During election campaigns, pollsters call people asking how they’ll vote. Of course, well-designed polls have predictive value, which is why politicians pay for them. They represent what a multitude of people have in common. And when elections are held, the power to vote is considered the ultimate weapon in any functioning democracy.
The belief is that the voice of people is the voice of God. In a very interesting way, financial markets run similarly complete with a two-party system—bulls and bears, with a silent group of undecideds who may throw their weight to either party. And just like the final tally in an election, the market price represents the consensus of value of all market participants expressed in action at the moment of the trade.
High and low prices, the open and the close, the angle of every trendline, the duration of every pattern, all reflect a rolling vote of the crowd. The big question is; if the price point represents the wisdom of the crowd, is it the true value?
As a matter of practice, advocates of the “wisdom of the crowd” are the trend followers or so-called momentum traders. They understand market psychology and hence natural lovers of the trend who believe all price points reflect the “truth”. They are the kind that believe markets include some of the most brilliant minds (and deepest pockets too) and that arguing with this group is dangerous business.
But pitting against this group is the value investor. Bottom fishers who look for securities with prices that are unjustifiably low or unreasonably punished by a clueless majority. They are the most philosophical who believe only a certain price point (intrinsic value) is the “truth.” Most would believe Plato that “elections are typically decided by fools”. Perhaps the tortured German-American poet, Charles Bukowsi, best captures their whole investment philosophy, he says, “The masses are always wrong. Wisdom is doing everything the crowd does not do. All you do is reverse the totality of their learning and you have the heaven they're looking for.” One may add, “Isn’t it the masses who cried out, “Give us Barabbas and crucify Jesus?”
Back to our question: Is the consensus of the market, the “truth”? By the above observation, it seems at one point in time, both perspectives agree. On that point, yes. However, both stay at odds for the most part as prices converge/diverge towards the fundamental value.
Here’s my overall take; whether your decision is based on value or price strength, so long as you’re making money, stay with the method. There will be seasons when value will work and others when it won’t. Same applies to trend following.
To add another crucial point, everyone needs to embrace one investment approach. This is because having it helps keep focus during market volatility, prevents reactions that might derail long-term plans, fosters discipline and ensures investments align with one's goals and risk tolerance. Combined, they help the market operate efficiently and effectively.
Mwanyasi is MD, Canaan Capital.
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