When you first start work in a City dealing room you are encouraged to have a view on everything. Morning meetings are conducted across squawk boxes – a network of intercom speakers that let hundreds of people listen in – and cover all the bases.
The economists, the research analysts, the technical analysts (chartists), the new issue departments and the traders must all have their say. It leads to a superficial grasp of just about everything that has a price, a grasp which is hundreds of miles wide but just a few millimetres deep.
The trader’s mindset
This environment encourages you to think like a trader, and to have a view on any market. That view is likely to be transitory. It could be informed by “fundamentals” – a subjective assessment of macro-economic trends such as inflation, interest rates, GDP and currencies.
Or it could be informed by “technicals” – what do the charts look like? Is price momentum and money flow supporting your market, or crushing it? If you’re in the stockmarket, the primary influences will be your employer’s proprietary research on individual companies.
Since insider dealing is now illegal, such research is unlikely to offer any terribly profound or unique insight. And whether you operate in stocks or bonds, or elsewhere, another non-trivial influence will be whether your employer has a boat-load of inventory he is desperate to sell on to somebody else. But the point remains: you start off with the mind-set of a trader. And the attention span of a gnat.
Becoming an investor
If you are lucky, or intelligent, or fall in with the right crowd, you may advance to the second stage of the City’s evolutionary life cycle. You slowly start to think like an investor. Through some mysterious mental process, you start ignoring the irrelevant and start focusing on the specific. And most things are irrelevant.
You start accepting that there are limits to knowledge, and you start developing and polishing “an edge” – that specialism that lifts you out from the herd.
Your time horizons start to lengthen. You no longer obsess about price movements of hours and days, and instead start to think properly longer term. You no longer make arbitrary predictions about a frankly unknowable future. You concentrate on true fundamentals: what is this company really worth? Is that bond issuer a high-quality creditor or a lousy debtor?
A trader has that breezy “win some, lose some” attitude that comes from punting with somebody else’s capital. An investor typically concentrates on avoiding an irreparable loss. Regardless of whether he is acting on behalf of a client or managing his own wealth, the investor treats all money with as much respect as if it were his own.
Whether within the Square Mile or outside it, most participants in the market think like traders. And most traders will end up losing, because they possess no proprietary edge, and no real belief system other than a desperate craving for wealth. If one does not know to which port one is sailing, no wind is favourable. Those that make it to the next level, that of the investor, have a far superior chance of converting their efforts into affluence.
But given sufficient good fortune and the vagaries of careers in the capital markets, you may yet ascend to the summit of the financial-market food chain. You start to think like an owner.
The zen of being an owner
Once you become an owner, your world view contracts yet again: now nearly everything with a price is irrelevant. You restrict your zone of interest to those things you feel you truly understand. You achieve a zen-like patience.
Having identified those special situations that most appeal, you ignore all distractions and wait patiently for the market to offer up those spoils at a price that suits you, and not any other. If Mr Market is not amenable today, there is always tomorrow. In the interim, you read, and you read, and you read. And then you read some more.
It’s the people who think like owners who will win the game. Warren Buffett probably started out in the already advantaged category of investor, but it’s surely no coincidence that his net worth really exploded once he stopped playing trading games with stocks and started acquiring entire businesses.
Our modern financial world is overflowing with a grisly combination of distractions and outright threats. In a world of negative interest rates, all bets are off. But those who steward their capital with the mind-set of an owner – for them, all things will be possible. Traders are ten-a-penny. Our markets, and for that matter our economy, need more owners.
• Tim Price is director of investment at PFP Wealth Management. He also writes The Price Report newsletter.
Category: Market updates