John Maynard Keynes likened investing to a beauty contest which is described in this Wikipedia entry:

Keynes described the action of rational agents in a market using an analogy based on a fictional newspaper contest, in which entrants are asked to choose from a set of six photographs of women that are the "most beautiful." Those who picked the most popular face are then eligible for a prize.

A naive strategy would be to choose the face that, in the opinion of the entrant, is the most beautiful. A more sophisticated contest entrant, wishing to maximize the chances of winning a prize, would think about what the majority perception of beauty is, and then make a selection based on some inference from his knowledge of public perceptions. This can be carried one step further to take into account the fact that other entrants would each have their own opinion of what public perceptions are. Thus the strategy can be extended to the next order and the next and so on, at each level attempting to predict the eventual outcome of the process based on the reasoning of other rational agents.

"It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees." (Keynes, General Theory of Employment Interest and Money, 1936).

Keynes believed that similar behavior was at work within the stock market. This would have people pricing shares not based on what they think their fundamental value is, but rather on what they think everyone else thinks their value is, or what everybody else would predict the average assessment of value to be.

If Keynes was right - and I think he was - then we should be spending most of our energy trying to figure out what the other participants in the market are thinking and doing. Investors use a variety of methods to accomplish that. For instance, some follow the investor polls that show how many people say they are bullish and bearish and that can give us an idea about the sentiment of the other market players. Unfortunately, polls merely tell us what other market participants are willing to say to pollsters, not what they are doing. I think it is better to just observe current market prices and, using the principle of Occam's Razor, try to determine what the market is telling us. Here's what we observe today:

• Stocks are rising 
• Bond yields are rising
• TIPS yields, a measure of real interest rates, are rising
• The US dollar is rising
• Commodity prices are falling