The Theory of Reciprocity
In my last post I stated I feel that in the short run, too many people are concerned about beating their benchmarks. In the long run, benchmarks are extremely important.
The theory of reciprocity states that in the long run, every investor will see the same fundamentals in every stock. If you’re a trader, you will see every technical pattern in every stock. If you take the same position as everyone else, you will not achieve abnormal returns. Abnormal returns can only be made when you take an action that differs.
I want to emphasize that I am oversimplifying— this concept can become extremely complex. Empirical evidence shows that capital appreciates over time, meaning investing/trading is not a zero sum game. However, capital can appreciate at different rates.
Although I have a somewhat contrarian point of view, the theory of reciprocity applies regardless of your investing style. Selling too early/late, not honoring your stop losses, etc, all affect your long term ability to produce an abnormal return.
