Michael Mauboussin has just released his latest paper titled – Who Is On The Other Side?. In the paper Mauboussin describes a number of inefficiencies that exist in the market, driven mainly by the optimism or pessimism of human beings. Included in the paper is Mauboussin’s Checklist for Identifying 15 Market Inefficiencies:
1. Are investors overextrapolating from recent results, leading to unrealistic expectations?
2. Is there evidence of performance chasing in a security, sector, or asset class?
3. Do sentiment indicators suggest extreme fear or greed?
4. Do investors have correlated views that create fragility in the market?
5. Do you have a different time horizon, allowing you to take advantage of time arbitrage?
6. Are you more analytically skillful than the other investors you are competing with?
7. Are you placing different, and more precise, weights on information?
8. Are you accurately updating your views based on new information?
9. Do you have reason to believe that the story about a security will change?
10. Do you understand a complex investment opportunity better than others?
11. Have you legally acquired information that other investors don’t have?
12. Are you paying attention to all relevant information?
13. Are you trading with forced buyers or sellers?
14. Can you take the other side of fund flows?
15. Can you step in when arbitrageurs are tapped out?
You can read Michael Mauboussin’s latest paper here – Michael Mauboussin – Who Is On The Other Side?
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