Further Than Expected

(Excerpts from "Taming The Lion" by Richard Farleigh (2005))

Whenever I see heightened emotions again among traders, I revisit some books for wisdom and perspective. Here are notes from a nice short book published before the last bust of the 2008/9 financial crisis, by an Australian trader and investor, Richard Farleigh, called "Taming The Lion".

The book draws upon 20+ years of Farleigh's experience as a student of the markets, investing in equities, options, forex, fixed income and venture capital, to share some essential lessons.

The following notes come from one of my favorite chapters, about "Price", Chapter 7.

I like chapter 7 as well as the beginning of the book where Farleigh's life story is recounted by a friend.

Farleigh’s backstory begins with tragedy and ends with triumph. He started in life with very little aside from abuse and abandonment. Thanks to the love of foster parents who adopted him and a teacher who saw a lot of potential in a very shy and underestimated child, he would eventually retire at age 34 as an investor in startups.

7.0 Prices go further than expected

Historically, all of the different asset classes have a habit of surprising people by how far they move, and by how long they keep moving. While the market also has plenty of periods when it goes nowhere, the small moves do not come as a surprise...The amazing thing is the price reaction when the fundamentals change.”

"The big moves provide fantastic opportunities to make money. It is necessary to avoid the temptation to jump on and off a good idea in just a week or a month, and to instead doggedly stay with the winners."

7.1 Forget the old price

"People often arbitrarily decide that a market is under or overvalued. In many cases, it is based on a feeling that the price has moved too far.

"...If a big move means that the market has made a mistake, is the old price or the new price the wrong one?"

7.2 People often misjudge probability and logic

"To start with it is human nature to seek clarity. No one likes to be wishy-washy, so we make up our minds about things. 'America is good', 'America is bad.' ....Being definitive about things has its benefits, but it can stop us thinking clearly about different possibilities and probabilities"

High profile events are overestimated

"High profile events can skew peoples' view of reality....We all focus on the lottery winner more than the thousands or millions of ticket buyers who quietly miss out."

Unusual events do happen

"Unlikely events do happen... it is human nature to look for another cause apart from what's obvious. This creates conspiracy theories...."

Traps for investors

"...A common pitfall is to overestimate the strategies we see employed by successful investors”

Hindsight and over-confidence

"Another danger is, that in retrospect the financial markets can seem quite simple....We forget that at the time, most of us were very uncertain about what was going to happen. That's why so few people made money from these 'obvious' price moves.”

"For this reason, I try to keep an open mind, even when I am asked for my views on the markets."

There are more nuggets in this book but these simple concepts are among the hardest to master.

I'll close with the following:

"The simpler the design of the model, the more powerful....Because markets are a product of human behavior, it is unlikely that they follow an unknown but precise pattern...."