Paul Kedrosky writes about the source of superior investment returns; which states that the key is to find the actionable investments where you disagree with the consensus. Certainty, say that gas prices will move in a direction different from the consensus estimate, is one thing but then what action do you take?
In my noodle this got mixed up with a model of group forming I’ve been meaning to write up. It’s from a paper that Karim passed along. In this model the group has a consensus model of the world, while it’s members have their personal models. Call these vectors in belief space. Over time the group’s model shifts, if you are optimistic about the wisdom of crowds it shifts toward the truth. The member models also shift toward the group’s model via socialization, indocrination, etc.
It’s fun to draw analogies between that model and some of the other models (1, 2, 3) of groups.
More interestingly though. One of the canonical dozen questions about open source is why members freely reveal: relinquishing ownership what are presumably valuable bits of knowledge to the commons. You can ask that same qustion in an investment context.
Let’s say you are confident that we are about to transition over Hubbard’s peak and the price of oil will sky rocket. Do you reveal this knowledge to others? To first order the investment answer is no. Instead you go find actionable investments (say long haul railroads on the upside and trucking companies on the downside) and then you just stand by and wait to get rich.
But investing is a funny thing. You get your prize when the consensus model comes into alignment with your investment. Predicting the movements of the consensus is what counts, that’s only somewhat aligned with accurate predictions about reality. When calculating when you’ll be able to cash out the question isn’t “when will I be proven correct” it’s “when will the crowd believe I’m correct.” The sooner that happens the better the investment oportunity.
Investments based on any number of certain events (peak oil, global warming, China’s currency, the US balance of trade, Iraq’s oil reserves, etc. etc.) are most highly leveraged just at the moment before the crowd begins to take them seriously.
For that reason you might freely reveal your more accurate model in the hope of accellerating the crowd’s phase transition out of it’s delusions.
One driver of free revealing can be an entirely selfish attempt to increase the net present value of your investments.
Great insight. Over the years, I’ve made this a conscious part of my publishing and marketing strategy. Back in the early 90s, when we were a largely unknown publisher of specialty Unix books, I did a bibliography of all the best Unix books from all publishers, including my competitors, with the argument that retailers ought to be paying attention to this market, and that if we did, we’d get our fair share of the upside. When we published The Whole Internet User’s Guide and Catalog in 1992, we started a huge PR campaign about the internet and the web, not about the book, because we figured that people would discover the book. Similarly, in 1997/1998, I began open source activism, in part because I figured that raising the profile of the software would also increase the market for my books. (That being said, changing people’s minds becomes addictive, and I’ve spent a lot of time on activism in areas where I have very little product, just a conviction that the area or idea is or will be important.)