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The stock-picking race

Long queues at petrol stations are not a sign of panic buying, but of the exact opposite. It’s quite rational to fill up your tank if you fear that others’ buying will cause a shortage. Sure, the total result of all these individually rational choices is a mess, but the essence of social science is that aggregate outcomes are not simply individual actions writ large.

What’s this got to do with investing? Plenty. Just as rational motorists anticipate the behaviour of others, so rational investors must do the same. We should ask not just “is this a good company?” or “what is the economic outlook?” but also: “what will others come to believe about this company or the economy?” We must ask: if I think this is such a good asset, why is somebody happy to sell it to me? And: mightn’t others have already realised its attractions and bid up its price?  

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