Need for Thinking Mentors.
Or, the coming shifts towards Mental Analysis.
It keeps happening over and over again, in different areas, at different time, with different asset classes, in different markets but somehow people just don’t seem to get it. I am talking about the disconnect between events and prices of traded instruments. People still fall for the linear-thinking approach that if they know the news then they will also know what the effect is. Take for example real estate prices and fate of real estate stocks. Almost nobody believes that real estate prices will fall but there is a reasonable agreement that they are no longer rising. There is a fear that they could fall. In the last few years the real estate prices rose, in some places dramatically, but the prices of real estate stocks continued to fall all thru. In the last six months there hasn’t been any rise in real estate prices and the absorption of inventory has been declining. Recently the data on comparative absorption of existing inventory for Q1 of 2014 showed that it had dipped to less than half (pan India) compared to a year ago. So clearly there is a lull (to say the least) in the real estate industry. But amazingly, the Bse Real estate index has gained over 65% in the last quarter! Stock prices of real estate stocks are doing the exact opposite of what one would expect based on the data. During the years that real estate prices were rising- and sometime strongly- the stock prices dropped continuously. In the time that the real estate prices have stopped rising, perhaps started decaying and inventory is piling up, the stock prices are zooming!
What could explain this disconnect? The only thing is that the markets are not living in the occurrences of the past but in expectations of the future. Therefore stock price movements have a very low level of correlations to the real data and a very high correlation to imagination of the data! But this fact is almost impossible for most people to accept as it would amount to jettisoning what looks to be a “rational “approach. And if there is anything that we as human beings have been taught thru the years to be is rational. Thus adopting the kind of mind-set that is really required for the markets are actually beyond the natural abilities of almost all except a few. And those few are the ones that succeed.
The good news however is that such a mind-set can certainly be acquired. It needs traders and investors to teach themselves new ways of thinking, of going against standard accepted formats, of becoming counter-intuitive, as it were. This is difficult to do by oneself but can be done with the aid of a mentor. As proprietary trading and boutique fund management practices increase, the need to seek out a ‘thinking mentor’ will become greater and greater. Those that recognize this need will succeed faster and better. Those that refute that it is necessary will be the ones paying up. Take your pick as to which side you want to be in the future.