The Guru Theory of Investing: Part II
I hope you read “The Guru Theory of Investing: Part I” or this Part II will not make much sense. If you did read Part I, I hope you solved the puzzle, or at least looked up the answer. I have to confess that I gave up when trying to solve it, and even after hearing the answer, it took me hours of denial and disbelief before I finally “got it.”
Why is the answer so baffling?
Well, there are 50 people will brown eyes on the island and 50 people with blue eyes on the island, and all the Guru says is “I see someone with blue eyes.” Isn’t the Guru just stating a fact that everyone already knows? How is this adding any information?
It really seems like no information has been added, but in fact a crucial piece of information (the base case) has been added. While it’s true that everyone knows that someone has blue eyes, it’s not true that everyone knows that everyone knows that everyone knows…(x 50 people)…that everyone knows that someone has blue eyes.
The recursive chain of logic that happens is this: first, someone who has blue eyes (but doesn’t know they have blue eyes) says to themself “ok, let’s assume I have brown eyes.” Then they turn to their left to another person with blue eyes and ask themself “now, what would this person think?” And what that person would think is the same thing: “Ok, let’s assume I have brown eyes. Now, what would this other person think?”
Think. Look. Think. Look. Think. Look… Until it reaches the final blue-eyed person. This final person would have no idea what to think if not for the helpful Guru who made it clear that they are the one-and-only person with blue eyes (since in this chain of assumptions, everyone else has brown eyes).
Investors like you and me are a lot like the islanders. Instead of wondering what our eye color is, we’re wondering, “should I buy or sell this stock at the current price X?” But just like the islanders, we ourselves have no clue what the answer to our question is, so we look to other people and imagine what they’re thinking. And what do those other people think? Well, they look to other people and imagine what they’re thinking. Etcetera, etcetera.
Investing is fundamentally about trying to gauge what other people think the value of something is (a kind of “Keynesian Beauty Contest”). And this is exactly why investors, like the islanders, need a “Guru.” Only a Guru can help solve the otherwise unsolvable problem.
So what does an Investing Guru look like? Here are a few:
1. Keith Gill, aka /u/DeepFuckingValue
In the recent GameStop/GameStonk/GME short squeeze, he was the guru. The other /r/wallstreetbets members didn’t have to guess in the dark about what each other thought, they could all look to DeepFuckingValue, and the prevailing mentality was “as long as this guy is in, I’m in.”
2. Elon Musk
We certainly can’t call Elon Musk The Guru of Bitcoin or Dogecoin, since they’ve been rising and rising long before Elon got involved (similarly to how he was not the original founder of Tesla). But he’s certainly become a recent Guru, helping to drive prices much higher.
3. Warren Buffett
One of the OG Investing Gurus. People weren’t always buying Apple and Coca-Cola stock just because they love iPhones and high-fructose corn syrup (though they do), they played off of the moves Warren was making.
Maybe now you’re saying “Ok, that’s interesting. I sort’ve believe it. But how can we use this ‘Guru Theory of Investing’ to make more $$$?” That, unfortunately, I don’t really know. Gurus often appear out of nowhere, and if you wait until there is a clear Guru, it may be too late. The value may have already shot up. But if you think of a way, let me know.
