Thursday, August 31, 2006

Principle #13 - Be Open To New Ideas

Investing involves making predictions (or guesses) about the future. Frequently we make our predictions by extrapolating the present and the past. Trend following or momentum investing is a clearly defined investment strategy that does exactly that - take a present price trend and use that trend to predict the future price.

However things change. Anchoring and near term bias are two factors which make investors slow to adapt to change or to accept either new ideas or that the market has changed - unless in a state of panic. Some trading systems recognise that change is inevitable and deal with it with stop loss orders or a trading rule that seeks to identify when a trend has ended. A recent example is the commodities boom. For a long time, twenty years, commodity prices were in a cyclical and apparently terminal state of decline. But things changed. Emerging markets grew and consumers in developed markets spent at an unprecedented pace. Increasing demand met a relatively inelastic supply with soaring prices as the result. Those who identified that there had been a fundamental change would have made a lot of money.

I have no idea what the future will bring, but it will be different. Being alert to change and to new ideas and ways of looking at and evaluating investments is a key attribute of a successful investor.

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