A constant is something that is changeless or a quantity that does not vary. The concept of constant in trading is really important. Let me explain why.
In a fast-changing world, consistency is only possible if you manage to some things that do not change. If you don’t manage to the constants, you will most likely be all over the place and compound return negatively. You need a beacon, and your set of investment/trading constants is that beacon. I discuss Jeff Bezos' opinion on the topic in this blog post.
Bezos says: “It is important to focus on what’s not going to change in the next five to ten years.” The same is true with investment management strategy.
What’s not going to change in your investing or trading business in the next five to ten years? You might want to build your strategy around that.
Here is a list of some of the constants I use:
• Stocks fluctuate: they are volatile.
• If you see a roach in the cupboard, you will find many more: Cockroach Theory.
• Stocks are manipulated.
• Investors and traders overreact.
• In aggregate, diversified portfolios track the market return minus some.
• In aggregate, if a stock move after an analyst makes a recommendation, the move should be faded.
• Intrinsic value has a much lower volatility than its corresponding stock price.
• Traders, when trading, behave like animals.
• Efficient market hypothesis: the market is information efficient. EMH does not mean securities are priced right.
• Positive information about a security takes more time to be reflected in stock price than negative information.
• Shelby Davis's Law: “A purchaser of common stocks makes most of his money in a bear market; he does not know it yet.”
• Corollary to Shelby Davis's Law: A seller of common stocks creates most of his value in a bull market, but he does not know it yet.
• Customers are more truthful than management.
• When opinions are diverse, stock prices approach fair value.
• When opinions are similar, stock prices diverge from fair value.
• Investors are fickle when they lose money.
Anything else I should be thinking about? Let me know.
Michael Bigger