Is the Market Right or Wrong?
"I take the opposition position."
This lesson comes from the one and only, George Soros.
What Side are You On?
There is a constant debate on Wall-Street—is the market right or wrong? Is the market a mechanism that has priced all data in to perfection, or is it a constant shifting from one extreme to the other, never finding perfect balance?
Is the market a compilation of random movements around equilibrium? Or is it just the manic nature of human emotions?
Everyone has their opinion, and ours is valid too—especially if our viewpoint is working for us.
Here is what George Soros has to say.
“The prevailing wisdom is that markets are always right. I take the opposition position. I assume that markets are always wrong. Even if my assumption is occasionally wrong, I use it as a working hypothesis. It does not follow that one should always go against the prevailing trend. On the contrary, most of the time the trend prevails; only occasionally are the errors corrected. It is only on those occasions that one should go against the trend. This line of reasoning leads me to look for the flaw in every investment thesis. ... I am ahead of the curve. I watch out for telltale signs that a trend may be exhausted. Then I disengage from the herd and look for a different investment thesis. Or, if I think the trend has been carried to excess, I may probe going against it. Most of the time we are punished if we go against the trend. Only at an inflection point are we rewarded.”
George Soros
A Hypothesis
Whether George Soros is right or wrong here, and whether his view on the market is shared by the reader or not, is not relevant.
However, what is important here is thinking. What George Soros has done, is doing, and will continue to do that works is have a thought, a hypothesis, on what the market is doing.
What this offers him is not only a way to be right, to know when he is right, and to scale into a position when he is right, but also a way to be wrong, and get out of a position when he is wrong.
Then, and only then, can he learn from the trade, make a physical or mental note, and move onto the next with more knowledge and skill than before.
This is how we beat markets, not with random luck, but with thoughtful observation and testing.
This is what makes great traders great, and this is what will make us great traders.
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