In medicine, the term “systemic” refers to a disease or poison that affects the entire body.  The term “local” refers to a disease or poison that affects just one area of the body.  A local disease is contained.  A systemic disease affects the entire body.

Asset managers likewise make local errors and systemic errors.  An asset manager might think he is investing in a company with a great competitive advantage that turns out to be an also-ran subject to intense competitive pressures.  That mistake, while costly to the individual asset manager, has little effect on the market overall.  It was an error in judgment that is localized.

Local errors tend to offset one another.  One asset manager might overvalue a company while another undervalues it.  Their actions offset one another, which neutralizes the effect on market prices.     

Systemic errors, in contrast, cut across many market participants.  Something within the system causes many asset managers to make the same mistake at the same time and in the same direction.  Because of the coordinated nature of the error, systemic errors do affect market prices, often in a material way. If something within the system causes many asset managers to mistakenly overvalue a particular security, for instance, the actions taken by those asset managers make that security overpriced.  The security stays overpriced for as long as the underlying systemic error remains undetected.  Over time, the error reveals itself and the market corrects.  

One way asset managers get crushed is by buying into one of these systemic errors at the wrong time.  Buying into a systemic error just prior to that error revealing itself can be devastating for an asset manager.  Buying into the U.S. housing market prior to the Global Financial Crisis is but one example.  Buying into the dotcom bubble of the late nineties is another. Buying into Enron or WorldCom or Bre-X at the wrong time are others. These were systemic errors made by many market participants at the same time and in the same direction.  The ones that bought into the euphoria got crushed.

The coordinated nature of these systemic errors make them almost by definition part of the prevailing consensus.  Something in the market causes lots of market participants to get it wrong.  They all move in the same direction at the same time.  Their actions create their own reality in the market.  If many people for whatever reason overvalue a company like Tesla, their coordinated actions cause Tesla stock to increase, which of course provides short-term reinforcement for the underlying systemic error. That, then, gets embedded in the prevailing consensus.  Sometimes the consensus gets it right.  Sometimes it doesn’t.