💵 Rational Imperfection

In association with DarwinexZero. Allocating real capital to successful traders 👇

I can't believe this is happening, the market's so irrational! Nah. This imperfection is perfectly rational mate. Maybe you just need to cope a little harder...

Why do we have such a hard time understanding that the market is irrational? Better said, why do we have such a hard time accepting that the market is irrational?

This right here is a work of art 👇

So, anon. Do you want to be a legend or do you want to make money?

I think everyone struggles with the need to be right, which is why some kind of systematisation inevitably creeps in once we get tired of being right and losing money.

The Trader IQ Journey

Most people entering the trading/investing world start on the left. They realise the world's full of fuckery, but they just want to make some extra money. Most believe they are intelligent enough to beat the market...

Then comes the inevitable baptism of fire...

Stuff like this 👇

There's nothing wrong with this analysis. Carvana is an absolute dumpster fire of a business, carrying boatloads of debt, unprofitable, all the usual story with these growth companies. The debt restructuring just kicks the can further into the long grass.

What's the stock worth?

We tried a bit of price discovery yesterday, and found out that it's worth a lot more than it was on Tuesday. In pre-market today it's worth roughly 2.6% more than yesterday...

But is it really worth that? All depends how you look at it.

Is it perhaps temporarily worth the current price because that's what people are willing to pay for the stock?

Clearly it is. At any given moment, that's what price represents. The last bid is all that matters. That's the current worth.

Is that the value of the company? Is the share price a fair representation of value?

Honestly, who cares? If you're trading or investing in the stock market, that's not the game. Hasn't been for a long time.

Ben Graham's bible of value investing (The Intelligent Investor) was first published 74 years ago.

The idea of the modern market allowing genuinely good businesses to become undervalued enough to meet Benny's criteria is long gone.

All that matters is one simple question...

What will someone else think this is worth?

I mean this in the nicest possible way, but nobody cares about your opinion here. It's the Keynes beauty contest 👇

It's a great theory. There's one big problem though. We're really bad at guessing what other people think, (but really good at projecting what we think onto other people).

When someone's having a meltdown about their position, claiming the market's irrational, and somebody tells them to cope harder, there's truth in that cruel humour.

Projection is a coping mechanism (often used to deal with stressful or anxiety-provoking experiences).

Anyway, what's more irrational than getting absolutely rinsed on a position "because you know you're right"?

Once the market's beaten you up a few times, you learn that it's far better to take the hit, move on, and live to fight another day...

Homebuilders were the perfect example 👇

Early is the same as wrong. I zeroed in on the big US homebuilders three months ago, thinking that they'd got ahead of themselves and were priced for something close to perfection.

I stand by that statement.

Problem is, they basically got perfection, so kept on rallying... 👇

This was the summary of the idea 👇

That hasn't really happened (yet?), other than '23 rate cuts being priced out. Instead, new homes have taken a larger share of the market. Existing homes aren't coming up for sale, so homebuilders are in the sweet spot...

Sentiment has improved. And the narrative has shifted...

Now, I still look at the situation with high mortgage rates, and builders using mortgage buydowns & incentives as unsustainable.

I look at the share prices of these homebuilders now and think they're even more priced for perfection than they were before.

But aside from a couple of short-lived nibbles, I'm still waiting for this beauty contest to declare a winner.

I started writing this yesterday, before D.R. Horton’s (DHI) earnings were released. Those earnings were fine given the context, and the stock traded up by as much as 6.8% in pre-market.

DHI is now trading -3.5%... Is the crowd starting to turn?

I think it's worth another nibble and then see if the narrative keeps shifting...

But it the fickle crowd changes its mind again, it's time for me to move on and look for opportunity elsewhere.