Tuesday, September 06, 2005

Market Timing

Here is an interesting interplay between economic factors and social factors - which can be explained using systems thinking.

Sometimes, stock market values can undergo a “market correction” – finding a new price level. The adjustment mechanism can be regarded as "feedback loops with very long delays" - as we described in a previous post on Company Value.

The timing of these market corrections (as well as decision-making generally) can be explained in terms of Lacan's theory of Logical Time. In trading stocks, the most profitable time to make a decision is just before everyone else does. (This is the reason why contrarian investing - doing the opposite of everyone else - sometimes works.)

Stock price movements often have their own momentum – they continue to rise or fall, beyond reasonable correction – an undervalued company now becomes overvalued, and vice versa. This results in overshoot and oscillation.

There is a stock market saying: "Never try to catch a falling knife". When you see a stock price falling to unreasonably low levels, it may be tempting to buy and profit from a quick recovery. The trouble is that falling stocks have often got a lot further to fall.

[Update] See also Market Timing 2.

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