Why invest in one thing over another? (Part 4)

Key Points

  • The Efficient Market Hypothesis has plenty of criticisms that are not only important to understand, but also have strong validity, and therefore should not be dismissed.
  • Boom and bust cycles provide strong evidence of pervasive market irrationality; nevertheless, this is not the same as knowing when irrationally exists and knowing when it will go away.
  • It is not enough to be able to spot irrationality because, “the markets can stay irrational longer than you can stay solvent”.
  • Rational and irrational investors may be unduly influenced by behavioral biases leading to the sustained, yet unpredictable mispricings of securities.

Continue reading → Why invest in one thing over another? (Part 4)

Why invest in one thing over another? (Part 2)

Key Points

  • Whether you agree with it or not, having a sound understanding of the Efficient Market Hypothesis (EMH) is critical.
  • Making active investment decisions requires factoring in all relevant and available information that may influence future performance and risk. This is a daunting task.
  • Nevertheless, according the EMH, the market is able to do this seamlessly and instantly.
  • According to theory, the markets have a way of equalizing prices such that all investment opportunities provide similar risk-adjusted returns on a go-forward basis.

Continue reading → Why invest in one thing over another? (Part 2)

Why invest in one thing over another? (Part 1)

Key Points

  • Fundamentally, investing is just putting money to work for future use.
  • When choosing between two investment choices of similar risk, pick the one that is more likely to lead to a greater return over your investment horizon.
  • However, according to the Efficient Market Hypothesis, consistently making the right decision on this is far easier said than done.

Continue reading → Why invest in one thing over another? (Part 1)