Investors are constantly inundated
with the latest regional conflict, political debate, economic data and interest
rate predictions. All of this information represents the collective viewpoint
or “consensus” of investors at any given point in time.
Over the many years we have spent
studying the markets, the truest thing we know is that the consensus is already
priced into the market... and the consensus is almost always wrong. If an investor
believes the economy and earnings will be better in the future, they will
“vote” with their money. In aggregate, all of those votes create the price
level for a particular stock. If the consensus comes true, you won’t see much
of a change in the markets and prices will generally drift sideways.
What changes the price of stocks
are the things that the consensus doesn’t already expect. Therefore, the only
way to make excess risk-adjusted returns is either:
1) Find where the consensus is
wrong.
2) Look outside the box.
