The cost of a crowded trade

The most dangerous phrase in this business is "everyone knows." Everyone knew, at one point or another, that a sector could only go up, that a technology had no ceiling, that a currency was finished. Each of those was expensive to have believed.

A crowded trade is not risky because it is popular. It is risky because the price already holds all the optimism. When the good news is fully priced in, you keep the whole of the downside and almost none of the upside, and you paid a premium to agree with everyone.

We are not contrarian for the sake of it. Disagreeing on reflex is just consensus with the sign flipped. Before we buy anything we ask one question. What has to be true for this to work, and is the price already assuming it?

When the honest answer is that everything has to go right, we walk. Obvious ideas are never in short supply. Cheap ones are.

The views above are the firm's own and are provided for information only. They are not investment advice, nor an offer or solicitation to invest. Capital at risk; the value of investments can go down as well as up, and past performance is not a guide to future results.