I’ve posted Entry #119 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Investors Know the Valuation Level Without Checking It.
Juicy Excerpt: The answer (I believe) is that we humans know all sorts of things that we do not realize we know. A book that offers an in-depth discussion of this point is The Wisdom of Crowds. The Wikipedia entry on the book explains that group assessments of a reality are often better informed than the assessments made by the smartest members of the same group. For example. “the crowd at a county fair accurately guessed the weight of an ox when their individual guesses were averaged. The average was closer to the ox’s true butchered weight than the estimates of most crowd members, and also closer than any of the separate estimates made by cattle experts.” The book discusses many illustrations of the phenomenon. There is an intelligence that only large communities of people possess.
The stock market is comprised of many people. Acting as a community, we know things. We know things that none of the best informed among us know as individuals. We even know things that we don’t know. We know today that stock prices will be headed downward again in days to come even though we do not today possess the confidence in this belief it would take for us to express it in words (or to act on it and thereby to speed up the day when prices fall).