How The Zen Master Teaches Us To Be Better Traders
There was once a boy who lived in a little village. For his birthday, the boy’s father got him a horse. The village was astounded by the father’s generosity, and every time they saw the boy, were quick to remind him just how lucky he was, exclaiming “You are so lucky, boy!” Every one said so, except the old Zen Master, who simply said “We’ll see.”
Six months after getting his horse, the boy was out riding it when the horse reared up violently and threw him off its back, breaking the boy’s leg. The villagers were quick to shower him with sympathy, telling him “You are so unlucky!”
Again, everyone did so, except the old Zen Master, who simply said “We’ll see.”
Another six months went by, and the village was in upheaval. The country was going to war, and army officers were rounding up all able-bodied young men for conscription into the war effort. All the village’s young men were herded off, except the boy, still hobbling because his leg had yet to heal. The older villagers crowded around him smiling, saying “You’re so lucky you broke your leg, now you don’t have to go to war! ”
What do you think the Zen Master said?
At first glance you might wonder what the story has to do with markets – to see how it is pertinent, change what happens to the boy to what happens to market prices:
Market prices went up; everyone called the boy a genius investor for making money!
Market prices crashed; and everybody called the boy a fool for losing money.
Market prices went up again; and the boy started rebuilding his longs…
What do you think the Zen Master said?
The point here is to wait and see, not jump to conclusions, especially when it comes to short term price moves. Markets have a tendency to overreact both to the upside and downside, which makes extrapolating their implications too early a very dangerous habit.
Of course, the difficulty lies in identifying when a price move is an overreaction, and at what point the short term ceases to be the short term anymore. After all, in markets, the time comes where a trader must take action; no participant can simply wait and see forever.
However, knowing of the majority’s tendency to react in a knee-jerk fashion and trade on their emotions can provide a trader with entry/exit opportunities. The key is to stand outside of the emotional currents of markets and the financial media, and also to understand the broader system and what is happening within it.
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