Efficient Market Theory In A Nutshell
The only one who is smarter than anybody is everybody.
Markets reflect the vast, complex network of information, expectations, and human behavior. These forces drive prices to fair value. This simple yet powerful view of market equilibrium has profound investment implications. No one individual or firm knows more than the collective wisdom of 7 billion people.
A great way to test this theory is to see the amount of active mutual fund managers that have been able to beat their respective benchmarks. Their performance have been dismal, in fact no more than random chance alone and statistically insignificant.
A fundamental component of Free Market Investing is the Efficient Market Hypothesis, first explained by Eugene F. Fama in his 1965 doctoral thesis:
“An efficient market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value.” Eugene F. Fama, “Random Walks in Stock Market Prices,” Financial Analysts Journal, September/October 1965.
Professor Eugene Fama – Why Do Small Caps And Value Stocks Outperform
Eugene Fama, Robert R. McCormick Distinguished Service Professor of Finance, May 24, 2012.
Starting in the 1960’s, market volatility was seen to be the sole driver of asset pricing, as expressed in the Capital Asset Pricing Model known as CAPM. In 1992, this award-winning academic co-authored a paper which identified two other variables that drive asset class returns.
Do You Make These Mistakes When Investing & Planning For Retirement? This workshop will inspire you to change the way you save and invest through compelling evidence and insightful analysis of today’s challenging financial landscape.
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Capitalism Works & Three Common Myths of Capitalism
Is being pro-business and pro-capitalism the same? Does capitalism generate an unfair distribution of income? Was capitalism responsible for the most recent financial crisis? Dr. Jeffrey Miron at Harvard answers these questions by exposing three common myths of capitalism.
After viewing this 3 minute video call our office 1-877-526-8727 and request your FREE copy of our Investor Awareness Guide and our Seven Deadly Investor Traps audio CD.
If the material makes a connection with you, the second step is to call our office and schedule your complimentary 45 minute investment coaching conversation. This conversation will give you a chance to learn more about us and give us a chance to help you achieve greater clarity about what you hope to achieve. Call us today and see how we can make you a more confindent investor.
Our Strategy
Nobel Laureates: Recognize that Nobel Prize winners researched the market. Nobel Prizes have been awarded to academics for their analysis of how stock markets work. The allure of findings is that they are not biased by a need to earn a commission or sell you an IPO, bond, stock, mutual fund, UIT, magazine, or newspaper. More than 100 years of academic research has concluded that index and passive mutual funds are an investor’s best investment. Sadly, the great majority have never read these academic studies.
Our Investment Strategy is founded in research and academics, investing on the basis of “what we know,” not “what someone thinks.” Our strategies are based upon the following Core Principles:
Markets Work:
Based upon the works of Paul Samuelson, MIT, and Eugene Fama, University of Chicago, we know that markets work and that they are efficient. Current prices for a security incorporate all available information and expectations. “Mispricings” do occur but not in predictable patterns that can be identified ahead of time. Thus, “active” management strategies cannot consistently add value through security selection or market timing while “passive” investment strategies will reward investors with capital market returns.
Risk and Return are Related:
Based upon the works of Harry Markowitz, Nobel Prize in Economics, and William Sharpe, Nobel Prize in Economics, we know that risk and return are related. The more risk that an investor is willing to assume then the more return they can expect to receive.
Portfolio Structure Determines Performance:
Based upon the works of William Sharpe, Nobel Prize in Economics, and Eugene Fama and Kenneth French, University of Chicago, we know that portfolio structure is the major determinant of returns, not security selection or market timing. Further, academic research has shown that there are three dimensions to stock returns. In addition to market exposure, i.e. exposure to stocks, research has shown that returns are also affected by exposure to small-company and value stocks. Our structured portfolios are designed to capture the premium in expected returns that come from investing in small-company and value securities.
Diversification:
Based upon the work of Harry Markowitz, Nobel Prize in Economics, we know that portfolio diversification reduces risk. Our structured portfolios are globally diversified in over 12,000 securities worldwide to manage and control risk while capturing the performance of domestic, international, emerging, and frontier markets.
Call our office today 1-877-526-8727 and request your FREE copy of our Investor Awareness Guide and our Seven Deadly Investor Traps audio CD. If the material makes a connection with you, the second step is to call our office and schedule your complimentary 45 minute investment coaching conversation. This conversation will give you a chance to learn more about us and give us a chance to help you achieve greater clarity about what you hope to achieve. Call us today to see how we can make you a more confident investor!