Earlier this month in an attempt to avoid work, I posted excerpts from an email response to a reader who had requested generalised information about how to structure an investment portfolio in the current climate (see: http://footballisfixed.blogspot.com/2007/06/some-words-some-wise-some-foolish.html). One aspect of trading that was deliberately omitted from the post concerns Middle Aged Markets. Why did we specifically choose not to suggest trading on these mid-phase structures? The answer is focus...
Young and mature markets offer significantly more simple analytical structures to a market analyst. In the former the fundamentals are paramount while, in the latter, an analysis of corrupt non-democratic structures is a primary template. The degree of absolutism in infrastructure enables a slimmed down systems thinking style of analysis to be incorporated into the overall holistic trading model structure. Mid-phase markets are slightly fuzzy and, consequently, significantly more non-linear mathematics is necessary in the analysis. These markets incorporate inputs and structures covering all market phases as a competitive playing field is fought over by different global power individuals, companies, hierarchies and consortia with shared strategy. For amateurs to successfully trade on these markets, a disciplined market focus must be built into every day of your life. Most amateurs neither possess an holistic big picture thing or an analytical thing which makes the various market forces and dynamics rather opaque to put it mildly. Even highly skilled analysts will endure periods of trading on mid-phase markets where a breakeven short-medium term trading scenario is the best that can be expected. In addition to this constant climate of machinations and background noise, there are repeated infrastructural breakpoints as new power bases are formed to hijack the competitive process into a more monopolistic structure. The markets lurch forward in a series of seemingly randomised steps (they aren't random, by the way, but that's another story for another time!) and analysts build their sector specific trading models in real time as new realities conveyor belt themselves into market realities. It's like physics at speed. Our Trading Team target solution to any new market breakpoint within twenty four hours although some major infrastructural events may lead to a window where trading on that particular market is suspended while we test the robustness of our model. Nowadays, the model is solid enough to be trusted (with a little human prompting) to identify mispricing virtually immediately in any new market structure.
In addition to issues relating to corporate flux through market competition and corruption, there are added layers of complexity caused by regulatory capture, market efficiency and insider trading. Once international and/or national organisations and regulators become co-opted into the competitive market process, entirely new sector constructs appear at speed which is highly befuddling to amateurs. Pro's know where to look for swift solutions to new realities - amateurs start thinking random walk or resort to selected psychological styles to explain "their" new reality. Markets are often at their most efficient in mid-phase windows which represents clear issues to any trader or analyst. We are always looking for value and, for value to exist, our analysts perception of a true price needs to differ to a statistically significant extent from the market. As markets grow up from their young structure, one of the prime new inputs is insider trading. Insiders take on far greater importance as the market sector develops into middle age. Whenever a new sub-structure is established, related markets will be markedly inefficient for a window which allows clear competitive (yet corrupt) advantages for an insider trader. Numerous revealing academic papers illuminate this area and game theorising the process enables analysts to clearly observe the mini-cycle from efficient to inefficient and back to efficient again.
We would also suggest keeping away from the even more psychopathic markets like derivatives. Many of the market types broadly under such a heading are opaque, non-regulated, highly manipulated entities which require a combination of a VERY clear sector holistic view together with some horrendously complex mathematics. Particularly heavily tilted towards the insiders who develop the market templates, it is possible to win in these marketplaces but one should remember that one is effectively playing high stakes poker on a table that is controlled by the house.
In summation, Middle-Aged Markets are a challenging environment for market newcomers. For the insiders, the middle-people, the analysts and the regulators to be profiting to various degrees of handsomely, there are, by necessity, a whole bunch of patsies from the workers of the world through to amateur market participants. As Warren Buffett quite correctly states: "If you have been in the [poker] game for 30 minutes and you don't know who the patsy is, you're the patsy".
© Football Is Fixed/Dietrological
