I am currently reading Mandelbrot’s The (Mis)Behavior of Markets, and although a few years old, I came across two pages on his market “rules” that I felt inclined to share. Hopefully this will not be a repeat for some of you as I am a bit late to the game.
Mandelbrot’s Market Rules
Rule 1 – Markets are risky
“Extreme price swings are the norm in financial markets – not aberrations that can be ignored. Price movements do not follow the well-mannered bell curve assumed by modern finance; they follow a more violent curve that makes an investor’s ride much bumpier. A sound trading strategy or portfolio metric would build this cold, hard fact into its foundations…”
Rule 2 – Trouble runs in streaks
“Market turbulence tends to cluster. This is no surprise to an experienced trader. In financial dealing-rooms across the world, the first fifteen minutes of trading each morning are critically important; it is when experienced traders, staring at their screens, take the temperature of the market. They know that when a market opens choppily, it may well continue that way. they know that a wild Tuesday may well be followed by a a wilder Wednesday. And they also know that it is in those wildest moments – the rare but recurring crises of the financial world – that the biggest fortunes of Wall Street are made and lost….”
Rule 3 – Markets have a personality
“Prices are not driven solely by real-world events, news, and people. When investors, speculators, industrialists, and bankers come together in a real marketplace, a special, new kind of dynamic emerges – greater than, and different from, the sum of the parts. To use the economists’ terms: In substantial part, prices are determined by endogenous effects peculiar to the inner working of the markets themselves, rather than solely by the exogenous action of outside events. Moreover, this internal market mechanism is remarkably durable….”
Rule 4 – Markets mislead
“Patterns are the fool’s gold of financial markets. The power of chance suffices to create spurious patterns and pseudo-cycles that, for all the world, appear predictable and bunkable. But a financial market is especially prone to such statistical mirages…bubbles and crashes are inherent to markets. They are the inevitable consequence of human need to find patterns in the patternless.”
Rule 5 – Market time is relative
“There is what one may call a relativity of time in financial markets. Early on, but mostly when developing the multifractal model, I came to think of markets as operating on their own ‘trading time’ – quite distinct from the linear ‘clock time’ in which we normally think. This trading time speeds up the clock in periods of high volatility, and slows it down in periods of stability….”
Anyways, I’m still reading but its great so far so if you haven’t read it I recommend you pick it up.
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