Newsletter – July / August 2010 – Big Game Hunting

Big Game Hunting

In ancient times our ancestors hunted to survive. They learned to ‘stalk’ animals that lived very different lives than we human beings. Human hunters stalked their prey by trying to imagine what their prey’s life would be like: then they would know how to successfully track them. In modern times successful investors need to learn the same skills. In order for us to hunt in today’s financial market jungles, we need to stalk the activities of our prey: the ones from whom we make our profits.

Ancient human hunters’ hearts beat at about 65 beats per minute (BPM.) An elephant’s heart beats at about 30 BPM. Lemmings’ hearts beat at about 400 BPM. How did those primitive human beings stalk both little animals and big animals when the paces of their lives were so fundamentally different? Can modern investors hunt successfully in the financial markets if we don’t understand the paces of the different investors from whom we hunt for profits?

Consider, for example, those multi-billion dollar pension funds who like to buy investments and hold them for years. They might have liked to buy their massive stock market positions in the late 1970s and quietly reduce those positions in the first decade of the 2000s. These investment pachyderms move slowly and deliberately – and when they move, they move BIG. And they move in herds. How does one hunt a herd?

Then there are the jackals: the thousands of day traders buying and selling stocks and futures all day long. Their basic pattern is to take an opening position in the morning and to close out their trades in the afternoon. For these in-and-out traders, carrying an investment overnight represents higher risk than they are willing to take. They are in quickly and out quickly, operating at an entirely different time horizon than the herd.