Comments on: Religion and Stocks…What Do You Believe In?

By: Rob Bennett

Rob Bennett — Thu, 09 Apr 2009 10:04:29 +0000

I’m with John. I say that the Efficient Market Theory is 100 percent myth, 100 percent gibberish.

I like it that he also says that most people should be in index funds. That’s also true.

What’s happened is that the Efficient Market Theory proponents came up with an explanation for why most people do a poor job of picking stocks and people noticed that it is true that most people do a poor job of picking stocks and jumped to the conclusion that the Efficient Market Theory is right. No! There are perfectly logical explanations for why most people do a poor job of picking stocks that do not require a belief in the Efficient Market Theory.

Investing is a highly emotional endeavor. Most people get caught up in the emotion. Warren Buffett doesn’t. That’s his secret. Anyone of average intelligence can pick stocks effectively IF he first devotes a lot of effort to getting his emotions under control. That’s a big job.

The great irony is that Efficient Market Theory proponents are the most emotional investors of all. The author is right to compare belief in this theory to belief in a religion. I have nothing against religion (I am a believer myself) but I do have something against intense dogmatism. I have never seen in any other area of life the intense dogmatism that I have seen among advocates of the Efficient Market Theory. They say with their words that they are unemotional. Their arrogant disregard for other viewpoints tells a different story.

Rob

By: John Forman

John Forman — Tue, 25 Nov 2008 14:36:27 +0000

weakonomist – What you are talking about is the complete opposite of Efficient Markets. The EMH says skill or talent cannot create outperformance (only luck). This is not to say, however, that I disagree with your general suggestion that most folks are probably best off with index funds.

By: Nut

Nut — Tue, 25 Nov 2008 13:14:39 +0000

I totally agree that the whole idea of “Warren did it, I could too!” is far fetched. I invest around 90% of my money in index funds, but I have to feed that greedy/stupid part of me that thinks he can do better than the market! I only own a couple of stocks (and one of them is Berkshire Hathaway), but I still think that having a stock or two (or at least entertaining the possibility of buying some) is a good idea. It keeps you paying attention to what’s happening in the world of finance and how stocks move up and down depending on economic conditions, earnings reports, etc. If I only owned index funds, I might not pay attention to any of that stuff.
Which might actually save me a lot of stress, now that I mention it….

By: John Forman

John Forman — Mon, 24 Nov 2008 15:57:52 +0000

When I first heard about EMT in college I knew it was bunk, and the longer I spend in the markets I more convinced I am of that fact. Efficient markets rely on perfect distribution of information and rational decision-making. The information part of it has certainly moved in that direction, but traders still get (and act) on information at a dispersed periods of times. As for rationality, one needs only to look at the behavior of prices over the last year or so for rejection of that idea.

Markets tend toward efficiency when they are at low volatility and the information flow is light. The faster things are moving, the less efficient the markets become.

By: the weakonomist

the weakonomist — Mon, 24 Nov 2008 14:57:39 +0000

EMT is the theory most everyone should subscribe to. Buffet and Lynch have an ability that is unique to them. Because we can’t see this ability, we think we can mirror it.

Compare Buffet to LeBron James, arguably the future of the NBA and one of the best basketball players in the world. You see his speed, his power, his agility, and abilities. You know you can’t physically do what he does, so you don’t try and go pro with your b-ball.

But Buffet is just some old white guy who bought stocks in brands he liked. He made a bunch of money, so you thought you could too.

I’m guilty of buying a stock here and there, but it’s mostly for fun. Just like I’ll play ball at the YMCA.

There is a reason Buffet endorses index funds, it’s because he knows his skillset is unique and the vast majority of people cannot do what he does. I would follow his advice, long before I follow his investing strategy.

Just like LeBron James will tell you to go to college, even though he didn’t.

PS: P/E ratios will always be more interesting than ANYTHING associated with baseball. Football is another thing…