Observations on the Investment Process

A few random observations on the investment process:

1. Good investment advice will always sound the best and make the most sense when looking back at the past or planning ahead for the future. It will rarely sound so great in the moment when you actually have to use it.

2. Depending on which side of the aisle they are on, professional investors are constantly debating, mocking or defending the Efficient Market Hypothesis (EMH). But rarely do you hear sophisticated investors discuss ways to make their portfolios and investment process more efficient, which would serve them far better over the long-term.

3. These days I almost find it amusing when people are surprised by short-term market outcomes. Last week after three straight days of big losses, stocks rallied yet again. I saw a few snarky comments like, “Yeah this is totally healthy behavior.” People are in constant search of an explainable narrative on the markets. There’s never going to be a “normal” or “healthy” market.

4. People in the investment industry are always congratulating each other (and sometimes themselves) for making good calls on their predictions or forecasts. Great call on that stock. You really nailed that call on the Eurozone. Rarely, if ever, do you hear someone praised for their process, which is far more important in the long-term. If you’re investment plan consists of being right on a never-ending series of “calls” you’re going to have a difficult time in the markets. No one is right on a consistent basis trying to call everything. Making fewer decisions is almost always a smart move for investors.

Further Reading:
Portfolio Management & Decision Fatigue
A Few Reminders
Benjamin Graham: Father of the Efficient Market Hypothesis?

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  1. Steve commented on Jan 18

    The market is volatile by nature. It is up a lot or down a lot almost 2/3rds of the time. Returns between zero and 10 percent are not as common. Those who proudly proclaim their ‘perfect’ calls conveniently forget all their wrong ones. As we all know, a broken clock is right twice a day, and that blind squirrel eventually finds a nut.

    • Ben commented on Jan 18

      Yup and somehow they forget all those other calls they missed and only trumpet the ones they finally stumble upon.

  2. Ryan commented on Jan 18

    Anyone who debates or mocks the efficient market hypothesis does not understand its purpose. It does not guarantee that investors cannot beat the market, It is simply a formal expression of the idea that prices reflect information.

    The EMH is intrinsic to all finance. In fact, I don’t think its possible for an investor to not rely on it in some form. Alpha, beta, CAPM, factor investing, passive investing, indexing, portfolio optimization, asset pricing, option pricing, etc… All link back to EMH.

    • Ben commented on Jan 18

      Yeah there are always going to be cases where investors act irrationally, but I’d say 90% of investors would be better off going under the assumption that the markets are efficient.