The Undisputed LAWS of the Financial Markets?

[MJ DeMarco]

I was looking to get everyone's opinion on what they BELIEVE to be the UNDISPUTED LAWS of the financial markets. I'm defining the "financial markets" as the stock, options, and commodities markets.

I'm looking for 100% LAWS, not ambiguities or "feel good" mantras that aren't 100% accurate.

For example, the LAW OF GRAVITY works 100% of the time. If you drop a marble from your hand, it will, 100% of the time, fall to the floor.

Another example, "Pigs get fat, hogs get slaughtered" is not a law but a guideline. It isn't a law and just means don't get too greedy.

LAW #1
---------
There are no "experts".
No one knows which direction the market will move on any given day.

(The other day one "expert" was saying "BULL BULL BULL" and then not 5 minutes later, another "expert" was saying "BEAR BEAR BEAR!")


LAW #2
--------
FEAR is a more powerful motivator than GREED.


LAW #3
---------
Time cannot be suspended, it always is moving forward.
(Relates to options markets.)


LAW #4
---------
When demand exceeds supply, prices move up. When supply exceeds demand, prices move down.



What other LAWS can you think of?

Or, what might be a law? (A stock will never rise to infinity? A stock never goes straight up? Remember, a law is indisputable.)

 

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[Steve W]

For every dollar that you make, someone has lost a dollar. This same person had every intention of profiting, not losing money.

 

[Rain]

For every dollar that you make, someone has lost a dollar. This same person had every intention of profiting, not losing money.

So true.

Not sure if this would count as a law, but always do your due diligence. The market will humble anyone.

 

[Vigilante]

Any stock can go lower until it reaches zero. There's no such thing as a stock that has reached it's "bottom" unless it is at zero.

 

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[Felix II]

For every dollar that you make, someone has lost a dollar. This same person had every intention of profiting, not losing money.

Is this really true? I'm by no means a financial guy, but I'm fairly certain the markets are not zero-sum.

 

[CarrieW]

Idk but those 4 you listed sound right on to me... I am interested in this as well.

depending on what you are trading. not every kind of trading is zero sum...

 

[townhaus]

Prices fluctuate

There is no "right" price- only what the market agrees (for now)

Markets can stay irrational longer than you can stay solvent

Anything can happen

 

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[CarrieW]

#5 the market is always right!

 

[CarrieW]

possible #6 it doesnt matter how valueable you percieve something to be. its only worth what someone else is willing to pay for it!

 

[Steve W]

not every kind of trading is zero sum...

Let's liken trading to chess - you take a pawn, your opponent loses a pawn. -1 + 1 = 0. If I'm wrong, please enlighten me - it would be nice to have free money...

 

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[CarrieW]

http://www.fxstreet.com/education/trading-strategies/lessons-from-the-pros-forex/2009/02/19/

consider yourself enlightened you can feel free to google it as well if you feel I am wrong... but I read this awhile back and I believe I am correct

 

[CarrieW]

heres another Is trading a zero sum game?

 

[CommonCents]

"past performance is not a guarantee of future results." To find the undisputed laws, just read the fine print from financial services ads, their lawyers spell them out for you.

 

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[Steve W]

consider yourself enlightened you can feel free to google it as well if you feel I am wrong... but I read this awhile back and I believe I am correct

Thanks for the link Carrie.

I don't have much spare time so only had a cursory look but it immediately looked to me as though the writer is describing the process for a small set of trades & completely ignoring the big picture (ie that even though someone may lose a trade & may later make a larger win on the same stock/whatever, that in the long term the money to pay for these profits has to come from somewhere).

I'm not an expert & may well have this wrong but I don't want to hijack this thread so will leave it at that.

 

[socaldude]

Thats funny I was just writing about how the value equation is an economic LAW.

Here's what i think are some laws:

Law 1: Risk INCREASES as more variables are UNACCOUNTED for and risk DECREASES as more variables are ACCOUNTED for.

so in other words i think that the "more risk=more reward" is total BS.

Law 2: As interest rates increase corporate earnings tend to decrease.

Law 3: Supply and demand is a law because its derived from logic and mathematics(graphs).

Law 4: Nobody knows where the market is going because psychology is very difficult to measure but the more you can account for the higher chances you have of getting it right.

Law 5: The long term movement of the stock market is up.

 

[G-man422]

I) All fiat currencies eventually fail.
II) Commodities will never go to zero.
III) Precious metals are the assessors of the markets.

 

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[CarrieW]

Zero-Sum Game Definition | Investopedia

just in case anyone else wants info on this heres another source thats not a person....

you cant "liken" trading to a game. they dont follow the same rules.

 

[townhaus]

I) All fiat currencies eventually fail.

