- 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)”
- Three key assumptions underlie the Efficient Market Hypothesis.
- First, investors are rational and they invest rationally.
- Second, irrational investors exist, but they tend to cancel each other out.
- Third, rational investors eliminate any remaining mispricing caused by irrational investors.
Continue reading “Why invest in one thing over another? (Part 3)”
- 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)”
- 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)”