Shane Parrish at Farnam Street wrote about a key concept that really jumped out to me.
“In a nutshell, when everyone learns the same lessons, applying them to the point of religious devotion, there can be opportunity in the opposite. If everyone is thinking the same thing, no one is really thinking.”
The post referred to Peter Thiel and the tenets of the private markets. This principle shows up numerous ways in the public markets as well:
This is very apparent in common rules found in trading books. Certain ideas have a tendency to get really popular because they are easy to digest. When that happens, the rules don’t work.
Mass market psychology: If everybody has the same experiences, feelings and fears; it pays to be different.
During the 2011-2014 rally, market participants as a whole got very jittery and negative on every buyable dip. That particular of fear drawn from two recent stock market crashes played out time and again. Market participants thought they were acting rationally, but they weren’t.
Market Tactics: Edges trading the markets are often moving targets. Sometimes they are constant. A certain setup works, certain moving average, signal etc. When that’s the case, it just means few people notice them and we should use them until they don’t work.
After enough people figure the edge out, new edges eventually develop while old edges become worthless.
Trade ’em well