Why we all need Justin Bieber to help us beat the markets.
Everybody thinks they are better than average. Why else try anything? So, it should also come as no surprise that all of us think we can do better than fifty-fifty when it comes to calling the markets. We also know the power of numbers and if indeed we can do slightly better than average, we can make huge sums of money in the financial markets. Particularly, when you deploy leverage and you do it over and over again (high frequency), but that is another discussion.
So why is it so hard to do better than 50%? Think of it this way: you come to a fork in the road, and you can go left or right. We can use charts, technical analysis, fundamental valuations, and any other technology, model or techniques known to (wo)man, to help us make this difficult decision. However, the sad fact is that what we do hardly matters. The only thing that affects our fortunes, is what the person after us decides to do.
The markets are the ultimate melting point of supply versus demand, and clearly the more people that do the same thing, a trend makes. Whilst this certainly opens up the field of behavioural finance, it is renowned to be a very inexact science. No one can understand human behaviour as we act irrationally by definition. So predicting what the person next to us is going to do, is as much of a coin toss as anything else we aim to achieve by applying sound analysis to our decision.
The other thing that makes it difficult calling the market right more often than not, is the timing of what other people may do. It could be that the first two or three people go down the same path as we do, but others could be waiting in the balance. Maybe they were busy the day after we made our excruciatingly hard choice or maybe they were on holidays. The most frustrating thing of all, could be us having made the right choice, but at first others do the opposite, leading us to cut our losses, only to find a huge tidal wave of Beliebers (sorry couldn’t resist) come our way when it is too late.
Fact is, the markets are random and no matter what we tell ourselves, it is very difficult to beat the numbers. Particularly with so many sophisticated players and all their technology going at the same thing. It becomes a bit like a football match of the two best teams, which invariably tend to end in boring draws as each side’s strength is neutralized by the other. Worse, is thinking one has discovered the holy grail by getting lucky the first few times. Remember, it can come up tails nine times in a row, but that doesn’t mean it will be heads on the tenth roll of the coin. So stay long and strong, but go to the casinos if you are feeling lucky and you might even get a free cocktail whilst you're playing.