Miss Congeniality movie poster
“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.
Photo credit: letterberry/Thinkstock
“In investing money, the amount of interest you want should depend on whether you want to eat well or sleep well.”
— J. Kenfield Morley, Some Things I Believe
Return is commensurate with risk. If anyone tells you that you can make a large return with small risk, zip your wallet.
Remembering our great dog, Puka.
When asked why he continued speculating, James R. Keene, a famous speculator, replied, “Why does a dog chase his thousandth rabbit? All life is a speculation. The spirit of speculation is born with men.”
— Bernard Baruch, Baruch: My Own Story
Be sure to understand that speculation differs from investment. Also know the difference between speculation and gambling.
Investing is for longer time horizons and has a generally lower risk for lower expected reward. Gambling involves blind risk-taking.
Speculation is about taking calculated risks to protect against future price fluctuations and profit from price movement.
Now in our 30th year, Options Hotline specializes in the art and science of sensible speculation.
Have a superb Sunday and good luck in your trading.
This one is apropos to our current deregulatory environment.
Be sure to understand the difference between investing and speculating…and the difference between speculating and gambling.
At Options Hotline, we’re all about Superleverage and the art and science of sensible speculation.
“Wall Street people learn nothing and forget everything.”
— Benjamin Graham
Benjamin Graham is known as the “father of value investing.” Two of his books merit inclusion in your library, Security Analysis (1934, written with David Dodd) and The Intelligent Investor (1949).
When asked about the accuracy, or lack thereof, of Wall Street forecasts, Graham reflected on his studies. His results indicated you had the choice of tossing a coin and taking the consensus of expert opinion.
As to why that was, he answered that everybody in Wall Street was so smart that their brilliance offset each other, that all the information they know was already reflected in the level of stock prices, and consequently whatever happens in the future represents what they don’t know.
Gain some knowledge each day and use it. It helps you stay a step ahead of the crowd.
Enjoy the rest of your weekend!