There’s an old Wall Street saying that in the short term, stock markets are voting machines and in the long term, they’re weighing machines.

Experience shows this to be very true, extremely important, and almost completely ignored.

By way of example, let’s look at the current Bitcoin rally. I recently tweeted that cryptos seem to be rising with gold more often this year.

As a quick aside, I do not see gold and cryptos as much alike at all; the #dropgold campaign strikes me as being a wrong-headed PR stunt.

But that’s not what I want to discuss today. What really struck me was someone’s response:

“Gotta look at this as a seasonal trade. No different than trading anything else. Value is not needed in trading, only sentiment.”

In other words, Mr. Market is voting for Bitcoin again, and it pays to go with the popular vote here.

The person who wrote the comment may be entirely correct, given his context of trading, not longer-term investment. If the pattern I commented about holds, it could bring great news for cryptos this summer. But that could also happen if I’m wrong, just because a visible minority creates momentum for Bitcoin and the investor herd follows.

This is worth a closer look.

The short-term “voting” function of the market does work. It’s what lifts “flavor of the day” stocks far above any objective valuation. The problem with this, as my reader points out, is that it’s completely divorced from value. This makes it hard to make any rational decisions on when to enter a trade, what constitutes a reasonable gain, and when to exit.

Timing the exit is particularly problematic. All market timing is inherently dangerous, but market manias tend to have such strong upward momentum, they carry traders along until the flavor of the day bubble pops. When it does, it’s so abrupt, it catches traders by surprise. And since most people see the future through the lens of recent experience—which is unsustainably positive in a manic market—they don’t believe the bubble has popped until it’s far too late.

So yes, it might be possible to make money on crypto momentum in the weeks ahead. If you do, hats off to you. For myself, since I’m not a day trader and I don’t see how anyone could possibly be sure the day buy isn’t the top of the rally, I’m not interested.

I have absolutely no fear of missing out; I’d greatly prefer missing out to a blind gamble on unknowable odds.

The good news, for the rational speculator, is that this same short-term voting function of the market can create terrific buying opportunities. That happens when the popular vote is so negative, the momentum takes prices well below any objective valuation.

Of course, every promoter pushing some dog of a stock will tell you it’s oversold and a wonderful opportunity. But there are times when it’s measurably true, and the odds greatly favor a price recovery. For example, there are times when mineral exploration companies with great management trade for less than cash. Today, there are many with significant gold, copper, and other discoveries in hand, trading as though they had nothing at all. There are even profitable producers on the deep-discount rack—in stark contrast to massively money-losing market darlings on Wall Street trading at extremely high multiples of any reasonable valuation.

The problem with taking advantage of Mr. Market’s short-sighted voting like this is that the payday depends on the longer-term “weighing” function. This is actually not a problem for disciplined speculators, as they have the confidence and patience to wait to be right. But it is a serious problem for emotional investors who confuse price with value.

Back on the bright side, when something grossly oversold rebounds, its exceptional performance draws the attention of the voters in the market. This results in positive momentum that often overshoots to the upside, making for exceptionally high returns. But again, one must have the discipline to take profits when one has them. Greed is just as dangerous to the rational speculator as fear.

Self awareness is vital here. It may sound harsh, but the truth is that people prone to panic when prices drop for no good reason—or cling to winners far longer than makes any sense—should probably not even try this sort of speculation. The fact that something valuable is underpriced is no guarantee that prices won’t drop even lower before they head higher. They eventually must, but “inevitable” is not the same as “imminent.” And nothing goes up forever. No one can time markets perfectly.

Fortunately, the market’s weighing function really does work—for the patient.

The only question is whether one has the discipline to make it work for oneself.

That’s my take,

Wednesday, May 15, 3:59pm, EDT, 2019