There seems to be an ever increasing chatter about how the market is going to revert to the mean or it is broken or it is undervalued. Whatever it is let me remind you of two important ideas that are found in about any book you will ever read around finance and investing.

The market can stay irrational longer than you can stay solvent and the market’s goal is to extract the most money from the largest group of people.

If I could change the first quote it would say: The market is almost always irrational but when it is rational it pays you enough to forget.

Obviously not an easy sell if you running money. But that does not mean you can not be profitable. In fact, it means the exact opposite. The market gives everyone a chance to win but how much and what you did leading up to that point is the difference.

I would change the second quote to read: The goal of a market is to be healthy, when it is searching for participation equilibrium much money changes hands often to the few that are prepared.

There are many unnatural things that happen to a market. But underlying it wants to find participation equilibrium. It means cutting out the weakest leading the strong lower and allowing the few to pull everything higher. The problem is cycles are getting shorter and power is not as concentrated. If you are confused, imagine how confused the market must be.

Do I think it is important to have those conversations from the start of the post? Yes. But they should be focused on what to do. If the market does x I will look to do y or z and will be more focused on doing z but if m happens I will look more closely at y. (more…)