“There are in the elds of economics no consistent relations and consequently no
measurement is possible.” Ludwig Elder Van Mises Many investors believe that price is
determined by a simple tug of war between supply and demand factors. They feel that
the fundamental study of this area is all that is needed. For example, in nancial
markets the fundamentalist will look at corporate earnings, interest rates, changes
in money supply, and many others. In agricultural markets such factors as planted
acreage, crop reports, weather considerations and transport would be important. However, as B. Pugh states:
“All the crop news and political events will be of little use. If it were possible to trade successfully by good and bad weather conditions, it would be unbelievably easy to make money when the news lters through ten or twenty thousand minds
interested in wheat. The major opinion may be quite different from the opinion of
an individual.”
Let’s dene exactly what a futures market is. It is in effect an area to bring buyers and sellers together and facilitate trade. A futures market does not exist to
ration supply and demand, nor to allocate resources, but simply to facilitate trade. It is a perfect example of the free enterprise system at work. “By nature men are nearly alike, by practice they get wide apart.”
Confucius - The Confucius AnalectsIt is the market participants that ultimately
determine the price of a commodity. There is no scientic theory or formula that
determines what the price of anything should be. The facts and statistics are
there for all to see. However, people’s opinions on the statistics vary. All of
us make personal, subjective, emotional judgements, along with all the participants
that ultimately determine price. Our decisions are affected by our emotions.
We can all be logical and rational, and it is this side of our nature that has allowed us to advance in such areas as medicine, communications and computer technology. However, we are fundamentally emotional beings; this is an innate part of our nature, and we are subject to a variety of moods including hope, despair, euphoria, greed, fear, optimism, pessimism and many more. If you want a graphic example of how humans determine price, think of what happens when you exchange a worthless piece of paper for a variety of goods.
Money relies on a shared consensus for its value, which would disappear if the
consensus evaporated. “Men at some time are masters of their fates, the fault dear Brutus is not in our stars but in ourselves, that we are the underlings”.
William Shakespeare - Julius Caesar
There is one statistic that has remained constant in investment since records were
kept - and that is the ratio of winners to losers has remained constant over time.
On reection this would seem a startling fact, but despite the massive advance in
economic forecasting methods and supply of information, the ratio remains the same.
Being in touch with all the market news will not, as B. Pugh pointed out, put your
investments in the plus column. The obvious conclusion to be drawn is that
success in the market is dependent on something else. That something else is emotionalism and how it affects our personality when we invest. It is our emotional make up that is the weak link in the investment process. “We cannot escape it (emotion). In the future it will cause another panic in Stocks. When it comes, both traders and investors will sell Stocks, as usual, after it is too late,
or in the latter stages of a bear market.” W.D. Gann (1949)
It is emotion that causes the majority of investors to be wrong at critically important turning points - to quote Gann again: “Therefore, in order to make a success, the trader must act in a way to overcome the weak points that have caused the ruin of others.”
