(Excerpt from The Interesting Times 23 Apr 2021 by Taylor Pearson)
If you stumble on what looks like a great opportunity that the market is ignoring, 99 times out of 100, the market as a whole knows something you don’t. So it’s good to start with the assumption that markets are efficient and then work to disprove that on a case-by-case basis.
Even though you’re usually wrong and the market is right, the 1 out of 100 times that you really did identify an inefficiency are worth a lot. They are what Peter Thiel refers to as secrets – things you believe to be true that few others do – and are often the basis for the most profitable “trades” whether that’s an actual trade, starting a business, or positioning yourself in your career.
One interesting place where I think markets are often inefficient is what I call The Illegible Margin. Things that are easy to measure and put into an Excel spreadsheet tend to get priced pretty efficiently. Things that are hard to measure often get ignored.
In the case of residential housing: natural light and design are both very hard to quantify. I think that leads to them largely being ignored. (The lack of pricing good intra-neighborhood seems driven by most people in the U.S. driving instead of walking places so people don’t really care about walking distance. The commute time “mispricing” seems driven by people wanting to live in a “good neighborhood” often driving by school districts).
In the context of careers, new industries tend to be mispriced because the path isn’t very legible. I started learning about Search Engine Optimization (SEO) in 2011 and that was how I got my first job.
At the time, I couldn’t even explain to my parents what SEO was. There certainly weren’t any degrees or formal credentials. Everyone in the field was self-taught.
It wasn’t a particularly bold or savvy bet on my part. By 2011, it was pretty clear that search engines weren’t going anywhere and that more and more businesses would rely on them to acquire customers. It was just illegible and so the competition relative to the demand made it easier to break in and grow quickly.
What opportunities do you see that might be mispriced because of The Illegible Margin? That’s usually where the best investments are.