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Waiting For Nothing

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By definition major social change is driven by individuals who go against the crowd.

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I hope you will relate the following story to how markets work.

I arrived at the airport late last night. There had been extremely bad weather and many flights had been canceled, so the actual flight arrived right on time. But as I descended the escalators I could see the line for taxis was very long. When I went outside I saw just what was happening.

There were no taxis where there usually is fifty or so waiting. The line for these zero cabs was at least 100 people long, winding around the building out of sight. I quickly calculated that the last people in line might as well start walking to the city for they would arrive faster than waiting for nothing. But there they stood.

I had been at this airport before. I had nothing to lose. I walked right past the line for a two minute walk to the next terminal and got a cab right away.

How does this little story relate to markets?

The people in line were thinking inductively, as almost all people do. They assumed that the people ahead of them must know what they are doing and thus rely on them to do the "thinking." People are social animals and have powerful instincts urging them to "get along" and "go with the flow." The fact that there were no cabs didn't dawn on the last people in line…surely the people ahead know that cabs are just on their way. Every person in line must have been thinking the same thing. This is how compression (out-sizing risk) and major market tops are formed: the last buyers, the most buyers, are buying just because everyone else is.

I was thinking deductively. There were no cabs. The line was very long. I had nothing to lose by going to the next terminal. This is how some investors avoid major losses, by eventually going against the crowd and reducing risk before the masses.

By definition major social change is driven by individuals who go against the crowd.

So the next time you feel that irresistible urge to get into something because everyone else is, please just stop and think for yourself. Think deductively: put the facts together, as best you can, and draw some conclusions.

It very well may be that everyone else is right (inductive thinking and empirical evidence certainly have validity), but there are times when making inductive assumptions can be disastrous.

Best Regards,
Mr. Practical
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No positions in stocks mentioned.
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