Four classes of men in market

I wouldn’t say that. I would answer it this way: I believe that men make markets and man doesn’t change. Man may or may not interpret the importance of the fundamental the way I do. I believe that there are different classes of men and that in every market, there are always these four classes of men to a greater or lesser degree. Of course, there are much more than four types of men in the markets. But for the sake of simplicity and analysis, I have reduced them to four. Each group can at any one time be dominant. The key is to know what the mix is of men who are making the markets. It’s a question of which class will win out, and which class is dominant.

The first class of men doesn’t think. The second does think, but must have a reason for taking action. They are going to succeed over the long haul. The third class is in there professionally — hedgers, commercials. The fourth class thinks that they think. They are highly emotional and are never able to control their emotions.

The difference is this: many people can’t think, but only do what they are told. Usually, the first class makes up the majority of a market. Today they don’t — they need to have an exciting market. The second group is comprised of people who are intelligent and are able to think for themselves — the successful traders. The members of the fourth group try to think for themselves, but are incapable of anything more that emotional thinking.

IM: So 1975-1980 might be a period of time where the metal markets were dominated by those who don’t think — the outside speculator who just wants to buy a bull market. The commercial might be someone who sold the metals, and the higher they got, the more the commercial sold.

There’s a difference between those who speculate for money, and those who trade — not to make a lot of money — but to protect their inventory. The hedgers are the third class and think more long term.

The ride up was caused by those who don’t think, but the wild excessive top to the gold — and to virtually every market — is caused by the fourth group — the emotional traders.

Bull markets breed emotionalism and therefore attract the fourth class, as well as the first class. The third class is always in the market, by necessity. And the second class is never very far, always looking to get in early on an attractive opportunity. So the first and fourth class of men change the market in its later stages, bringing extremes. I think there were fundamentals that caused the gold market to go up, but not as high as it did. At key turning points in the market, the fourth class dominates, such as when we saw $800. gold.

It is something that I’ve learned to do that I think is invaluable. You see, I try never to let a trade get to me to the point that I’m anxious about it. I’m not a master of my anxiety, so once I feel myself coming to that point, that alone is reason enough to get out of the trade. Once I begin to worry about it, I might better be out of it. There’s no way to recoup my losses by keeping this trade, since there’s no way I can.

A good trader doesn’t let fear or anxiety dominate him. He must demonstrate that he can by doing something about it and not worrying.

Most of the people who have traded commodities are walking dead men. They remember and fixate on the fear they experienced when they were wrong. Unless they can shake that, they’ll never trade well again. The experience has been so painful that they will remember it for the rest of their lives.

I concentrate on possibilities rather than probabilities.

I know that there’s always a possibility that what I don’t want to happen, will happen. The market will not act in accord with my expectations.

You have to ask the question, ‘How must you function in order to survive?’ The answer is to be able to accept a loss. Not having expectations makes it a little easier to accept a loss. You must realize that losing is a part of soul growth, so to speak. It’s necessary. It’s hard to accept, but necessary.------LONGSTREET

Change

People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them. - Jean Monnet

The Seed

When we think about events, either in our daily lives, or in the market or the economy, it is important that we don't think of them as simply existing or coming out of nowhere. This is, because that is. This is not, because that is not. We cannot create or remove a condition, expect it to emerge or expect it to disappear, without understanding the seed that produces it, and the causes and conditions that allow it to spring up.-----Thich Nhat Hanh

Generally speaking, the seed we water is the one that grows. That's why if we spend our energy thinking about what we don't want, what we don't like, what is wrong – we'll tend to nurture and strengthen exactly the wrong things. If we water the seeds of peace, understanding, empathy, happiness, and so on, those are the seeds that will grow.

The basic condition for anything to emerge is for the seed to exist. But that is not enough. The seeds of a bear market are often fully present in the later stages of a bull market – overvaluation, excessive speculation, acceptance of risk without sufficient compensation, extension of credit to poor credit risks, belief in the sustained growth of cyclical businesses, overconfidence, and so forth.

But in order to manifest as a flower, or a weed, or as fruit, other conditions have to be present. Buddhists distinguish two kinds – “same direction” and “opposing direction.”

Conditions in the opposing direction tend to hold back the manifestation of the seed, but can also force it to become stronger before it manifests. If you plant a seed in firmer soil, the roots may be forced to dig deeper in order to establish themselves and find water, whereas a seed in easier soil may grow more quickly but have weaker foundations, so it can be uprooted easily. Conditions in the same direction are those like water and sunlight, which provide the background environment necessary for the seed to grow.----------John P. Hussman

Zen of Market

A novice monk approaches his teacher and asks, “Is this a bull market or a bear market?”
The teacher replies, “If it is a warm day, and I say that it is winter, will you still wear your heaviest coat?”

