I’ve recently read some interesting anecdotes about times leading up to stock market crashes. They talk of things like even the milk delivery boy having a stock tip. Or the janitor who make his yearly salary in a week. Or the stay at home mom who made hundreds of thousands.
What I find so interesting about this is the idea that as soon as everyone in a market believes something is happening, it necessarily makes that belief untrue.
Example: If all people in a market believe that a company will go bankrupt, wouldn’t it’s stock price reflect that fact and therefore be close to zero?
Conversely, if all people in a market believe the market is in a “new era” of profitability and growth, shouldn’t the index reflect this at that moment.
Irrational exuberance (great book by the same title with related ideas) exacerbates this fact even farther.
It’s when everyone in the market believes the same thing is going to happen, that there’s no more room for money making on that side of the fence. When everyone says that the same thing, by DEFINITION, the market price reflects this and that’s when it’s time to bet the other way.
This idea not only applies to stocks and asset pricing in the financial world, but also to the world of ideas in general. If everyone holds the same idea, then that idea is likely well explored, while ideas or ways of doing things that are far from the original idea are likely unexplored. And though they may be unexplored for good reason, this is where risk enters the equation and idea experimentation begins.