Tuesday, August 30, 2016

What are investors in the dynamics of the economy?

I have been thinking about how investors interplay with the economy. While the facile view is that investors are the source or money, which isn't false, and they take profits, which is true, they also provide another role.

Investors, including banks, provide a forcing function "of a kind" to the market conditions of the day. Of course people have called it market forces for many years. In some ways that forcing function can provide two effects with specific behaviour apart from random action that is assumed. I will try to establish what "of a kind" means.

The first is reward and punishment for good / bad management of the company by drastic forcing of stock prices, futures etc. This everyone understands.

The second is as a resistance function for and against the current stock price trend. In general investors buy when stocks are undervalued, and sell when they net a profit. This is another one that is probably covered to death in the literature.

What isn't covered is perhaps the application of artificial intelligence to the problem. With principal component analysis, one could understand "exactly" how individual forcing functions operated. If one had that, then you have a stochastic prediction of future action when those same actors held a stock for example.

Whether by algorithm or by human behaviour, they will share a common signature. For example, one might peg a 10 or 15% profit and then always sell.  That makes it, with enough analysis and data, easier to forecast movement. Not guaranteed, not assured, but trends would improve your chances of making the statistically correct decision when faced with buy, hold, or sell.

Note, I am not a financial planner of any kind, which means I am not obligated to lie to you about investing in any way. My evidence for investment knowledge is a 20 year track record of stock investing and turning a profit, not great but consistently positive.