It must never be forgotten that the stock market is a game of PICKING THE WINNER OF THE BEAUTY PAGEANT. It is not about picking your own choice to win. It is about predicting who the judges will pick. If you know the judges are racist scum, there is absolutely no point in picking the pre-eminently superior girl with the wrong skin tone. Your job is to know who the judges like, before they make it public.

You may be thinking that this analogy contradicts the Efficient Market Hypothesis. But the theory does NOT mean that the market is always correctly valued. When academics discuss efficient markets, they almost always mean informational efficiency – stock prices fully reflect all relevant information (data). But markets also reflect all the participants’ sentiment. That sentiment determines how the data is projected into future expectations.

Informational efficiency does not say that prices are fundamentally correct. If even a substantial fraction of investors make the same error, the consensus can diverge significantly from true value. In fact, finding a ‘true’ value is not the objective of most investors. Most are concerned with how (under the influence of mass psychology) the market will evaluate the investment three months or a year hence. (paraphrase from reference)

People with a public voice can change a market’s opinion and make money more easily than the Retail Investor. These people are in the locker room with the judges. They have both the power to persuade the judges and the power to report back to you, falsely, what the judges are thinking. The Retail Investor must ask himself “Is the public voice honest – or skewing the bets to better his own odds? All people with a public voice have conflicts of interest vis-a-vis the retail investor. Consider what they might be before you listen.

Being ‘correct’ about a company’s value won’t make you money in the stockmarket: not unless and until the market sees the error of its ways and is persuaded to agree with you. The market can remain irrational longer than you can remain solvent. It’s liquidity is a wonderful attribute. Don’t fight it.

When you identify a metric that the market is ignoring (e.g. high options costs) there is no point in short-selling the stock. The situation probably will not change in the forseeable future. All you can do is ignore the stock, and move on to another. Similarly, some stocks’ prices are controled by technical traders. No matter what you think of technical analysis, don’t assume your fundamental analysis will triumph any time soon.

The game plan is to be correct without being TOO correct.

  • Think for yourself but listen to the market.
  • Don’t take positions that are too extreme.
  • Understand the valuation metrics being used by others … and their problems.
  • Try to predict when that metric will eventually change to agree with yours.



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