Yes, I just started this week’s commentary with lyrics from Guns N’ Roses. Don’t count out a future Vague Destination entitled “Welcome to the Jungle.” Both titles are very appropriate springboards for a conversation about financial markets.
One of the overarching themes of my investment philosophy is patience. In the investing game, patience means acting only when opportunities present themselves, and not one moment earlier. Practicing patience, all by itself, can give you a huge edge over other investors because the hardest thing for most people to do is nothing. It’s incredibly difficult for investors to grasp the idea that making a decision to do nothing is just as proactive as making a decision to change something. But as you’ll see, doing nothing must become a regular part of your process if you want to be a successful investor.
If I Can’t Have You Right Now, I Will Wait, Dear
As a starting point, I define an “opportunity” as a trade, long or short, where the Quantitative and Behavioral Gravities for a given market align with that market’s Fundamental Gravity.
The market’s Fundamental Gravity helps me quantify its economic conditions and how the central bank of that economy is responding to those conditions. Over the intermediate to long term, nothing impacts asset prices more than the Fundamental Gravity. That said, the other two gravities are critical to identifying trading opportunities. While the Fundamental Gravity tells me how a market should be trading, the Quantitative Gravity tells me how it is trading and the Behavioral Gravity tells me how investors perceive that market.
To earn excellent risk-adjusted returns, year in and year out, you must understand the Fundamental Gravity for a given market and trade in the direction of those fundamentals, when and only when the Quantitative and Behavioral Gravities align.
I monitor over two hundred markets globally across all four asset classes, and even in a universe that diverse, opportunities don’t present themselves every day just because financial exchanges are open for business.
However, experience tells me that if I exercise a little patience, opportunities will present themselves. Let me show you the importance of patience by evaluating the aspect of financial markets that garners the most attention from investors: price action.