As far as ‚market efficiency‘ is concerned, there are really two schools of thought:
- Some people who buy shares believe that they have a special insight and can ‚outperform‘ the market (i.e. outperform against other market participants)
- Other investors believe that the share price, at all times, reflects all known and published information about the business and its environment, so you can’t beat the market.
The reality is that a market that is large and liquid is almost always efficient. They might be anomalies, but they are rare, and ironically, investors who trade a lot because they believe that the market is inefficient are actually helping the market become highly efficient.
MyMoneyWorks believes that there is no point (well, apart from the fun of it) trying to outperform the market, because it almost never works. Rather than trying to beat others, it is very good already if you invest in quality stocks (or indexes). These are companies that are profitable and growing, as far as possible consistently, over the long term.
Don’t try to be too clever, history has shown that being average is great. Whenever you think that the price of a stock is a ‚bargain‘, ask yourself the following questions (inspired from Ken Fisher, the money manager):
- „What do I know or see about this company that the vast majority of other market participants doesn’t know or doesn’t see?“ Almost always, the answer will that you don’t know anything special that others don’t know already
- even if you feel very strong about something (positive) about the business that you think others don’t see, ask yourself: „Could it be that there are other (negative) things that I don’t see or know about the business – but that most other market participants probably see or know?“
- even if you really believe that you have seen something special that others don’t see, ask yourself: „How many years will it take for the market participants to also see, recognise, and understand what I see, and adjust the price accordingly?“. If the market never sees what you see, then you are most likely wrong and you might as well have seen a mirage.
- Last but not least: „If even the pros don’t beat the market (98.9% of US equity funds underperformed over the last 10 years), why do I believe that I can beat the market?“.
As Warren Buffett, the CEO of Berkshire Hathaway, says: „it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price“.