Meir Statman of Santa Clara University is a Professor of Finance whose research focuses on behavioural studies.
Despite being a proponent of behavioural finance he believes that ordinary investors cannot get a better risk-adjusted return than they can in low-cost index funds!
Being a behavioural finance proponent he does not believe that markets are efficient-but that does not mean people should not Index, his brief explanation is as under,
Q: You pound the drum for index funds. Is that because you think the markets are efficient and therefore unbeatable over the long-term?
A: The market is not efficient. It's crazy, but the fact that it's crazy doesn't make you a psychiatrist. It's crazy like a wild animal. You wouldn't want to go against a wild lion because it's crazy. It's crazy in ways you cannot understand and cannot forecast.
People in behavioral finance and standard finance come to the same conclusion - don't try to beat the market. Whether it is rational, as people in standard finance say, or crazy, as I say, don't try it.
Practically speaking, individual investors should treat the market as unbeatable and realize that when they try to beat it because it is inefficient, they are likely to injure themselves, rather than gain at the expense of another.
Can professionals beat the market? His answer,
Q: Do you think pros can beat the market?
A: Yes, they can. But it's still a zero-sum game. If some people win, it means that some people lose relative to what they can get by being in an index fund.
My interpretation of the above for Indian investors / advisors,
· Indian markets are competitive because they comprise of a large number of professional investors who are all attempting to generate alpha, a brief list includes: MF, PMS, insurance, treasury, FII and hedge fund managers, stock pickers, analysts both fundamental and technical and so on and so forth.
· The constant analysis and activity of the above ensures that Mr Market knows more than individuals and hence it is difficult for individuals to beat it (outguess the market) consistently.
· Therefore, ‘beating the market’ is a) more of a random outcome b) it is known in hindsight and c) past data is of little predictive value going forward.
· I am tempted to repeat Meir Statman’s sage advice for Indian investors: People in behavioral finance and standard finance come to the same conclusion - don't try to beat the market. Whether it is rational, as people in standard finance say, or crazy, as I say, don't try it. Practically speaking, individual investors should treat the market as unbeatable...!
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