Tuesday, May 27, 2008

Catching Falling Knives

Tim Price, in his blog http://thepriceofeverything.typepad.com/ provides wonderful insights into the behavior of Wall Street honchos. Mr Price writes:

"One of the innumerable problems with Wall Street and the City is that they never do seem to learn from their mistakes. Property market bubbles; whichever hedge fund John Meriwether is associated with this week; the venality of quasi-monopolistic agencies associated with credit, housing or debt ratings.. Each generation seems obligated to re-experience the errors of its predecessors."

All of this is equivalent to saying "This time it is different". How many times have I heard this on TV. We are told that trillions of dollars are waiting to come to India. Thus, this market will consolidate, then go up. Sure. Equity markets remain in a secular uptrend. Prosperity & inflation ensure this. But, traders must survive now, they do not have the luxury of long term bets. If traders make mistakes, they perish (this reads a bit dramatic, they actually go out of the trading business, back to retailing, selling cloth, practicing medicine or whatever financed their trading ventures in the first place). Traders cannot afford to find out that this time it was not different. That would be too late. Trading is then based on what is visible - the movement of prices on a chart are the most visible feature of the market. If prices are falling, it is a sensible idea not to buy. There is no sense in catching falling knives. This simple precaution can save a lot of money for Indian stock market traders.