Why there are no shortcuts in investing and how to avoid being left holding the bag

Will you be left holding the bag?

Hi,

Ever felt like you are missing out on investment opportunities?

That stock that somehow kids on Reddit made lots of money on, or maybe some crypto coin that a Discord community discovered way early.

Yet when you start looking into it it’s all over and way too late.

How do you make sure you can spot these opportunities in time and profit from them?

That’s right, you don’t!

Spending your efforts trying to be in the right place at the right time is a flawed approach and particularly in the markets it will leave you always arriving late.

Let’s dive into why there are no shortcuts when it comes to investing.

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The markets are a balancing system. A living experiment of many people evaluating what an asset will be worth in the future. Even if they are gambling, they are making bets and participating in the evaluation.

This is why any hack or unfair advantage only has a limited life span.

It is only a matter of time before everyone learns of the shortcut and tries it out. The more people invest with this approach, the more prices inflate. Eventually people will start selling to be safe seeing the asset as overvalued and unsustainable leading to a price dive.

At a larger scale this process is what causes the market cycles.

Famous trader George Soros used the social theory of reflexivity in his book The Alchemy of Finance to explain how the markets are a living experiment.

Living experiment means that there is a two way relationship between cause and effect. You see some data about the market and this is the cause for you to invest which produces an outcome as an effect. If it worked like a science experiment, you could redo your experiment over and over and expect the same outcomes and define a cause for the effect. The problem is that when you invest, even if small, the effect you have on the market, changes the cause. That means that next time, because the data will be different, you cannot expect the same outcomes if you apply the same effect.

Because of reflexivity you cannot be sure that a method that worked for someone else will keep working.

Remember this, and you will avoid being lured into some get rich quick in the markets scheme and being left holding the bag when the tide turns.

Note that you can also use this knowledge to your advantage.

This is basically the nature of the contrarian investor. The contrarian investor recognizes when there has been too much effect in one direction and choses to go against the current.

Of course, if everyone is a contrarian in a situation, then no one is a contrarian, as most teenagers learn eventually trying to stand out just to find themselves copied.

So what do we make of this?

Why does someone seem to be able to take the shortcuts and win?

The ones that do, don’t see it as shortcuts. They happen to be in the right place at the right time simply because they weren’t trying to.

The meme stock traders are passionate about meme culture and found a way to apply it to the markets. They would have spent time in the Reddit subgroups anyhow. It became their edge for some time.

The shitcoin degens (people that take high risks on dubious cryptocurrencies) spend time in group chats on various platforms where they would be anyhow because they are attracted to the crypto space and find good entertainment and community with like mindeds. Eventually they get a feel for the rhythms of these coins, their edge being the time they spend interacting in the space.

As an outsider one is trying to trade without an edge, which does not work.

Note that these market situations can’t last forever by the nature of the market.

The only shortcut is to be able to adapt, which requires learning the skills also known as good old hard work.

As Charles Darwin said “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change”.

My recommendation is to simply be entertained by the craziness of the market and to stick to or create your own edge and figure out how to adapt to the ever changing experiment.

Have a good one,

Chris

Originally posted 25th January 2023 on ElliottSays.com

Thank you for reading! :)

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