Investing with Keynes by Justyn Walsh

Author:Justyn Walsh
Language: eng
Format: epub
Publisher: Pegasus Books
Published: 2021-03-30T00:00:00+00:00

BACKING THE RIGHT HORSE

A difference of opinion is what makes horse racing and missionaries.

—Will Rogers, The Autobiography of Will Rogers

The model that perhaps most resembles that of the stock market is the humble racetrack. At the races, bettors compete against other bettors, the odds on horses constantly moving to reflect the perceived favorites. Additionally, horses are handicapped with varying weights in an attempt to level the playing field – horses with a good win record will carry heavier weights than less successful nags. The stock market displays a very similar dynamic – investors compete with each other, buying and selling stocks based on their apparent prospects, and stocks perceived to have more potential are “handicapped” by higher price-to-earnings multiples than those securities deemed to be less promising.

In an ideal world – the world posited by efficient markets diehards – prices generated on the stock exchange by buyers and sellers will reflect the relative merits, in terms of earnings potential, of a security, so that each share is as good a bet as the other. In an interview with Outstanding Investor Digest, Berkshire Hathaway’s Charlie Munger expanded on this point:

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