by Teeka Tiwari 08/21/08
Unlike the realm of politics or religion, when it comes to the stock market, dogmatic opinions rarely result in success.
As professional investors we cannot afford the luxury of a fixed point of view. In the same vein, we must avoid extremist view points, whether too bullish or too bearish.
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The best investors are usually realists. They have the ability to strip away emotion, dogma and their own personal prejudices when evaluating global events and their impact on financial markets.
The market despises extremes -- 68% of the time the market is within one standard deviation of the mean. Knowing this gives us fantastic perspective when we see the market overly stretched in one direction or the other. Like water seeking the lowest point, the market is constantly seeking the "mean," and it will always revert back to the middle of its trading range.
And always remember that today's "dog" is tomorrow's "star" -- always!
That's why a strong understanding of sector rotation is so important. Just like clothing styles, stocks rotate in and out of favor. And it's almost comical how predictable these rotations can be.
When it comes to the way that the broad markets move, there is almost a spiritual flow. As there should be, because it is the mood, hopes and dreams of the market participants that guides stock prices -- especially when we begin trading at the margin of the upper or lower limits of the market. Like nature, the market constantly seeks balance.
This is where a strong understanding of human behavior can help you immensely in your trading decisions.
Mental flexibility -- the gift of being able to imagine the world as different from what it is today -- is a skill worth developing. Having a vivid imagination married with a firm understanding of the business cycle can yield bountiful rewards. I urge you to stretch your mental muscles and start on this path.
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