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I received the following email in response to my post: Too Much Information.

Hi David,

If I understand correctly, the only way to make money on the market is to go against market rules and principles. And that electronic and computerized market places have made that a general law?
Very interesting

- Michel


Dear Michel -

My post was more about large institutional traders rather than individuals. The old ways of finding value in the market are gone because of the almost instantaneous delivery of financial data. Institutions have created new markets where data is not evenly distributed.

Individual traders can make money by understanding a simple fact: Until proven otherwise, fear and greed are the only constants in the market and when fear and greed rule, fundamentals don't matter for much.

My approach to the market is to attempt to measure levels of fear and greed and make trading decisions, both short and long term, based on those measurements.

When this market finally bottoms, fundamentals will be used to justify buying and those judgments will be correct because fear will have driven stocks to very cheap levels. However, as time goes on and the economy improves, investors will become less risk adverse and the measurements used to measure "value" will deteriorate to justify buying more. That is, until we reach the point where fundamentals are thrown out all together (See Internet Bubble and Housing Bubble.)

Ultimately, the way to survive the market is to think for yourself. Herd mentality works in the middle of long bull or bear runs but it doesn't work at the extreme. If you always follow the herd then you will be caught leaning the wrong way at the extremes.

Best,
David