![]() As each dip bought leads to more confidence that so to will the next one and the one after that. Each test it survives, the stronger the reflexive relationship becomes. It occasionally gets tested by disconfirming evidence. So the narrative and the market form a self-sustaining feedback loop that goes on and on. This results in the buying of more stock, which drives valuations up, and thus creates a market that’s now more incentivized to maintain and propagate the bullish narrative… and more importantly, slap on cognitive blinders to new info that may threaten this narrative. The longer we see positive earnings growth, the more market participants begin bullishly extrapolating this earnings growth into the future. This manifests itself in situations like the following. Do you smell what I’m cooking? George Soros on Reflexivity In The Market Meaning, our observations of the market affect the market itself, which in turn affects our observations and so on. Financial and economic data tends to trend once it gets going. It’s a useful heuristic and works pretty well, most of the time. It’s a cognitive bias where we overweight the first or most easily available information when making judgements. Good earnings today = good earnings tomorrow. Boom… problem solved… no more uncertain future. They take the hard numbers the revenue growth, margin trends, and current cash flows. So to get around this seemingly intractably uncertainty-judgement issue, the majority of market participants simply extrapolate the present into the future. Like making a lot of money in the stock market. Round peg + square hole.īut the human mind is inventive when it needs to be, especially with the right incentives. The future path of the stock market is hazy and complex, i.e. Especially if it’s uncertainty surrounding something that’s a strong emotional trigger - like our finances or the stock market. To top things off, we (as in, we humans) abhor uncertainty. And like the great sage Yogi Berra once said “It’s tough to make predictions, especially about the future.” There’s a lot of unknowns and unknown unknowns. The market and economy is a complex beast. That’s no easy task… it’s a lot of things to take into consideration. It’s supposed to look out into the near future and make judgements on things like revenues, margins, earnings, inflation, the discount rate, potential risks, geopolitical shocks etc… and then make bets on what the proper value (the price paid today) is for those future cash flows. The market is supposed to be a forward discounting machine. And a helpful mental model to use in today’s choppy market action. Do you know what Soros means when he says the market is wrong because it’s biased about the future? I believe the market prices are always wrong in the sense that they present a biased view of the future. The Palindrome (Soros) once said, “The generally accepted view is that markets are always right - that is, market prices tend to discount future developments accurately even when it is unclear what those developments are.
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