Chris Lau - Seeking Alpha

Wednesday, July 08, 2009

Soros, Kaynes and ...Beauty Contestants

Soros on Market Instability



I found this video originally posted by Ritholz here:
http://www.ritholtz.com/blog/2009/07/video-o-rama-roller-coaster-ride-into-the-long-weekend/

Soros is a brilliant macro investor. In the video, he describes China as being the main beneficiary of the aftermath of the market crash in 2008.

He also expresses his view that markets do not tend towards equilibrium (i.e. efficient market hypothesis is incorrect). This is contributing to market instability. Market instability runs contrary to the Graham/Dodd's approach of valuing a security using discounted earnings power. It is for this reason that Hedge funds do not use this, because stock prices don't work solely on earnings growth.

I liked this line (from Keynes) describing the above point: beauty in a beauty contest is judged not on how beautiful a person actually is, but on what others all perceive on who is the most beautiful.

By that logic, must hedge fund managers be, metaphorically speaking, beauty contestant judges? In the environment of market instability, I would say so.
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