Return to March Contents
Traders can get caught up in a scenario in which they believe the market will unfold. Becoming a neutral observer may be the best strategy.
"Scenario trading is trading in accordance with a dominant idea or story. It can be very dangerous -- or it can make you a fortune. The scenario acts as an integrating theme and it can dominate your thinking. That theme could be fundamental, technical or personal in nature, and it colors your thought processes. And it definitely affects your trading."
TRADING VS. INVESTING
I'm writing about scenario trading, not scenario investing. It's not as dangerous to invest in a scenario, because the scenario has time to develop. If the idea is good, time can bring it to fruition. On the other hand, buy and hold can also mean never having to admit you're wrong, so if the idea is flawed or something new develops, you could be left holding the proverbial bag because of your buy-and-hold strategy.In my opinion, the finest example of effective scenario investing is Warren Buffett. A reading of Robert G. Hagstrom's The Warren Buffett Way shows how Buffett looks for good undervalued companies, buys them and holds them. His thinking and research are solid. He is arguably the most successful investor of the century. He is not, however, a trader.
Usually,the scenario is fundamental in content. I watched a famous market participant lose large chunks of his fortune several times, betting heavily on the fundamentals he had thoroughly researched. Each time he knew he was right.
An example of a successful scenario trader is George Soros. George has high-quality information sources. He thinks clearly. According to Soros on Soros, when he is convinced that an economic scenario is about to unfold, he bets heavily on the concept. His successes are also heavily publicized. People say, "Ah, that's the way to trade!" However, he does -- and this is not as well known -- get immediately out on the first sign that he's wrong, on the first sign that the scenario is not playing out as he anticipated. He also takes some major hits based on trading this way.