Economics is About the Common People

One of the things I love about economics is that it is so broad and all encompassing.  Things that appear to be seemingly unrelated actually are. The more books I read, the more investment vehicles I use, the longer I trade in the stock market, the more I realized how the mindset of a seemingly insignificant average joe could drastically alter a nation's GDP.  How can the whim of an average person have such far reaching effects you might ask?



Well, in my opinion, economics isn't about the numbers, it's about the people who create them. It's about their perceptions, their mood, and the choices they make as a whole society.  We often forget that it is people who create the markets.  They are the ones who set the prices of everything in the world from complicated financial instruments to everyday things such as gas, milk, clothes, etc...  So who exactly are these people?  It's us!  The masses.  Yet for some reason, we often forget that. We are not these complicated, mysterious beings that react to the environment in a unpredictable manner.  Quite the contrary.  So if people create the market, why do we often view the stock market as this mysterious beast that follows no rules and appears to move seemingly in random fashion?

I believe it's because the stock market is an ever changing pot of ideas and perceptions of the people who are investing in it.  Thanks to technology, the speed of a trade moves at the speed of light all over the world.  It is the people from many different countries, not just America, who are making the trade decisions thus it is the majority mood or perception that governs where the markets go.

I think that because we are individuals, we each have our own biases as to how to look at the market and what we think is important.  We all like to think we are objective, but the truth is we are not. We only believe what we want to believe.  Our cultures, our values, how we perceive the world vary not only from person to person but also from country to country.

The tricky thing about investing is you have to take time into account.  Sometimes I think people appear to be right all the time only because enough time has not passed for us to see that eventually they will be wrong!  Sort of like the rise and fall of a tide.   So in my opinion, where the market is going and what the hottest next new investment is, is not as important as determining the mood of society and what they believe in.

Let's take for example, if you invested in widgets because you know that widgets are rare and will be in high demand in the future because of reasons X,Y, and Z.  You know you're right and you have all the facts to support your statements, but the problem is all this knowledge you have is all for naught if the majority of the investors don't listen or don't care enough to act on it.  Thus,  there is a high chance that you will never be rich if the rest of the investing masses do not come to the same conclusion before you're dead!

The time of when you buy and when you sell will be governed by the mood and perceptions of the masses and there is nothing numerical or factual about how people feel.  So how can you tell how people feel and what the majority mood is? By talking to people. Lots of people from many places and backgrounds.  Not just the same people over and over again, but always increasing your social circle with people from all kinds of backgrounds.   This is effectively the same thing as increasing your sample size if you were to take a scientific research approach to investing.  The more people you talk to from a myriad of backgrounds, the more likely you are to see the bigger and more accurate picture of the world.  Again, what is actually true is not as important as knowing what the majority of the people believe in.