Knowing your place in the food chain

Something we allude to regularly on this site is the importance of objectivity in gambling. In terms of sharemarket investing, one of the most important areas of objectivity lies in knowing your own limitations.

It can be helpful to see the sharemarket in terms of an ocean.

At the top of the food chain are the Whales, massive investors who can move the market singlehandedly. These comprise multi-millionaire or billionaire individuals who sometimes become corporate raiders, the Kerry Packers, Sir Ron Brierleys, Robert Champion de Crespignys, Joseph Gutnicks and so forth. It also includes the giant funds such as AMP that invest billions of dollars worth of superannuation and other money. Whales are not always fast, because of their size, and often leave a trail, but you cannot fight against them. If AMP is selling, the price is probably not heading north. If Packer is selling, you will probably not even know why your shares are falling until it is all over.

At the next level are Sharks. These are millionaire investors usually very close to the action, often with inside information. In many cases they are company directors or their associates and they effectively control the prices of many lesser stocks. Whales cannot invest in any but the very large stocks, as the liquidity of second line stocks is insufficient for the kind of stakes that are worthwhile for a Whale. A Kerry Packer is not interested in investing a mere million or two, no matter how attractive the percentage return, it's a couple of nights blackjack or a weekend at the races for big Kerry, and larger sums would distort the market in many stocks and drive the price up so high as to make the move counter productive. Sharks can move in however and make a nice meal of the smaller fish.

Attached to the Sharks are the equivalent of the Remora Sucker Fish, smaller investors who know a Shark and use their knowledge to advantage.

Experienced investors of lower net worth are like various types of fish. Some can be quite large like Barracuda, whilst others are more like Whiting, flitting here and there in search of a small, quick, profit.

Finally there are the inexperienced investors and mug punters. They would be ideally characterised as wood-ducks, quacking loudly about their latest 'tip', except that wood-ducks do not inhabit the ocean. For the purpose of our analogy let us call them Plankton.

Plankton usually don't care about market capitalisation, or indeed any 'fundamental' information about a stock, and trade with various theories about why they are going to win. Some might believe everyone wins in the sharemarket, others just let their broker, a Shark, make all the decisions for them, others are there because they like the product of a particular company and think that this somehow means the stock is necessarily good value at the price they paid. Many of them are highly intelligent or successful people, but know nothing about the potentially dangerous ocean that they have dipped their toes in.

NEXT ... Why does knowing your place in the food chain matter?



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