So true

 

[CommonCents]

the risk/reward ratio is for assuming more risk, investors want a more reward potential. It's not really risk=reward.

most are looking for alpha, generating more reward for a given level of risk. Any fool can take on more risk willy nilly. Kind of like buying wine, you can pay through the nose for a nice bottle but the true winos love to find a great bottle for the price.

as far as zero sum game, Some say no and differentiate the market from gambling which is zero sum. they are not directly comparable since in the markets there are unrealized gains/losses. however, if the market was immediate settlement you would realize gains/losses. The confusing factor is if stock xyz has 50 million share float and one share trade boosts the price by $1 you just created $50 million in added market cap, however, if all those shareholders went to sell to capture than $1 gain, well, you know what will happen.

 

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[CarrieW]

Thats funny I was just writing about how the value equation is an economic LAW.



Law 2: As interest rates increase corporate earnings tend to decrease.

Law 3: Supply and demand is a law because its derived from logic and mathematics(graphs).



.

something derived from logic and mathematics are an opinon and not a fact therefore it cannot be a law.

also the tend to in the law 2 that you proposed makes it automatically not a law because it can also not...

 

[socaldude]

something derived from logic and mathematics are an opinon and not a fact therefore it cannot be a law.

Newton's 3 laws of motion are derived from logic. And mathematics is a law because you can't disagree with 2+2=4.

 

[CarrieW]

mathematics is a law. I agree. different forms of math can contradict each other. and still be a law such as counting on base... the

laws of motion may be derived from logic but they didnt become laws untill they are proven

just because something seems logical doesnt make it a law. it was logical that the earth was flat untill it was PROVEN it was not...

putting both together and using that to form a conclusion is a hypothisis not untill its proven does it become a law.

this is coming from a high school drop out... still I think I am right. please if I am wrong let me know

 

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[Lionhearted]

The only real market data that is relevant to anything is what the market you are looking at is doing at the present moment (right now). Past performance does not guarantee future returns.

 

[Jake]

Markets can remain irrational longer than you can remain solvent.

 

[Jonleehacker]

Is this really true? I'm by no means a financial guy, but I'm fairly certain the markets are not zero-sum.

The markets are a negative sum game, for every transaction there is a winner and a loser, and the brokers and exchanges take a cut.

 

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[xtracrispy]

In a bull market, the small cap stocks should go the fastest (because institutional investors are always get killed by the speculators. Remember the Nifty Fifty?)

 

[NerdSmasher]

The only market which is zero-sum is the options market. (Futures may be as well, but I haven't ventured into those yet, so I'm relatively uncertain - suffice it to say that cash-settled markets are probably zero-sum) Or, negative sum if you consider broker costs. (This is not to say that you are guaranteed, nor even statistically likely, to lose money in them...)

The stock market and commodity markets are not zero-sum, and there is a reason.

Some people have a "lost decade" in American stocks, as the S&P 500 has not progressed past its previous high in several years. Does this mean that no one has gained anything from the time they spent holding shares of companies in 10 years? Of course, one could argue that the traders profited, but they didn't hold onto their shares for that whole time. What about the investors?

Consider a random company, such as First Energy, an electric utility. In October of 2001, its stock was at about $36/share. In March of 2011, its stock was again around $36/share. Of course, looking at the chart, shareholders may have been upset they didn't sell it for $80/share, but did they literally gain nothing for being a loyal shareholder? Of course not. During that time, First Energy paid $17.67 in dividends, which would be a 49% gain on the $36/share. If reinvested, that number would be even higher. Of course, 49% over 10 years isn't a great return; but is it zero?

The nonzero aspect of the stock market comes from the fact that not only does money come in from people buying shares back and forth, but also from legitimate business operations and profits, in the form of dividends. These increase the total pool every year, and are technically the reason people invest in stocks in the first place - to get some share on their profits.

 

[willymo]

Charts and indicators don't move price. Price moves the charts and indicators.

 

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[enlightening]

- In a liquid market, the price at any moment is determined by the last two people who decided they want to make a trade right now
- The longer something goes away from the average, the more likely it is to reverse
- The actions taken by the most people at the same time are self-defeating and money-losing
- Something that doesn't produce cash for the owner is only worth what the next buyer will pay for it
- Trading between owners in a market will decrease the total profits that all owners collectively make in that market by the amount of the fees. Only cash flows directly to the owners, or acquiring/selling outside of that market, can increase the total profit of all owners.

 

[guilhermekramer]

Not exactly rules, but Mark Cuban wrote some harsh truths about the stock market the other day in his blog.


My favorite part is where he distills what "fundamentals" are all about:

Stocks go up and down depending on supply and demand. If a stock is
marketed well enough to create more demand from buyers than there are sellers, the stock will go up. What about
fundamentals? Fundamentals is a word invented by sellers to find buyers.

Price-earnings ratios, price-sales, the present value of future cash flows, pick one. Fundamentals are merely
metrics created to help stockbrokers sell stocks, and to give buyers reassurance when buying stocks. Even how
profits are calculated is manipulated to give confidence to buyers.

I get asked every day to invest in private companies. I always ask the same couple questions. How soon till I
get my money back, and how much cash can I make from the investment? I never ask what the PE ratio will be, what
the Price to Sales ratio will be. Most private investors are the same way. Heck, in Junior Achievement we were
taught to return money to our investors