This post was originally made on June 23, 2006 on a former blog of mine.

All hail the yin and yang of markets. When you’ve read as many investing books as I have and when you pay as close attention to the markets as I do you notice that all the market combatants need each other to survive. There are countless numbers of purveyors of information out there who want to you believe that their way is the best, hands down. And, by God, I bet they can back it up with some serious backwards looking data.

I thrive on the study of the actual nuts and bolts of markets. I love to see how and why they work the way they do. I create a hypothesis, test it, and move on. The one thing you realize when you do this however is just how reliant upon each other we are. In order for a market to function efficiently (or nearly efficiently) we need to have a diversity of opinion. If everyone believed in the same thing and acted in the same manner then there would be no market. We would just be a world of imitators taking each other’s word for it.

A diversity of opinion is necessary to have buying and selling and a relatively efficient establishment of the price for a given security. When everyone’s opinion suddenly becomes congruent we have a massive buying or selling (aka bubble if that’s what you want to call it). At that point the price may not reflect any real analysis of the underlying expected value of the security. It simply reflects the price that everyone else “thinks” is correct given the fact that everyone has begun to want (or not want) the same thing.

I wanted to bring this point up today to remind you that you need a bit of a sanity check when you are evaluating investing techniques, newsletters subscriptions, or the latest pop guru investing seminar. Popularity breeds imitation. Imitation breeds excess. Excess breeds improper valuation of securities…and THAT is what makes profit opportunities. I am sure most of you have heard of Jim Cramer by now, the popular host of Mad Money on CNBC. Well if you get enough people believing in what you say and doing what you say do then well…we have over or under valuation. There have been scores of traders making money taking the opposite side of some of Cramer’s most popular picks.

Investing is a process. Sometimes the process works out and sometimes it doesn’t. If the magnitude of your victories far out surpasses the magnitude of your losses then no one should care if you lose 90% of the time and win 10%. It’s possible to be victorious in that scenario.

Technicians need fundamentalists, fundamentalists need technicians. Value investors and growth investors need each other. Buy-and-holders need traders. Traders need long-term holders. Large cap gurus need small cap gurus. Every type of strategy needs an opposing force to take the opposite side of its trade. It’s yin and yang. I believe one can be successful using a number of different strategies. What matters is not that your strategy is better or worse than someone else’s. What matters is that you HAVE a strategy, follow a process, know the limits of your strategy, and be flexible and disciplined. Investing is hard enough without the added burden of trying to prove that what you are doing is the only right way to go about things. Leave the ego at home and be thankful that someone else thinks differently than you lest you have no one to take your trade.

“The heart of a human being is no different from the soul of heaven and earth. In your practice always keep in your thoughts the interaction of heaven and earth, water and fire, yin and yang.” -Morihei Ueshiba

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