Every week I look for a subject to discuss what I have heard from clients/prospects. Some are questions, some are comments. This week I am going to discuss ‘The Efficient Market Hypothesis’ written by Dr. Eugene Fama in his Phd. Dissertation. Partly because Dr. Fama won the Nobel Prize in Economics for 2013 and partly because I continue to hear questions on market timing, when to get into and out of the market. I actually had someone ask for the current hot stock(s). YIKES!!
I have mentioned ‘The Efficient Market Hypothesis’ , now Nobel prize winning, many times before. It has also been referred to as Free Markets Work. Dr Fama’s definition of the efficient market is as follows:
“In [a free] market at any point in time the actual price of a security will be a good estimate of its intrinsic value”.
This is just a brief definition because I do not wish to bore you with the entire dissertation. What he is saying is that price of a stock today represents its true value today. It does not represent a forecast of the future, because we all know no one can predict the future. Therefore, all the knowable information is already in the price of the stock (security).
Any future movement of that stock is random and unpredictable.
Given this information we know that if you are trying to use
- Stock picking
- Market timing
- Track record investing
You are gambling and speculating with your money. Anyone who recommends you use these tactics with your investment money should be considered a Wall Street bully.
When my financial services career began in 1992 I found it very curious why not one firm that I worked for recommended using ‘The Efficient Market Hypothesis’ or any other academic study I learned in finance classes in both college and graduate school. The research I learned proved these concepts work and making predictions does not.
What I concluded was the Wall Street bullies need you to continue to gamble and speculate with your money because this generates the most fees for these firms.
It has been proven numerous times that there is zero correlation between a stock pickers/market timers ability to pick the right stocks or correctly time the market in the past and their ability to do so in the future. This means that just because any adviser/agent has a good track record in ‘beating’ the market there is no evidence that they will repeat. It is not impossible but highly unlikely.
If this is true, then why do investors continually seek out the ‘best’ investments for right now?
Why do these same investors look for someone to beat the market?
The markets offer great returns long term why not concentrate your investment money on capturing market returns?
Most of these questions can be answered by the fact that the Wall Street bullies continue to market gambling and speculating.
There will always be someone making predictions about where investments are going. Stop being a victim of the Wall Street bullies. Learn about the most recent Nobel Prize winning concept along with other academic concepts to engineer a portfolio for you.