Risk

“Ancient man had no risk management. Everything was left to ‘fate’ and the whims of the gods. Because ancient man felt that he was merely a victim of circumstance he did not see a need to plan for the future. Therefore, he had no future. In his book Against The Gods: The Remarkable Story Of Risk, Peter Bernstein plots out the history of man’s discovery of the law of probabilities and risk management. Suffice it to say, economic progress seems to run parallel with man’s ability to discover, quantify, and manage risk. Risk and reward are two sides of the same coin. One is not present without the other. You cannot receive the reward unless you are willing to take the risk and you cannot expect to keep that reward unless you learn to mange that risk. It is imperative to master both subjects if you expect to be successful in any endeavor, especially the arena of investing/trading.”
–Source: Pearce Financial LLC

Bets

“There are just four kinds of bets. There are good bets, bad bets, bets that you win, and bets that you lose. Winning a bad bet can be the most dangerous outcome of all, because a success of that kind can encourage you to take more bad bets in the future. You can also lose a good bet, but if you keep placing good bets, over time, the law of averages will be working for you.”
–Larry Hite, Trader

“Life is nothing more than a series of bets and bets are really nothing more than questions and their answers. There is no real difference between, ’should I take another hit on this Blackjack hand?’ and ‘Should I get out of the way of that speeding and wildly careening bus?’ Each shares two universal truths: a set of probabilities of potential outcomes and the singular outcome that takes place. Everyday we place hundreds if not thousands of bets - large and small, some seemingly well considered and others made without a second thought. The vast majority of the latter, life’s little gambles made without any thought, might certainly be trivial. ‘Should I tie my shoes?’ Seems to offer no big risk, nor any big reward. While others, such as the aforementioned ’speeding and wildly careening bus’ would seem to have greater impact on our lives. However, if deciding not to tie your shoes that morning causes you to trip and fall down in the middle of the road when you finally decide to fold your hand and give that careening bus plenty of leeway, well then, in hindsight the trivial has suddenly become paramount.”
–Larry Hite, Trader

Secret

Trading's only real secret is... The best loser is the long-term winner ---- Phantom of the Pits.

Skill

There is no place in the modern world for the unskilled; no one can hope for any genuine success who fails to give himself the most complete special education. The trained man has all the advantages on his side; the untrained man invites all the tragic possibilities of failure.--------RICHARD D. WYCKOFF

Pride

My pride did not let me act. The prestige of my theory was at stake. I just kept saying this stock cannot go down any further. I did not know what I learned later, that there is no such thing as cannot in the market. Any stock can do anything.-----Nicolas Darvas

Common Sense

There are no such animals as good or bad stocks. There are only rising and falling stocks—and I should hold the rising ones and sell those that fall------Nicolas Darvas

Decision

“…in contrast to astrology, one must accept the fact that success is not due to a fortuitous concourse of stars at our birth, but due to a steady trail of sparks from the grindstones of hard work, determination, good planning, and perseverance. When it comes to the future, there are three kinds of people: those who let it happen, those who make it happen, and those who wonder what happened.”----- Abhors Arrogance

Know

If you know yourself and your enemy, you will not fear battle.
If you know yourself but not your enemy, you will lose a battle for every one that you win; and if you do not know yourself and do not know your enemy, you will never see victory.
—Sun Tzu, The Art of War

Awareness

I think self-awareness is probably the most important thing towards being a champion.
—Billie Jean King

Bob Farrell’s 10 Lessons

1. Markets tend to return to the mean over time.
2. Excesses in one direction will lead to an opposite excess in the other direction.
3. There are no new eras – excesses are never permanent.
4. Exponential rising and falling markets usually go further than you think.
5. The public buys the most at the top and the least at the bottom.
6. Fear and greed are stronger than long-term resolve.
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chips.
8. Bear markets have three stages.
9. When all the experts and forecasts agree – something else is going to happen.
10. Bull markets are more fun than bear markets.

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Blindest

"Lying here, during all this time after my own small fall, it has become my conviction that things mean pretty much what we want them to mean. We'll pluck significance from the least consequential happenstance if it suits us and happily ignore the most flagrantly obvious symmetry between separate aspects of our lives if it threatens some cherished prejudice or cosily comforting belief; we are blindest to precisely whatever might be most illuminating."-- from Transition, by Iain M. Banks

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