I’ve put some thought into this lately. Let’s be honest, nobody knows what the stock market will do next. If you’re still thinking otherwise and trying to predict the future, then I can just say that it’ll take some more time for you to understand. Everybody is guessing something and someone has to be right due to so many different opinions, but that’s like betting on heads on a coin flip and being right. Trying to predict whether the market is up or down tomorrow is like trying to predict a coin flip, it’s random. But people are doing it everyday on social media, news etc.
The beloved consensus
From time to time the masses come to a consensus that something in the market has to go their way, be it a narrative about the economy, Fed, a particular company or whatever. It can spread across social media and news and now everybody knows about it. It feels so certain. But yet again and again something else happens or the future is basically the opposite of the consensus. It’s not a coincidence. It happens because the market participants have done their trades in favor of the narrative, and so the market is already pricing it in. That means it doesn’t have any risk premium going forward. The market is not here to give everyone a lot of money if they all agree on doing the same trades. Crowded trades don’t work because the market is a zero-sum game. If someone has to lose for someone else to make money, then how could popular theses work?! They don’t. The risk premium is in uncertainty. By betting on something that nobody else is thinking of, one can have a high reward to risk embedded to it even if the chance for the particular outcome happening is low.
Examples of uncertainty
When I bought NVDA stock more than a year ago, I obviously didn’t know that it’ll increase over +200% in value. The market also couldn’t know about it or the rise in price wouldn’t have taken place. In hindsight, it may feel logical that Nvidia is a strong company, but I heard two different veteran traders with 40 years of market experience say that they shorted NVDA in 2023 and lost money. Taking small losses in trading is totally fine, I’m only telling it to illustrate the reality of uncertainty. If you read my last post about the +2900% daytrade in options, then I can add that I obviously didn’t know that the market was going to fall -1.5% in the last two hours of the day. The market didn’t know that as well, so it wasn’t pricing in the sharp decline which gave me good risk premium for an outcome that had a very low probability of happening. So how did I know to buy NVDA stock or the options?! I didn’t. I follow my process. I trade probabilities. I take risks in uncertainty. I often take small losses. This is how trading really works.
I feel in peace
Having not read any financial news nor social media for several weeks I feel in peace. It’s not that there is no use of the information, it’s actually harmful to follow. It’ll suck one’s mind into the most popular narratives that result in crowded trades that lose money. It makes people buy expensive tops and sell into fearful bottoms. Some contrarian traders use popular theses and headlines to take the opposite side in the market and fade such narratives. I’m yet to find an edge in this, so ignoring the masses seems to be the best way to go. Good performance comes from not knowing what the market will do next, because usually it’s something else of what the masses are expecting. Therefore, one could say that good performance also comes from not knowing what everyone else is doing. I’m not even getting into the fact that most people pretending to be traders online are actually salesmen, who can’t pull a dollar out of the market. It’s just one of the most fraudulent industries for a beginner. Finding a true mentor is hard but necessary.
Zero-sum games are different
Humans are social creatures. We are better together than alone. We learn from each other. We support each other. Society as a whole can do things that any individual alone is not capable of. The world improves thanks to citizens cooperating. It does not apply to zero-sum games.