What everyone knows.
My favorite Will Rogers quote: “It isn’t what we don’t know that gives us trouble, it’s what we know that ain’t so.”
There’s no better place to illustrate this principle than Wall Street. Stock prices reflect what everyone knows. The problem isn’t what we don’t know, but what we know that just isn’t so.
For example, everyone knows China is a growth engine and that everyone “should” be invested there. If everyone knows it, then stock prices already reflect that fact. If what everyone knows turns out not to be so, then a lot of people are in for a lot of disappointment.
Another example. Everyone knows the cable industry is toast because everyone will download TV and movies over the Internet for free. But, if everyone knows, then stock prices reflect that fact already, so no profits can be made betting against cable. In fact, if everyone knows it, and it turns out not to fully reflect the facts (how will all those people download all those movies and TV shows, perhaps over cable?!), then it might be possible to make money betting the other way.
Everyone knows that bonds and cash are safer than stocks. Perhaps that is why retail investors flooded into bond mutual funds last year and a lot of people pulled their money out of the market and put it into bank accounts. But, what if inflation comes back with a vengeance? What everyone knows will turn out to be very painful for, well, everyone.
What else does everyone know? Old line software companies are toast. Every Apple product is a blockbuster. Google will provide everyone with software for free just because, gee whiz, they’re such nice people. All airlines are lousy investments, always. Content providers will happily provide consumers with high quality entertainment for free over the Internet. Old line pharmaceutical companies are toast. Old line telecom companies are toast. Regulators can see problems coming and act to prevent harm. Global warming is occurring, caused by man, can be stopped, and should be stopped (the benefits outweigh the costs).
The trouble isn’t what we don’t know, or admitting that we don’t know. The trouble comes when what we think we know turns out to be just plain wrong.
A lot of money has been made over the years in buying the opposite of what everyone knows. It’s certainly worked well for me.
What everyone knows.