- The market is in a constant ebb and flow, regularly influenced by the latest headlines.
- Today, Nicholas Vardy explains how variant perception offers a different way of looking at things… and a whole new investment strategy.
“Variant perception is the effort to become sufficiently knowledgeable about whatever the subject is, that at a time to be at variance from consensus, because one of the few sure ways to make money in the market is to have a view that is off consensus and have that view turned out to be right.”
– Michael Steinhardt
The phrase “variant perception” was coined by an irascible stock picker named Michael Steinhardt, one of the hedge fund managers profiled in Jack Schwager’s classic book, Market Wizards: Interviews with Top Traders.
Variant perception is a straightforward idea with a fancy name. And it is one of the most important mental models for investing you will ever come across.
It’s also a concept that is particularly relevant to identifying both short- and long-term investment opportunities in today’s news-driven stock market.
Click here to watch Nicholas Vardy’s latest video update.
What Is Variant Perception?
“Variant” is defined as “differing” or “not universally accepted.”
“Perception” is defined as “the act of apprehending by means of the senses or of the mind.”
So a variant perception is simply a different way of looking at things.
The market always has a particular view on a stock or asset.
Academics argue that a stock’s price reflects all publicly known information about it.
That’s why markets are efficient – and why it is so hard to beat a simple index fund.
Variant perception suggests that the key to successful investing is believing almost the exact opposite.
Super speculator George Soros put it perhaps best…
The prevailing wisdom is that markets are always right. I take the opposition position. I assume that markets are always wrong… This line of reasoning leads me to look for the flaw in every investment thesis… I am ahead of the curve.
Variant Perception in Today’s Markets
Variant perception is a way of thinking that homes in on the very best investment opportunities.
There is always some narrative that dominates the financial headlines.
After 9/11, it was the threat of global terrorism.
After the global financial crisis of 2008, it was the collapse of Bear Stearns and Lehman Brothers.
Now it’s COVID-19-related news that dominates the markets.
Yes, markets are forever noisy. But they also have an underlying rhythm.
Today, individual stocks will move on COVID-19-related news.
If there is some bullish news on a vaccine trial, you can expect Gilead Sciences (Nasdaq: GILD) or Moderna (Nasdaq: MRNA) to soar.
If some bearish news on a trial seeps out, these same stocks will tumble.
The same rhythm applies to news related to cruise line, hotel and airline stocks. They will soar – or tumble – on the flimsiest of rumors or press releases.
The good news is, once you get the hang of these short rhythms, you can ride the market like a surfer rides a wave.
(This is precisely what I do in my new VIP Trading Service, Oxford Swing Trader.)
Applying Variant Perception to Trading
Let’s apply variant perception to active, short-term trading.
As I noted, the ebb and flow of the market reflect ever-changing perceptions.
Variant perception tells you to look at the world differently.
But how to apply variant perception in practice?
A good rule of thumb is to embrace an opinion that is the opposite of today’s consensus. Then use that as a framework for fleshing out your own views.
Oil prices have crashed to zero? Think about how to profit from a bounce in oil prices.
Does consensus hold that airlines, cruise lines and movie theaters will all go out of business? Imagine the exact opposite were true.
It’s in identifying and embracing insights driven by variant perception that many investment fortunes are made.
Longer-Term Variant Perception
Variant perception applies not just to short-term trading.
It also applies to developing a long-term view.
Conventional wisdom is that “the world will never be the same after COVID-19.”
I don’t buy it.
I believe that the world will move on and thrive beyond the current pandemic.
The same applies to financial markets.
As Harvard economist John Kenneth Galbraith observed, “The financial memory is very short.”
Picture the world in 2022.
Have airplanes stopped flying? Have Americans abandoned cruises? Are movie theaters gone from the face of the earth?
How you answer these questions will guide you in identifying the best investment opportunities.
Let me share my big, overarching variant perception.
I believe the whole COVID-19 problem goes away once a vaccine is found.
With the best of human ingenuity racing to find a solution… this is not a question of “if” but “when.”
I firmly believe that by 2022 (at the latest!), airlines will fly. Cruise ships will cruise. Real-world colleges will thrive, surviving the challenge of online learning.
This variant perception is driving my investment decisions over the coming months.
I’ll report back at a future date about how I fared.
About Nicholas Vardy
An accomplished investment advisor and widely recognized expert on quantitative investing, global investing and exchange-traded funds, Nicholas has been a regular commentator on CNN International and Fox Business Network. He has also been cited in The Wall Street Journal, Financial Times, Newsweek, Fox Business News, CBS, MarketWatch, Yahoo Finance and MSN Money Central. Nicholas holds a bachelor’s and a master’s from Stanford University and a J.D. from Harvard Law School. It’s no wonder his groundbreaking content is published regularly in the free daily e-letter Liberty Through Wealth.
