Last night I spent a lot of time writing an email to my mom. In it my goal was, as my subject line said: My goal in this email is to explain to you what I mean when I say something like "the price doesn't matter;" or the functional equivalent, "when you buy doesn't matter."

There is a great deal of information I have both intentionally and unintentionally omitted, I am sure. And of course not everything I have said is true because, in my opinion, there is not exactly a right answer.

Anyway, I hope that those who are new to trading and investing will find this post as helpful as I have found this forum and many others to be.

(underlined words are links in my email, I doubt the link function will work; but for those who are interested / unfamiliar with terms they were almost all just googled, and then, often linked to wikipedia)

Anyway, here is the body of the email, enjoy:

I am going to establish certain things as facts. Then I will make logical inductions within that context:

1.) First fact, while markets existed before Adam Smith's time, he is the first person to abstract their usefulness into anything resembling a good theory. One of Smith's theories is that markets are a self correcting system of resource allocation. He called this mechanism, the invisible hand. The internal discipline the market imposed upon itself had certain necessary conditions. One of those conditions was a constant money supply.

[When an asset get's overbid that selling opportunity becomes just a significantly enough risk : reward tradeoff that that mobile capital we have (especially these days with the internet...we trade and live in a global casino of hot money) flows into that opportunity and corrects the market down. This impulse is then met with "a reactive wave of buying" by the people that are of the opinion that the asset is under valued. Than the third wave is an impulsive response to that selling (and is by Elliot Wave theory not the shortest wave of the 3 impluse waves). The fourth wave is a reaction to that impluse. And, the firth wave is the peak or trough of that market (depending on whether it was a bull or a bear market to begin with).]


2.) Another fact, we do not have a constant money supply. It follows from this fact that the discipline of the invisible hand is distorted.

In this case, the status quo has been maintained (and even expanded). Essentially, the Fed has propped up the stock market and the rest of the world (including our own local / national crop markets) is in the process of responding to this new input to that system (the world's financial and monetary system). This system is based upon our (read U.S. Gov) debt. It is the asset that backs everyone's (read every country ever) currency.

There is not a single currency in the entire world that is backed by anything tangible.

The entire system is a house of cards with US DEBT as the foundation. (What Warren Buffet was referring to when he called derivatives "weapons of mass destruction" was the destruction of this order or organization.)


3.) This is how markets function: they are the collective (think how a bee hive functions) representation of EVERYONE'S RESPONSE TO STIMULI (new fundamentals...an uncertain future). In markets supply and demand perform a never ending dance to the tune of PRICE'S MUSIC (or you can think of it as price performing a never ending dance to supply and demand's music [this is the equivalent of "which came first, the chicken or the egg?").

Again that balance that occurs by way of the invisible hand is disrupted when the money supply is altered. The equivalent, given the above analogy is changing the tempo of the music: this necessitates a change in the dance.

4.) The future is by definition uncertain. Every new stimulus has an ensuing series of impulse's and reactions. But at all times there is a supposed amount of equal disagreement between price and value. This is the bid ask spread. I am being intentionally redundant: for the third time: this balance is destroyed by a non constant money supply.

5.) Because markets are a reflection of man: they are by definition both perfect and imperfect at the same time. This is because at any given instant the "fair price" (some people incorrectly consider this the equilibrium price) is what ever the market says it is (this is a trader's perspective).

But, as Albert Einstein has taught us, there is more than one perspective. (A good way of considering this, beyond over / under bid, is person A's investment horizon as opposed to person B's.)

If that is the perfect side than the imperfect side is the side that has to do with an uncertain future. But, of all the uncertainty that is the future we will only live one reality. Each of those possible realities represents a point on a statistical distribution.

What people are bad at doing is guessing where their particular reality (one that we all share) falls relative to the mean (if you will). If you buy based upon cycles, trends, or fundamentals and properly dollar cost average you will account for this variance.

6.) And therefore, this is why IT DOES NOT MATTER (in a certain sense) when you buy or at what price. Because the system is, by definition a partially imperfect system of allocating resources. So long as you are appropriately matched, given your investment horizon, you are doing the right thing.

Opportunity Cost then becomes the arbiter of your investment allocation. Certain cycles reach particular inflection points at various instances in time throughout a given sample. For now, things like oil, corn, wheat, gold and silver, are reaching theirs. Next I think we will see real estate (perhaps arable land) as the vague trend of the day. And then, perhaps the equities and bonds of yore would make a comeback. But, I think we are at such a structural tipping point with the end of the Keynesian Experiment that in the least bonds and equities will be radically transformed.