During my academic career both undergraduate and graduate I learned what works in investing and what doesn’t. Some of what works has actually won the Nobel Prize in economics. What I learned works is the Efficient Market Hypothesis, Modern Portfolio Theory and The Three Factor Model.
After a career in corporate financial analysis I started my career in financial services. I received what I was told was the best training in the industry. After completion of this training I realized that it was all about sales and nothing about academic research. ‘Sell what and how we tell you and you will succeed’.
When I asked why none of what we sold had anything to do with the academic research that worked. I was told that the academic research did not apply in the real world. The brokerage firm(s) know what was best and just follow their lead to success.
After years of frustratingly disappointing results I finally realized that the brokerage and insurance firms were wrong.
This message will focus on the Efficient Market Theory or that the Free Markets work. “In [a free] at any point in time the actual price of a security will be a good estimate of its intrinsic value.” Eugene Fama. What this essentially is saying is that all the knowable and predictable information is already in the price of the asset.
Therefore if you believe that the free markets work and the markets are efficient you must not follow the advice of the Wall Street bullies. These bullies want you to believe that they can predict the future and sell you the investments which will outperform the markets. These bullies also want you to believe that they can tell you when to get out of an asset class/individual stock to avoid any losses. WRONG.
The markets are random and unpredictable.
Although the markets are not perfectly efficient they are efficient enough not to allow anyone to consistently take advantages of these inefficiencies and ‘beat’ the market.
With this knowledge we can stop being a victim of the Wall Street bullies. If we want to stop being a victim we must not work with advisers who use:
- Stock picking.
- Market timing.
- Track record investing.
If you are really interested in earning market returns you need to follow a process and remain disciplined to that process. Remember earning market returns will lead to success over the long term. Of course no one can guarantee anything.
In future messages we will discuss the other academic research concepts notably Modern Portfolio Theory and The Three Factor Model. We will learn that if we combine all these concepts in YOUR portfolio, success will be yours over the long term.
Keep in mind none of these concepts, alone or in combination, involves eliminating risk but rather controlling how much risk is in your portfolio.
Finally, equities are the greatest wealth creation tool on the planet if we have a prudent process and maintain discipline. This is only possible in most if not all cases if you work with an investor coach.
Given the continued threat of a government shutdown many are forecasting a downturn in the market. This is where an investor coach would keep you on track and prevent you from panicking. Panicking or selling at the wrong time and for the wrong reasons is a top reason investors earn poor returns.
These same investors will blame the markets rather their own poor emotional decisions.