Why Markets Are Efficient

Here’s why I’m learning towards efficient markets.

Following Tim Ferriss’s¬†recommendations, I’ve read, in this order

1. Buffett – The Making of an American Capitalist
2. More Money Than God
3.¬†The Smartest Investment Book You’ll Ever Read

I’ve just finished the third. This¬†book falls under the “efficient market” hypothesis whereas the first two were strong advocates of the “inefficient marts” hypothesis. I have to admit I was pretty convinced by inefficient market theory, but Solin’s book has kind of blown it out of the water.

Anyway – this book is great. Its aggressive tone against what Solin calls “hyperactive” investing and the complete lies of the financial industry make this book mandatory reading for anyone interested in investing, regardless of whether you’re an efficient or inefficient market guy.

If more people read this book, it would make lives harder for unethical brokers pushing unsuitable products with no fiduciary responsibility. And that’s good in my book.

A lot of people don’t really consider critical things such as fees when they’re buying actively managed funds – this book explains in black and white what the dangers are.

Best of all there’s a very simple and clear approach in the final section – the book is not just a rant!

Great stuff.

The Market is Inefficient – at first

“People form opinions at their own pace and in their own way – the notion that information could be instantly processed is one of the ivory tower assumptions that has little to do with reality.” Sebastian Mallaby, More Money Than God

So this is one of the many cases for Inefficient Markets Theory. It’s in stark contrast to Dan Solin’s opinion laid out in The Smartest Investment Book You’ll Ever Read

Where am I with these opinions? Still undecided. But I do have a few opinions.

  1. You may be able to ‘beat the market’ but only temporarily. Soon enough whatever amazing strategy you’ve come up with will be replicated, and the market will become ‘efficient’.
  2. If markets were efficient, there would be no such thing as hedge funds – they couldn’t exit. No investing ‘edge’ would ever work
  3. It’s a very small minority who can continually ‘beat the market’ meaning that even if markets are inefficient, there are very few who can be relied upon to do it for long periods of time. This obviously has ramifications for who you should invest your money with.

I’ll be exploring Efficient vs. Inefficient – will be interesting to see where this lands.

First step is to see what people say online.