Trading Against the Elephant

This blog post came from a discussion in my facebook trading group. It was originally shared by Vivek Ravindra Hardikar. He read this story in the starting part of a fine book on Pair Trading written by Ganapathy Vidyamurthy.
Great Story, Great Book..

Here is the Story from that book.. 

****Once upon a time, there were six blind men. The blind men wished to know what an elephant looked like. They took a trip to the forest and with the help of their guide found a tame elephant. The first blind man walked into the broadside of the elephant and bumped his head. He declared that the elephant was like a wall. The second one grabbed the elephant’s tusk and said it felt like a spear. The next blind man felt the trunk of the elephant and was sure that elephants were similar to snakes. The fourth blind man hugged the elephant’s leg and declared the elephant was like a tree. The next one caught the ear and said this is definitely like a fan. The last blind man felt the tail and said this sure feels like a rope. Thus the six blind men all perceived one aspect of the elephant and were each right in their own way, but none of them knew what the whole elephant really looked like.

Oftentimes, the market poses itself as the elephant. There are people who say that predicting the market is like predicting the weather, because you can do well in the short term, but where the market will be in the long run is anybody’s guess. We have also heard from others that predicting the market short term is a sure way to burn your fingers. “Invest for the long haul” is their mantra. Some will assert that the markets are efficient, and yet some others would tell you that it is possible to make extraordinary returns. While some swear by technical analysis, there are some others, the so-called fundamentalists, who staunchly claim it to be a voodoo science. Multiple valuation models for equities like the dividend discount model, relative valuation models, and the Merton model (treating equity as an option on firm value) all exist side by side, each being relevant at different times for different stocks. Deep theories from various disciplines like physics, statistics, control theory, graph theory, game theory, signal processing, probability, and geometry have all been applied to explain different aspects of market behavior. It seems as if the market is willing to accommodate a wide range of sometimes opposing belief systems. If we are to make any sense of this smorgasbord of opinions on the market, we would be well advised to draw comfort from the story of the six blind men and the elephant. Under these circumstances, if the reader goes away with a few more perspectives on the market elephant, the author would consider his job well done****

In the markets different methods are rewarded at different times. A trend follower looks like a genius in a trending market and foolish in a range bound market. A day trader may look sharp in a volatile market and fundamental value investors can make money when value picks are in favor. It is not the method that makes the money in the long term it is the discipline to stick with a consistent trading plan, manage your risk, and persevere through the hard times when you are losing. I know many different types of long term successful traders that trade completely different methods but I know no successful trader that is undisciplined or lazy.