Expectation Mismatch: Key to Outsized Gains
How are outsized gains really made in the market ? There are as many investing strategies as investors, ranging from buy-and-hold-forever to trading day-long options. Whenever any method succeeds (one-time or consistently), it relies on one key foundation: Expectation Mismatch.
Let us consider a company X. The market values X at a certain price today. Depending on the methodology/multiple used, this implies a certain expectation of the business and/or the demand prospects for its shares (could be for any reason) in the future. And on an aggregate level, the market is mostly right. The law of large numbers take care of that. With millions of investors betting on their opinions, a reasonable center appears.
Notice I said mostly, not always. There are times when the market expectation makes no sense even to a bystander. Or the investor has knowledge, experience or insight that makes their expectation about the future prospects different from the overall market. This is when real made is made. If you really know what you’re investing in, and have the experience and background knowledge to back it up, you can pick up shares that are either depressed (because the market has given up on them), or highly elevated (for shorting - we do not recommend this for anyone, it is very dangerous and there’s a limited upside with infinite downside).
Patience helps. Buy those stocks and wait. Wait till the company executes and the market sees clear proof of the business value. Within a moment, the supply/demand equation for that stock will change. It often overshoots what would be a reasonable value. This is when the intelligent investor sells.