Post #6 What do you think is the average opinion of the average opinion?

Suppose you are given 100 photos and have to pick the best 5. Well that's easy, make it more interesting you say. Okay! You are given 100 photos and have to pick the best 5 AND thousands of other people will do the same - if you picked the most popular photos overall, you are eligible for a prize.

What do you do to win? The naive strategy is to pick photos which are most attractive to you. If you go a step further, you try to analyse what the majority perception of attractiveness a.k.a. "public opinion" is and you pick those. Go a step further, you now try to analyse what the average public opinion perception of the majority is going to be and you pick those. You can go on and on and in and into the rabbit hole.

Painting: Down the Rabbit hole, Salvador Dali

Keynes discussed this concept in his book General Theory of Employment, Interest and Money, 1936. 

Keynes believed that the stock market is similar. In the short term, people price assets not based on what they think an asset's fundamental value is, or even on what they think other market participants believe, but on what they think other people believe is the average opinion about the value of the asset. 

Stock market is in fact **multi-fold** harder - for short term investors and speculators. The price of assets in the short term are not driven by the intrinsic value of the underlying business but rather by the collective "narrative" driven by the psychology of millions of market participants. Sure some people are able to win this game too but the odds stacked against them are astronomical. But the good news is - one can choose not to play this game.

Play a different game

Being a long term investor, instead, helps you improve your odds of success by a multitude. Long term orientation can be a big edge in the securities market. 

What matters in the long run is a company's actual underlying business performance and not the market participants' fickle opinion about it in the short run. As Warren Buffett writes in his 1987 letter to Berkshire's shareholders: A long-term investor succeeds by coupling good business judgment with an ability to insulate his thoughts and behaviour from the super-contagious emotions that swirl about the marketplace.

Long term investing is driven by two premises:

1. A fundamentally sound company will increase its intrinsic value (as measured by the expected sum of its discounted future cash flows) over long periods of time.

2. The market may ignore such a business success for a while, but eventually will confirm it.

And thus, the job of the long term investor reduces to find companies that satisfy the first criterion above. So, do you think this job is easier than finding your way out of the just discussed rabbit hole of predicting the short term market movements?

Goodbye for now!! ❤️