Sunday, November 11, 2007

Thoughts on Trading and Creativity

Researcher Mihalyi Csikszentmihalyi describes creativity as an integration of ten seemingly opposing qualities. For example, the creative person exhibits great seriousness and intensity of work, but also the capacity to play with ideas and draw upon fantasy. Well-known researcher Robert Sternberg has compared the creative individual to an investor who buys low (entertains ideas when they are unpopular) and sells high. A key facet of creativity, from this vantage point, is novelty. The creative person thinks and performs in novel and productive ways.

We commonly hear that it is impossible to make money in the markets by following the herd. But the flip side of that assertion is that the successful trader and portfolio manager needs a degree of creativity: an ability to see markets in new ways, perceiving fresh relationships. A creative mode I've noticed among successful traders is a deep look at assumptions that the majority accepts and that might not be true or might already be fully priced into the market. The ability to question fundamental assumptions requires independence of thought, a willingness to be out of step with the status quo.

In 2002-2003, we saw the highest levels of bearish sentiment among investors polled by AAII in a decade, as half or more of those polled were bearish. Since August, 2006, we've been seeing an increasing number of 50+% bearish readings, including this past week. Those negative readings have marked good buying opportunities. That doesn't mean we can't go lower in the markets--the majority isn't always wrong--but it does call for creative pause. There are *so* many reasons to be bearish here; they fill the weekend financial media. So many reasons, indeed, that it makes me keep an eye open for opportunity, even as I protect capital.

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2 comments:

F-Trader said...

"Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited."

~George Soros

Anatrader said...

Brett

On the subject of creativity, a case in point is Richard Dennis of the Turtles fame. In the 1980s, he was already buying in strength and selling in weakness, a very sophisticated insight. It is counter-intuitive to buying low and selling high.

As Michael Mauboussin said:
Great traders conceptualize problems differently than other investors. These investors don't succeed by accessing better information: they succeed by using the information differently than others.

This is how Dennis has earned himself the Prince of the Pit.