Why engage in financial research? Some say that the questions stay the same and it is the answers which are changing. To some degree this true. I have been researching some of the same topics for 25 years, so you sometimes question why you should engage in the research process. The reasons can be made clear through reading how others cope with change. The markets are dynamic and constantly changing, adjusting, and mutating. Staying the same will lead to failure. This is a process that is occurring in all markets not just those of finance.
I just finished Michael Lewis's new book The Blind Side: Evolution of a Game. It is a great story of a special family and an interesting tale on the development, pricing, and marketing of football players with unique skills and the market adaptation to changes in the game of football.
I just finished Michael Lewis's new book The Blind Side: Evolution of a Game. It is a great story of a special family and an interesting tale on the development, pricing, and marketing of football players with unique skills and the market adaptation to changes in the game of football.
What makes Lewis a great writer for traders is his ability to discover stories that describe market inefficiencies which are exploited for gain by those who have a special vision. In Liar's Poker, the inefficiency was the development of the mortgage market and fixed income arbitrage. In Moneyball: The Art of Winning an Unfair Game, the inefficiency was looking at certain statistics which were not exploited by baseball scouts to find good cheap players - value investing.
To those who are able to find and exploit inefficiencies, there are profits. In the worlds Lewis explores, the job of the visionary investor is to find these exploitable opportunities because the markets will adjust quickly. In Moneyball, general manager Billy Beane acts like a value investor who uses new methods to find find ballplayers who could be acquired cheaply. Since it was written, markets adjusted to the statistics of on-base percentage and now pays a premium for those who can get on-base. The opportunity has been eliminated or priced out of the market.
To those who are able to find and exploit inefficiencies, there are profits. In the worlds Lewis explores, the job of the visionary investor is to find these exploitable opportunities because the markets will adjust quickly. In Moneyball, general manager Billy Beane acts like a value investor who uses new methods to find find ballplayers who could be acquired cheaply. Since it was written, markets adjusted to the statistics of on-base percentage and now pays a premium for those who can get on-base. The opportunity has been eliminated or priced out of the market.
In The Blind Side, Lewis describes how the development of innovations in the passing game has led to a premium for defensive linemen and linebackers who tackle the blind-side of quarterbacks. This innovation has led to the demand for specialized offensive left tackles. There is a premium for their skills to the point that they are now the second highest paid players in professional football. The market has innovated and adapted and now pays a premium for those with the skill to protect the quarterback. The market is now on the hunt for those special players who can provide an edge in protecting the quarterback.
So what do you have to do to be successful in the markets? You have to look for The New New Thing. You have to adapt. You have to change. You have to continue the process of research to try and find what others have overlooked or what can now give you an exploitable edge. It could be a new idea. It could be an old idea repackaged. It could be a response to the changing behavior of others, but it has to be innovative. To make money requires constant vigilance and adjustment.
That is why you still have to conduct research at any age.
So what do you have to do to be successful in the markets? You have to look for The New New Thing. You have to adapt. You have to change. You have to continue the process of research to try and find what others have overlooked or what can now give you an exploitable edge. It could be a new idea. It could be an old idea repackaged. It could be a response to the changing behavior of others, but it has to be innovative. To make money requires constant vigilance and adjustment.
That is why you still have to conduct research at any age.
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