1/ The idea that successful investors "have to be right while everyone else is wrong" is a fallacy.
What they really need is to have an opinion different from the market-clearing median opinion -- which may or may not be different from everyone else.
What they really need is to have an opinion different from the market-clearing median opinion -- which may or may not be different from everyone else.
2/ Given: a market is a machine that turns opinions into numbers.
Those opinions are usually distributed in something like a bell curve, with the median of the distribution roughly corresponding to the stock's current price.
Those opinions are usually distributed in something like a bell curve, with the median of the distribution roughly corresponding to the stock's current price.
3/ When there's consensus about the stock, the distribution of opinions is fairly tight. Any diverging opinion, in a tautological sense, is therefore seen as highly likely to be wrong.
Conversely, if the diverging opinion turns out to be right, it means everyone else was wrong.
Conversely, if the diverging opinion turns out to be right, it means everyone else was wrong.
4/ So when there's consensus, it's true that investors have to be right and everyone else has to be wrong.
Moreover, an investor's divergent opinion has to be many standard deviations away from the median, in order to not only be right, but be *profitably* right.
That's hard.
Moreover, an investor's divergent opinion has to be many standard deviations away from the median, in order to not only be right, but be *profitably* right.
That's hard.
5/ However, the more disagreement there is among investors, the more dispersed the distribution of opinions becomes. It becomes (more) possible to have a profitably differentiated opinion, without being multiple-sigmas away from the other investors.
That's a little easier.
That's a little easier.
6/ In an extreme case, like an earnings announcement, the opinions distribution could even become bimodal -- two likely outcomes, neither of which is the current price. In that situation, it's actually possible for a majority of investors to have a profitably-correct opinion!
7/ So when people say that "volatility creates opportunity," part of what they really mean is that when there's less consensus among investors, it's easier to be right without requiring everyone else to be wrong.
8/ It's very important to note that I'm calling this saying a *fallacy*, not saying it's *false*. Great investors really are right when everyone else is wrong.
I'm just pointing out that it's not absolutely necessary to be ultra-contrarian in order to be a successful investor.
I'm just pointing out that it's not absolutely necessary to be ultra-contrarian in order to be a successful investor.
