Here’s something that stopped me in my tracks when I first encountered it in Robert Hagstrom’s The Warren Buffett Way, and it’s one of those insights that completely reframes how you think about which ideas are actually worth pursuing.
The insight comes from a 1976 article by Jack Treynor, the prolific investing writer who, while pondering market efficiency, uncovered what I believe is a more profound truth we’ve all experienced across various areas of life: why the obvious moves rarely work.
Whether you’re trying to build a business, choose your career path, or even find a restaurant that isn’t overcrowded, the same pattern emerges. The people who consistently amaze us with their achievements seem to operate on an entirely different wavelength. They’re not necessarily smarter, but as Apple’s old slogan put it, they “think different”.
And here’s one compelling explanation for why this approach works:
“Treynor begins by talking about the ever-present puzzle of market efficiency. Is it true, he wondered, that no matter how hard we try we ’ll never be able to find an idea that the market hasn’t already discounted? To address the question, Treynor asks us to distinguish between ‘two kinds of investment ideas: (a) those whose implications are straightforward and obvious, take relatively little special expertise to evaluate, and consequently travel quickly and (b) those that require reflection, judgment, and special expertise for their evaluation, and consequently travel slowly.’
‘If the market is inefficient,’ he concludes, ‘it will not be inefficient with respect to the first kind of idea, since by definition the first kind is unlikely to be misevaluated by the great mass of investors.’ To say this another way, the simple ideas—price-to-earnings ratios, dividend yields, price-to-book ratios, P/E-to-growth ratios, 52-week-low lists, technical charts, and any other elementary ways we can think about a stock—are unlikely to provide easy profits. ‘If there is any market inefficiency, hence any investment opportunity,’ says Treynor, ‘it will arise with the second kind of investment idea—the kind that travels slowly. The second kind of idea—rather than the obvious, hence quickly discounted insight relating to ‘long-term’ business developments—is the only meaningful basis for long-term investing.’”