Possibly my favorite trading book that I’ve ever read is this gem by G.C. Selden, first published in 1912. Selden was a trader on Wall Street who studied behavior and psychology to a greater extent than most in his day. The book is full of insights on not just trading and markets, but human psychology in general. Here’s the excerpt I wanted to share today:
It is a sort of automatic assumption of the human mind that present conditions will continue, and our whole scheme of life is necessarily based to a great degree on this assumption. When the price of wheat is high, farmers increase their acreage because wheat-growing pays better; when it is low they plant less. I remember talking with a potato-raiser who claimed that he had made a good deal of money by simply reversing the above custom. When potatoes were low he had planted liberally; when high he had cut down his acreage – because he reasoned that other farmers would do just the opposite.
Catch any trader and pin him down to it and he will readily admit that the logical moment for the highest prices is when the news is most bullish; yet you will find him buying stocks on this news after it comes out – if not at the moment, at any rate “on a reaction.”
The market is always a discounting mechanism. At many times an imperfect one, late to anticipate what eventually comes to pass, but that’s only known in hindsight. Trading based on today’s news is a mistake. Rather, it’s the future news that counts.
In that sense, corporate earnings guidance has received short shrift in the current market. Most companies offered tepid guidance in the Jan / Feb reporting season, and a few of the large caps who have already reported do not see robust business conditions for the rest of 2013. As we approach earnings season in April and May, keep in mind that the future matters more than the past, and filter the headlines with Selden’s wise words in your head.