As traders and investors of any time horizon, what we’re doing in the market is exploiting the flaws of human behavior.
That’s the game we’re playing.
This isn’t about corporate fundamentals. And it’s not about the growth or slowdown of the economy.
That’s the kind of stuff they teach you in school. But that’s not what moves markets.
Prices of assets move up and down based on positioning.
The largest moves you see come from extremes in the way investors are positioned, or mispositioned to be more specific.
Understanding human weaknesses allows us to avoid making those mistakes for ourselves, of course.
But once we establish that aspect of the process, we can take it a step further and attempt to profit from the whole thing.
Stupidity isn’t the whole game.
But it definitely plays a big role.
The Basic Laws of Human Stupidity
I recently finished a new English translation of Carlo Cipolla’s 1976 book, “The Basic Laws of Human Stupidity,” with a foreword by the famous statistician Nassim Taleb.
The book is brilliantly written – humorous at times, yet fundamentally an academic study with insights every investor would be wise to understand.
There are several basic principles to acknowledge about human stupidity.
One is that everyone always and inevitably underestimates the number of stupid people in circulation.
The probability that a person is stupid is independent of any other characteristic of that person.
In other words, it has nothing to do with race, nationality, gender, level of education, or income.
A stupid person causes losses to another person or group of people when he or she does not benefit and may even suffer losses.
Non-stupid people always underestimate the destructive power of stupid individuals.
A Tax on the Stupid
In his book “The Psychology of Money,” my pal Morgan Housel talks about taxes on stupidity occurring naturally in society.
For example, in 2023 Americans spent more than $113 billion on lottery tickets, more than they spent on movies, books, concerts, and sports tickets combined.
This sort of irrational behavior can be seen across the market as well. And this is independent of trading experience or assets under management.
The irrational decisions by professional investors – with more money on the line – cause way more havoc than even the most reckless individual investors.
Our job as traders and investors of all time horizons is to acknowledge this behavior exists.
Then, we look for those irrational behaviors, particularly when they are at extreme levels.
Finally, we exploit them for our own selfish profits.
I talk to everyday investors all the time, and many somehow believe the stock market has been going down.
They truly believe that, after some of the greatest back-to-back years for the S&P 500 in American history.
And 2025 is off to a great start as well, particularly when you broaden the return data globally.
Is it stupidity?
Maybe.
Is it laziness?
Probably.
Is the complete misunderstanding of what’s actually happening, because they’re so easily distracted, a part of it?
Absolutely.
Here’s the All Country World Index hitting new all-time highs last week:
We’re here to identify divergences between perception and reality.
It’s the human flaws that we’re trying to exploit.
Understanding those flaws is a major part of it.
Everybody’s wrong.
We don’t want to fight that. Embrace it. Appreciate it.
And go profit from it!
Stay sharp,
JC Parets, CMT
Founder, TrendLabs