success?
Kinds depressing so far, isn’t it? We don’t have enough of that which we need, and getting any one costs in the amount of the others.
Well there are compensations, so I’ll look at those now.
Do you recall that above I used the word "arena"?
Let’s imagine we are in the position of a little guy let out onto the field during a big football game. It doesn’t matter which team we have been let in on, we’re not going to score, and if anybody passes the ball to us it will be only an instant before the moment of pulverization as heavier bodies arrive with great force in a moment of devastating contact.
So what could a puny amateur do in such a situation? Well, for one thing, the other bigger bodies have a certain balancing effect on each other, and are concerned with each other. If unnoticed, we may steal an opportunity. We can also follow behind a “blocking offensive” force and take protection in that position of greater safety. It helps significantly in doing this is if we have previously studied the offense and defense strategies of the big players. Then we can slip in and out again to suit our purpose better.
Unfortunately, I hear many little players saying things like “the big players control the game so we can do nothing”. Sorry, that’s selling yourself short, and defeatist - you can do a lot. Often after a bruising play where ground was lost (by the little guys) other voices are heard calling out “losers!” and suchlike. Well what would you expect from the crowd at a game? Encouragement? Seriously? You know, there probably is encouragement being shouted too, but it might just be less audible among the overall cheering and booing that goes with the big game – which is after all what the mainstream (sporting) media and cheerleaders are watching and reporting on. They do their job, and we remember their reports are not about the inner game-within-a-game that we are playing. It is our private sideshow. When we are noticed, one second later we get smashed. A low profile works better when one has our size of resources and is among heavyweights. That low profile is so important that whenever you notice the mainstream media reporting on YOUR activity, watch out!
So adjust your expectations, Abandon immature desire for recognition. Leave the glory for the big team players. Study the game for the little guy, learn how it’s different - and play on. Look around. There are plenty of other little guys out there too, nipping in here, ducking out there, unnoticed, and getting on with it.
And the game does have an end, whether we are on the big team or not. And we can change sides whenever we think it’s in our advantage to do so, and change back too, but this is more challenging for them, than it is for us. And if we want to leave the pitch for a bit while the giants bash each other to smithereens, we can leave and from the much safer sideline watch that play, only to return when one side is weakened. And they are big, so some of their plans are not flexible due to their need to dominate the opposing big team. We can see those transparent plans for what they are, once we know the game - and act on that knowledge for our own advantage.
Every resource requirement boils down to money and time. Allocate and use time (learning skills) to conserve the money cost.
We do have advantages. Some of them are good ones. Learn them. Use them.
To win you've got to somehow learn survival skills and tactics related to damage avoidance, and then get on that field and play : risk skillfully managed is the opportunity!