“It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”
— John Maynard Keynes, General Theory of Employment, Interest and Money, 1936
Keynes used an analogy of a fictional beauty contest in a newspaper (picking the six most attractive faces out of a hundred and those selecting the most popular would be eligible for a prize) to describe the actions of rational market participants.
He believed people were pricing shares not based on what they think the value is, but rather on what they think everyone else thinks their value is, or what everybody else would predict the average appraisal of value to be.
While Keynes is referring to professional investors in the early 1900s, a century later, with a wealth of information at nearly all our fingertips, his example is applicable to investors in general. It seems we’re no longer investing in the best companies, and we’re not even investing in the companies that we think everyone else favors — we’re investing in the companies that we think everyone else thinks are the companies that everyone else likes.
If the market is like a beauty contest, as Keynes’ words suggest, then it’s no wonder this market has people shaking their heads.
Find the beauty in life today.