When you see something absurd in the market, it’s helpful to ask, “What’s the trade?” How would you make money from it if it truly is absurd? Oftentimes, it’s not that straightforward and there is more to it than you think. This is a good check against biases and, if you truly believe that something is wrong, would you be willing to make the trade?
Read 15 Lessons From Newfound Research.
See also:
- Psychology overwhelms fundamentals in the short run
- Skepticism and optimism in markets shows us that there are cycles that occur but whether you can spot them is a different story
Links to this note
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Every Portfolio Is Long Something and Short Something
Every portfolio and every decision can be decomposed into being long something and short something. By weighting one area of the portfolio higher than another, you are short on the underweighted parts of the portfolio.