"Price Is A Liar" - John Burbank
|Edward Rooster||Oct 19, 2015|
On PRICE: "Price is nothing other than the equilibrium of liquidity. It’s where people agree."
Reading some notes taken by a talk, at UC Haas, given by hedge fund manager John Burbank, of Passport Capital, this quote struck me as very relevant. Rooster360 goes on and on about "following price" but a consideration about the nature of price wouldn't hurt and I found this observation by Burbank to be fascinating. It's all you have to work with. Burbank had been quoted as calling "price a liar" but that is an incomplete statement. It needs to be 'true' for the participant at EXIT, so it is not an inveterate liar to the value/arbitrage/variant investor/speculator.
In the parlance of liquidity, equilibrium has moved in favor of the investor/speculator/risk-taker in some particular situation. It's either "target" achieved or loss is accepted, or the opportunity cost is or will be outweighed by a new investment/speculation, prompting an exit to redeploy capital.
Liquidity and price becomes the truth upon exit.
Even if it's involuntary, price is the only answer you get upon exit, assuming you can get a counter-party/market-maker to enable your exit. Lie or not, that's the truth.
"The most important things don’t revert to the mean, they diverge from the mean." When I think about this idea, then it means the concept of "price is a liar" would be modified, as the "lie" of a price becomes less of a lie as the market's price for some idea/investment/speculation keeps going on in one direction, upwards or downwards. The emergence of a new "honesty" emerges with the market's interpretation of information for that idea is being discounted, in a continuous movement through time, and as liquidity is continually redefining its equilibrium, in one direction for a some sustained period of time.
Below is the link to these wonderful, thoughtful notes: