Real Estate Investor Magazine South Africa March 2015 | Page 62

FOREX

Do not fight

the tide
BY JAMES PAYNTER

W

e have heard this expression before, and
no doubt have experienced both the joy of
simply being carried by the tide, and the
battle of fighting the tide. These can be good lessons to
learn when understanding financial markets, the forces
that move them and their ever-restless nature.
In fact, there is lots in common between the sea and
the market. A cursory glance at the sea will not pick
up much, except that it never sleeps, and is constantly
changing. Observe it over a period of time and you will
see that it has cycles and moods, actions and reactions
within its apparent random activity.
So it is with the markets too – the more we observe
them, the more we see patterns and cycles to these
seemingly random moves, and various degrees of trends
(actions and reactions) superimposed on each other.
Of primary importance is the major trend in any
market (one spanning several years), which can be
represented by the tides of the ocean – the underlying
trend caused by the major pulling forces of the sun and
moon.
Remember how as a kid, you built that beautiful
sand castle well away from the sea edge, only to see the

waves steadily getting closer and closer, and no matter
how much you try and protect your castle, eventually
the waves flatten it, and you need to start all over again
– further up the beach?
The tide – the underlying force and cycle of the
ocean – catches us out time and time again. Why?
When we look at where the sea is now, and make our
plans around the fact that the status quo will remain –
instead of looking at what the trend is (rising or falling
tide) and the historical limits of these trend cycles
(low and high water marks), and thus be able to make
informed and intelligent decisions.
We often make decisions based on where the market
is right now, without any concern as to what the trend
is, or what stage it is in. Or worse still, we extrapolate
the current market trend indefinitely into the future
(as crazy as expecting an ever-rising tide), instead of
understanding the direction of the current trend, and
how far the market is expected to go before reversing –
based on historical trends.
And the result is disaster. Look no further than
the Swiss National Bank for an example – when they
decided back in 2011 to build a sand castle to protect
the Swiss Franc from dropping below 1.20 Francs to
the Euro.
The tide (primary trend) was against them, but they
thought their sand castle will hold up.
Which it did – but like sandcastles, it was only for a
while until the enforcements gave in, and the sandcastle
was swamped by the underlying tide. Eventually the
tide won – as it always was going to.
This must be a lesson for all Central Bankers and for
investors alike – do not ever fight the tide.

RESOURCES
Dynamic Outcomes
62

March 2015 SA Real Estate Investor

www.reimag.co.za