When it comes to market predictions, being right is not enough.
Magnetic Capital’s Prediction Matrix
It’s the beginning of a new decade, so it’s one of those times when we’re all thinking about, the future. Making our predictions. And hey, if you predicted, in 2010, that the time had come for decentralized money to take hold, and you acted on it by buying some bitcoin, well, you did great.
But there is one particular reason, the people who bought bitcoin early, did..so... well. Yes, they correctly predicted something that wound up happening. But that isn’t the main reason, they did so well. You see, being right about Bitcoin, was necessary, but not sufficient, to do really great. The reason people, who bought Bitcoin early, became fabulously wealthy, is because their prediction, was not a popular one, at the time.
I’d like to share with you a really useful way to categorize your predictions. This is an exercise we do at Magnetic Capital, called “The KASPAR Prediction Matrix”. It’s a very simple but powerful, technique. It involves placing your predictions into one of two buckets - consensus predictions, or non-consensus predictions.
Now when it comes to making money on predictions, a lot of people think, all they need to do is be right. But as I just mentioned, with the early bitcoin believers, that’s not enough. To do really well, when placing money, on a stock, a sportsbook, or a crypto, you not only have to be right- about what you think is going to happen (you know, actually making a correct prediction) - your prediction also, has to be “non consensus”. That’s another way of saying “not popular”.
So what is this consensus, non-consensus stuff?
“Consensus predictions” are simply the predictions that, the majority of people think, are going to happen. For example, a straightforward consensus prediction in the financial sector, is that the US dollar, will hold its strength, against other major world currencies, in 2020. Today, that’s what the markets are betting. Another, consensus prediction, is that the US Federal Reserve will keep interest rates, at their current level, or even slightly lower, over the next 12 months. Now the thing about these 2 consensus predictions, that I just mentioned, is that if you bet your money, that these predictions are going to happen, and, if you turn out, to be right.... you do ok. But not great.
So here’s the point. Making the right prediction, when just about everyone else, thinks the same way, doesn’t make you much money. It’s like betting, on the heavily favored football team. If lots of other money is placed on the same team, that money gets spread around to a lot of people. Following the consensus should help you avoid going off a cliff, but it also puts you, on the road to average.
Which brings us, to the more exciting (AND more dangerous place)on the KASPAR prediction matrix. Non-consensus predictions. This, is where the action is. Non-consensus predictions, are the things most people don’t think are going to happen. And that of course, is what makes them fun. Because….what if they do happen? I remember, very well, my partner’s non consensus prediction, that search results ranked by how much someone paid, would be a far superior way to direct traffic on the Internet. So he, Bill Gross, founded Goto.com, in the idealab incubator, in 1998. Goto, went public, less than 2 years later. With hundreds of millions of revenue. There were a lot of other search engines back then. None of which were making any real money. But the venture capitalists, and the technology press, they thought Bill Gross’s idea, was awful. You can still read all the dismissive articles back then about Goto.com. There still out there. The fact that the Google founders stole Bill Gross’s idea, that doesn’t take away from the fact that he made a lot of money, with his non consensus prediction, about how best to rank searches.
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