When I wrote last month about trades that are worth taking, I was careful to say we should be looking for trades that engage the interest of other investors or traders.
I wasn’t, of course, saying anything original. We face the same situation as generations of traders before us.
A couple of days ago, I was fighting my way through a couple of chapters of Maynard Keynes’s General Theory of Employment, Interest and Money. I found Keynes had written entertainingly about the subtle art of picking winning trades. In 1936 he wrote (and I paraphrase):
You Think She’s Pretty – But Will Other People Agree?
Professional investment may be likened to those newspaper competitions in which you have to pick out the six prettiest faces from a hundred photographs. The prize will be awarded to the reader whose choice most closely matches the average preferences of all the other readers.
This means you have to pick, not those faces you find prettiest, but those you think other readers will pick as the prettiest. Of course, all of the other readers are also going to look at the problem from the same point of view. So, to win the prize:
- You shouldn’t pick the faces you think are really the prettiest.
- You shouldn’t even try picking the faces you think average opinion will find the prettiest.
- You have reached the third stage where you try to figure out what average opinion expects the average opinion to be.
And there are some who practice the fourth, fifth and higher degrees.