Why Does Magic Work?

To put simply: a good magician provides a scenario where the viewer can project his/her own frame of reality onto what has occurred. Magicians don’t blatantly infer things, they let the audience do that. They know how the human mind works; we are wired to make connections where none may exist. This is a “bug” in our natural operating system--we are efficient at filling in mental gaps of information. Here is a video link to a Penn and Teller clip emphasizing our predisposition to “fill the gaps”--just amazing entertainers.

Notice this comic strip from Scott Adams, creator of Dilbert.

Scott Adams is openly methodical about his opaque cartooning techniques in his book, How to Fail at Almost Everything and Still Win Big. He creates the image of the lead character to be simple. This allows the reader to project him/herself as Dilbert. He also makes the backgrounds to his comics a plain gradient to provide optimal “imagination”. As a trained hypnotist in his early years, Adams learned that humans have the natural propensity to project.

It's important for us to not project in the often opaque markets, especially the stock market. One should have a procedure for risk management to prevent unnecessary loss of capital based on a false premise. If you have a $10,000 account, does it make sense to put $5K into Apple because it's Apple and the other $5K into Google because it's Google? It’s easy to draw market conclusions that pan out to be worthless--it's in our nature. It's ok to use intuition to enter the market. Many traders have great success using their own discretion, but the true edge is in the risk management system; the way you enter the market is far less important than when you exit. And your initial position sizing based on your risk parameters and assessment of your market should be well thought out.  

Clinging to an unchallenged belief is the downfall for most investors. One may get absurdly, freakishly lucky with a buy-and-hold strategy that finishes at a massive market peak right before he/she retires, but what if the market corrects 90% the year before retirement?

Instead of accepting magic as magic, realize that magicians dedicate an unbelievable amount of time into exploiting people's natural psychological deficiencies. 

Instead of confusing Warren Buffett's strategy as buy-and-hold, pop the hood of the car and see whats really happening inside.     

Ultimately, you can only win in the markets if someone else loses on the other end. When you're a buyer, you must find a seller, when you're a seller, you must find a buyer. This transcends all markets and all timeframes. Markets are a zero-sum game.