Basically, our population can be divided into 5 categories:
The innovators (2.5% of the population)
Early adopters (13.5%)
Early majority (34%)
Late majority (34%)
Laggards (16%)
Imagine for a second you had 5 investors trapped on an island and you calculated the average return of their portfolios. By definition, someone will be above the average and someone below. In real life, the average is approximately reflected by a stock market index and outperformance is what we geeks call alpha. However, alpha is a zero sum game. If someone beat the average, it came from someone’s underperformance.
The question follows - so how do I ensure I'm generating alpha?
Looking back at the law of diffusion we can derive a few things. To me, it implies that to succeed in this system we need to be:
- independent thinkers
- speed is an attribute
- know at all times where we stand
Because even if we are past the late majority and bordering on laggards, in the financial market, you can just do the opposite i.e. sell short instead of buy.
So that means if you find a guy on the street who is always wrong in the market, do not laugh at him! Treasure him with all you have or better introduce him to me! It’s the ones who score 50%/50% all the time that are useless!
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