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Strategies & Market Trends : Booms, Busts, and Recoveries
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To: Mary Cluney who wrote (61042)3/16/2005 1:48:08 AM
From: croesus1111  Read Replies (3) of 74559
 
"The prices on things reflect up to the minute all the smart people crunching their numbers based on all the information available (on the up and up and on insider information)."
"All the little investors along with all the big hedge fund operators are feeding into their heads or supercomputers, every bit of information available. If there is a bargain somewhere, the hedge funds are going to buy it up - even for fractions of percentages."

You are basically stating the "perfect market" hypothesis.

You, and that hypothesis, are right to the extent that prices are based on information. But different people come to different conclusions about the future based on the same available information. Part of that is based on assumptions that people start with. A related part is based on their beliefs about how the world works. People's market decisions are a product not only of information, but of assumptions, beliefs, and feelings (such as greed and fear). One might be able to group people into different factions that will probably act in particular ways given certain information. The factions are not symmetrical. There are usually a great deal more people in the markets that believe that the status quo will continue more or less unchanged in the near and distant future.

Eventually, almost by definition, that majority will be wrong. That error represents a great opportunity for other factions to be right. Furthermore, the majority faction acting on their beliefs for a period of time may open up the possibility of relatively low-risk/high-reward opportunities in out-of-favor sectors.
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