27 May Oscar Wilde

“[C]ynic…a man who knows the price of everything but the value of nothing…a sentimentalist…is a man who sees an absurd value in everything and doesn’t know the market price of a single thing.”

A cynic doubts the value of everything; hence, he accepts values based on market prices. For example, he accepts that a Rolls Royce is worth $400K because that’s the price at which a willing buyer and seller agree, regardless of the relative merits of the car or its cost of production. A sentimentalist values everything based on personal feelings and thoughts without regard to the reality of prices determined in the marketplace. For example, a sentimentalist might be unwilling to sell for $10K a ring received as a gift and replaceable for $1K.

The cynic values things empirically, it is what it is whatever it is.  The sentimentalist values things based on concepts and theories that rarely comport with reality.

Successful traders are cynical. They tend to view the current price of something as the best predictor of its price in the immediate future. Thus, they buy and sell things based on price trends. As something is moving higher in price they buy more and more of it at higher and higher prices. When the price trend breaks, they liquidate their positions at whatever the prevailing prices. Thus they buy high and sell low.

Successful investors are sentimental. They believe the value of something is a function of its relative value and cost of production. That belief allows them to continue buying something as its price declines while whatever they purchased previously is worth less than they paid. In this way they buy on average at lower prices. Likewise, as prices rise they sell. Thus, they buy low and sell high.

Both traders and investors can be successful as long as they know who they are and adhere to their respective strategies.