The study of capital markets has always been both intriguing and amusing to me. A lot of its theories are backed by mathematics and statistics. But the system in reality is stochastic, complex, and at times even volatile. We can learn from our mistakes or the mistakes of others. History often serves as a good guide for making decisions but no one can guarantee a discrete outcome.
Whether it is technical analysis with charts or regression models, the past is never a predictor of the future.
With trading stocks, be it day trading or the well-thought through strategies adopted by the large hedge funds, I have always felt that one principle remains consistent: Both smart and dumb money goes wherever the big boys go.
Those who got rich from trading think they know it all, but they were merely riding on the shoulders of giants. And so, it pays to know what the whales are doing.
Last month, one fund manager became an unfortunate statistic of this system.
The letter widely circulated on social media attracted a flood of comments from the online community, some applauding his honesty for admitting his mistakes, cutting losses and returning money to LPs. Others lamented that he should have done better by hedging his positions like any respectable hedge fund.
Nevertheless, for someone who has been in this business for over thirty years, this is a huge setback both personally to him and the investor community. One would think that any funds entrusted to a veteran fund manager would be in a safe pair of hands. But reality can be brutal. As one user puts it on Twitter:
It only takes one bad month. One wrongly sized bad trade.
It just goes to show that what we think we know of the workings involving financial markets do not always hold true.
Whether you are managing ten thousand or ten million dollars, in the end, stock prices are driven by the simple economics of supply and demand. It always comes down to flows and the biggest whale here is obviously the government.