The Paradox Of Investment Advice*

There is a fundamental paradox about the usefulness of investment advice with respect to all types of investments in general. If the advice reaches enough people and they act on it, knowledge of the advice will destroy its own usefulness. If everyone knows of a “strong buy” and they all rush to buy it, it will no longer be a “strong buy” because its price would rise so quickly that getting into the investment would no longer be attractive as the projected return would largely have been “taken” by others; thus, the risk may also have increased.

As mentioned above, this paradox holds true not only for securities, but for business in general. For example, if everyone starts selling the same merchandise or working the same business model (i.e., current dilemma in the online-dvd-rental market), then who will be left to buy, and where will be the profits (customers)?

*David Dreman, "Contrarian Investment Strategies in the Next Generation"