STREET DOGS

From Morgan Housel at Collaborative Fund: The problem is that there’s one field in investment markets.

Think about the day trader in 1999 whose marginal trade helped push Yahoo! stock to $430 a share. This trade made sense, because he thought shares would probably go to $431 by closing, when he’d sell. Now think of the store worker who was saving for her retirement 40 years away. If she wanted to invest in Yahoo! that day, $430 per share is the price she has to pay, because there’s only one market price. And it’s a price that, if taken, materially reduced her chance of retiring.

These two people rarely even know that each other exists. They’re playing different games, but they’re on the same field. When their paths collide, someone gets hurt. Bubbles do damage when long-term investors mistakenly take their cues from short-term traders.

It’s hard to grasp that other investors have different goals than we do, because an anchor of psychology is not realising that rational people can see the world through a different lens than your own. When momentum entices short-term investors, and shortterm investors dominate market pricing and activity, the long-term investor is at risk of seeing rising prices as a signal of long-term worth. Rising prices persuade all investors in ways the best marketers envy. They are a drug that can turn value-conscious investors into dewy-eyed optimists, detached from their own reality by the actions of someone playing a different game.

Few things matter more in investing than understanding your own time horizon and not being persuaded by the price actions caused by people with different time horizons. The key to success is not participating in a game other than the one you intended to play.