Investing dilemma

Investment performance is defined as seeking to get better than average results over a fairly long period of time – consistently, according to Institutional Investors magazine. Along the thinking, value of investment advice is substantial. For example, professional sophisticated investors would do return analysis, business analysis, and earning estimation etc. These analyses have extended to tiny details so that these investors have better grasp of their investing. For example, Return analysis has progressed from annual to monthly and ultimately to daily data, including dividend payments and adjustments for stock splits, stock dividends, and other capital adjustments. The scope of analysis now embraces small company stocks, a wide variety of bonds, real estate, and the financial markets of other nations.

Somehow ironic, are those investors or analysts willing to share this information? As Fama pointed out, “if there are many analysts who are pretty good at this sort of thing, they help narrow discrepancies between actual prices and intrinsic values and cause actual prices, on the average, to adjust ‘instantaneously’ to changes in intrinsic values… although the returns to these sophisticated analysts may be quite high, they establish a market in which fundamental analysis is a fairly useless procedure both for the average analyst and the average investors”

In other words, it is fruitless to do that much analysis because the Market is efficient. The Market is in the process of self-learning. As long as whatever theories have gained tractions, the Market will learn and saturate the theories. The advancement of communication technologies doesn’t change this rule at all.

On the other hand, simple logic would suggest that professional investors who devote full time and substantial resources to the task must be adding something of value. There seems a dilemma in this regard. The average little guy has no chance, therefore that investors hear little of value from broker. Also, agreed that everyone can’t do better than everyone else and the speed of price adjustments to other obviously public available information is too great to provide consistently profitable trading opportunities. However, there is a group of people seems working again this.

Even when the high performance is for rent --- John Neff and Peter Lynch have managed money for others --- the ability to combine financial acumen with an acute sense of timing and assessment of risk seems to be non-transferable. Rarely has an investment firm continued to produce superior results after the departure of it star.

These considerations don’t close the case in favor of the efficient market, however. Stock will be priced at what they are worth only when a sizable number of investors, with big sums at play, know how to values correctly. But does everyone know “how”? The lucky ones are obviously those who know “how” well better than average.

If everyone is a noise trader, the market will be chaotic. No theory about a market that is possible. The presence of avid and intelligent investor is a necessary condition for a market that lends itself to systematic analysis and understanding. The unhappy part of the story is that the more avid and intelligent those investors are, the more difficult they make life for one another. We are all blessed that there is just enough opportunity for one or another of them to win just often enough that the game takes on its zest. A little inefficiency goes a long way in making the game worth playing.

Luckily, there is always plenty of inefficiencies.