Judging the Judges

Without realizing it, John Maynard Keynes was one of the first technical analysts in the world.  Because technical analysis is the study of price which is really the study of the behavior of market participants, and he got that.

Keynes likened the stock market to a beauty pageant in Chapter 12 of his book General Theory of Employment, Interest and Money.  He talks about the fact that as stock market players, our job is really to judge the judges of the pageant rather than the contestants – because while a company’s fundamentals probably don’t change 20% in the course of a week, a stock price can.  This is public perception shifting with no change in the fundamentals.

The relevant quote:

“…professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.”

On Tuesday I did a quick phoner into Fast Money to discuss a new posture in our tactical accounts – much of what I said related to technicals and sentiment.  A friend of mine shot me an email after and asked, “but what about the fundamentals?”  And of course, he has a point.  But in a murky environment where fundamentals are subservient to macro data, headlines and supply/demand dynamics, I’ll stick with judging the judges themselves and playing perception.

It’s quick and dirty, but it can be very effective.




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