" Rich and Poor Serve Their Wall Street Masters"

Enclosed is link to an excellent article by Dan Solin, an actual example of portfolio churn which destroyed value for an investor. The author does comparison with passive index portfolios that would have created much more wealth for the investor.

http://www.huffingtonpost.com/dan-solin/rich-and-poor-serve-their_b_812718.html

Criticism of 'Market Efficiency'...but does it allow you to make money hand over fist?

Art Carden is a professor of economics at Rhodes College and the following paragraph is from his write-up, Why Economics is Crucial for Ethics.

“If you are making money hand over fist exploiting inefficiencies in the market, then I will believe you and listen to your criticisms of efficient markets.  Until then, I've seen nothing to suggest that markets are systematically inefficient in a knowable, predictable way.”

Active investors generally believe that ‘pricing inefficiencies or anomalies’ can be predictably & consistently exploited in stock markets....especially in the so-called more ‘inefficient’ emerging markets (such as India).

I believe, that no market can be perfectly efficient i.e.at all times and for all people...this implies that even if inefficiencies exist in the market, they are randomly scattered such that no individual can ‘outperform’ the market averages (by profiting from those anomalies) except for random chance!

To my mind, the practical implication of Art Carden’s observation is:

In a market (e.g. Indian stock market) that has the presence of thousands and thousands of professional active investors (MFs, FIIs, PMS Managers, analysts, stock pickers, treasuries, insurance companies, advisors, family offices, and institutional investors etc)-it is rather difficult for me to believe that individual professionals can keep outperforming by consistently exploiting the mistakes of their equally brilliant and motivated counterparts.

In other words, for an individual (s) to consistently exploit inefficiencies, profit from them and thus beat the market...their counterparts (also highly motivated investors trying to generate alpha) have to consistently turn CHARITABLE and allow others to ‘consciously’ win.

However, even if we believe markets are not efficient, then, in Jack Bogle’s words, (from his interview dated 4^th January 2011, Money Magazine...Investor’s Guide-2011)

You don't need the efficient-market theory to justify indexing. Indexing wins whether markets are efficient or inefficient. In an inefficient market, a good manager may be able to win by five percentage points a year over a decade.

But by definition, a bad manager must lose by the same amount. It all has to average out. So even if the market is very inefficient, the index will still capture your share of the market return.

Link to the interview,

http://money.cnn.com/2010/12/31/pf/investing/jack_bogle.moneymag/index.htm

" Telling someone you can't beat the market, is like telling a 6-year old, Santa Claus doesn't exist."

Professor Burton Malkiel of Princeton University is the author of a very famous investment book, A Random Walk Down Wall Street. The first edition appeared in the early 1970s and it has been so popular that it is now into its 10^th edition.

Burton Malkiel is a strong proponent of low-cost indexing and in the enclosed article and interview on Yahoo Finance-he says that investments via passive indexing (including ETFs) are becoming very popular!

Markets may not be 100% efficient-but it doesn’t mean that one can (consistently) beat them or be above average.

Stock prices (into the future) move at random-because news / fresh information (which causes prices to move) hits the market at random. It essentially implies that there are no ‘past patterns’ that can predict the future.

What is not news is already discounted into the prices by the market. This happens because the market is comprised of thousands of competitive, motivated and profit seeking people who do analysis 24*7*365. In other words prices (in the market) already reflect what can be known!

Hence, all that investors need to do is invest into low cost index funds / ETFs for their long-term financial goals and objectives.

And yet active management is hugely popular, people keep trying to beat the market and pay others to do the same ...why? In the words of Burton Malkiel,

“Telling someone that you can’t beat the market, is like telling a six-year old that Santa Claus doesn’t exist,” according to Malkiel. Basically, people deny the facts that show most investors don't make huge profits. 

He explains that we all keep trying for two fundamental reasons: investing is fun and some people DO make money.

In the market peoples' beliefs are similar to the fable of Lake Woebegon-the fictional land-where all children are ‘above average!’ Unfortunately, in their attempt to chase the rainbow of 'beating the market' many fail to capture the market average return, which over the long term is decent enough to meet many of our financial goals.

According to me, the sage advice of Dr Burton Malkiel is applicable to investors everywhere!

Link to the Yahoo Finance article and interview,

http://finance.yahoo.com/tech-ticker/burton-malkiel-markets-aren’t-100-efficient-but-you-still-can’t-beat-‘em-yftt_535789.html

Dan Solin's "Best & Worst Investing Awards for 2010"...a good guide for Indian investors too!

Enclosed is a link to Dan Solin’s write-up titled Best and Worst Investing Awards for 2010...they are the writer’s hand out on best and worst awards for “best and worst predictions, investment advice, financial products..." and so on and so forth.

According to me the article is a useful guide for investors everywhere, some kind of a general check list about what one should do and the things to be avoided.

What caught my attention was Dan Solin’s hand out for The Best and Worst Financial Product...this is what he has written, at points 9 & 10 of his article,

9. Best Financial Product: Exchange Traded Funds which, when used correctly, can permit investors to invest intelligently, at low cost. Unfortunately, they are more often misused to pick sectors and trade frequently, which reduces returns.

10. Worst Financial Product: Another tough one. Hedge funds, variable annuities, equity-index annuities and private equity funds all qualify. However, the award goes to Principal Protected Notes. Their name got them the nod. The principal is not protected against issuer default. They have excessive fees and the upside is grossly overstated. Their complexity makes it very difficult for investors to understand how they are being ripped off and why much simpler alternatives would be superior investments. This combination of qualities typifies the conduct of many brokers and other "investment professionals", and earned this product the award, but it was very close.

Daniel Solin is a graduate of John Hopkins University and the University of Pennsylvania Law School.

He has written a wonderful book The Smartest Investment Book You’ll Ever Read and is a financial columnist with The Huffington Post

Link to the write-up,

http://www.huffingtonpost.com/dan-solin/the-first-annual-solin-aw_b_801249.html