Chapter 15. Tracking the Trailblazers

 

I start where the last man left off.

 
 --—THOMAS EDISON

Every trade has a buyer and a seller. One person is happy to be the new owner of an asset that may appreciate in value, the other is happy to receive the cash. And they can both be right, depending on their individual goals, needs, and investment philosophies.

Anytime you trade, it's good practice to know why you're making a particular move and to consider why another smart, perceptive person is doing the exact opposite. Understanding the other side of the trade helps investors develop a healthy regard for opposing views.

This chapter will explain how traders can find out who is buying and selling and can make educated guesses about the reasons behind the trades. We'll discuss the pressures and incentives felt by different investor groups, and explain why their trades may point to opportunities for other market participants.

A Random Walk

In his famous book A Random Walk Down Wall Street (Norton, 1973), Burton Malkiel writes that, if one thousand people flip a coin ten times, mathematics suggest that one person would land heads each time. Not understanding the math, some would hail this person as an expert coin flipper. Malkiel makes the case for index investing by arguing that on average, active money managers cannot beat the market.

He has a point, of course. But a few investors post market-beating returns over time. That necessarily short list includes

  • Warren Buffett: Investors who follow Buffett ...

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