Is Market Efficient or Inefficient? Know the Hidden Secret and Make Tons of Money

Thursday, 30 August 2018

Is Market Efficient or Inefficient? Know the Hidden Secret and Make Tons of Money

Greetings from Hitesh! We have started education series posts relevant to share market. Yesterday it was on the way you think. Today, we will talk about market.

Root of Efficient Market Theory: -

In 1960, Chicago Business School developed some new concepts like Efficient Market Theory, Systematic Risk, Risk Adjusted Return, Non Systematic Risk, Alpha, Beta among others. Efficient Market Theory became the root cause for Index Funds and Mass marketing Mutual Fund products. (Some medical guys say that there are conspiracies to develop Medicines first and then they develop disease so that they can sell their medicines). Same way in the field of finance – there are some concepts which are developed for the benefit of few and they have been marketed so well world over in last 60 years that people have lost the track of reality. Efficient market theory is one such concept.

What EFFICIENT MARKET THEORY says?

1.  There are N number of participants in the market and they all have relevant information. They are intelligent, objective, highly motivated, and hardworking. (????)

2.  Because of the collective actions of these guys, information is reflected fully and immediately in the price of asset class. If the information is positive, they will all buy and if the information is negative, they will all sell. Due to this the price will always reflect FAIR VALUE.

3.  Thus, market price will reflect TRUE INTRINSIC value of the asset and no individual guy can consistently profit from them.

4.  Assets sell at prices from which they are expected to give risk adjusted return that are FAIR relative to other assets.

According to this theory, there is no possibility to earn above average return in your investments as everything is priced in.

The assumptions of Efficient Market Theory: -

1.  Investors are intelligent, objective, hardworking, motivated and well equipped.

2.  They have access to all information.

3.  They are open to buying, selling and shorting.

What are the FACTS?

Investors are emotional, and they are not objective when it comes to playing in the market. They may have access to all information, but can they do the detailed and same analyses of the same information? Most investors follow simple way – buy – hold and sell model. They are not ready to SHORT or play in multiple markets to take advantage of the opportunities.

That’s why BUFFETT has often said – “If markets were efficient, I would be standing on the road with bowl in my hand.”

In practice, access to information and analyses are highly imperfect. That’s why market prices are often far above or far below their intrinsic value.

Some investors can consistently outperform others due to differences in terms of skill, insights and information access. They can identify the misvaluations early and profit from the same.

What is my personal understanding of the Game?

I always ask one simple question – where is the market? Is my computer SCREEN a market? Is Stock exchange building a market? Is my fellow investor a market? Is my office a market?

I have found that market is within me. It’s my perception. It’s my greed and fear which motivates me to take my market moves. I am efficient some time and I am inefficient some time. Depending on my investments in my skills, my technology, my information network, I can increase my efficiency and to that extent I can make money out of the given opportunity.

What NEXT?

In Seven Habits of Highly Effective People, Stephen Covey talked about the 7^th habit - SHARPEN THE SAW. You need to continuously upgrade your health, resources and technology to be in the game. Anthony Robbins says – CANi - Continuous and Never Ending Improvement for the same thing.

So, don’t waste time in discussing market’s efficiency or inefficiency. Introspect yourself and you will find new ways to deal with the market.

I wish you all the best.

Follow me on Twitter @hiteshmparikh / WhatsApp - +91-9869425399.

Live With Passion…Invest With Passion.

Hitesh Parikh.