Don’t rely on Ms. Marie for prudent investment decisions
What do you do in the event of a temporary slowdown in the financial markets? Always remember that quality is synonymous with quality and that the length of time that a company’s stock is on sale is always temporary. Success in an investment is often defined as acquiring stocks of companies whose returns, according to your research, will outperform, over time, while meeting your risk requirements.
Notice I ignored investments in companies that some parasitic investment letters, TV artist, or commission broker say you need to buy right now. Believe me, if they really knew what stocks to buy and when, they would buy them and not live off subscriptions, advertisers and commissions.
There is nothing wrong with reading or listening to investment ideas. It’s when you apply these ideas without doing your own due diligence that losses occur. Act recklessly and the market will wreak havoc without remorse.
The timing of the market is as tempting to investors as the sirens of Greek mythology, whose enchanting voices lured sailors to their destiny. Short-term moves on Wall Street don’t hold a press conference ahead of time. Additionally, deciding to sell means you double the likelihood of an error i.e. the decision to sell and a subsequent buy decision.
William Sharpe, 1990 Nobel Laureate in Economics, calculated that in trying to time the market one would have to be right 74% of the time in both a market downturn and a market rally to outperform the S&P 500 Index long-term.
Poor investment timing can leave you feeling helpless, afraid and panicked. Panic is never productive and is usually expensive. Nonetheless, for some reason, Wall Street appeals to the gambling instinct in all of us. It depends on the notion that maybe you can ‘beat the house’. Lotteries rely on that.
Those planning to time the market would have been more productive with the late Madame Marie of Asbury Park, NJ, and her crystal ball. Yes, there really was a Madame Marie, real name Marie Castello, both medium and source of inspiration for Bruce Springsteen.
When Springsteen was a teenager hanging out on the boardwalk, Marie predicted he would become famous. He did, and he returned the favor by making her famous in his 1973 song, “Sandy.”
A more quantitative approach is the efficient market hypothesis (EMH). Developed by Eugene Fama, the hypothesis states that stocks always trade at their fair value.
There are three variations of the hypothesis: “weak”, “medium-strong” and “strong”. The weak form indicates that the prices reflect all publicly available information.
The semi-strong form claims that prices reflect all publicly available information and that prices change instantly to reflect new public information. No, probably not.
The strong form says that prices instantly reflect even hidden “inside” information. A degree of illegality here. The only information that is not taken into account is the news of tomorrow.
Another technique often tried is to mimic the movements of successful investors. For example, Robert Shiller, another Nobel Prize winning economist, pointed out that many people try to mirror the strategies of investors considered to be experts in their field.
The problem is that by not understanding exactly how someone is making decisions, you cannot completely duplicate the process.
A 2008 study by Gerald S. Martin of the American University and John Puthenpurackal of the University of Nevada, Las Vegas, showed that when SEC filings reveal changes in Berkshire Hathaway’s portfolio, prices shares of all newly acquired companies had an abnormal day. increase, on average 4%.
But wait. An article by R. David McLean of Georgetown University and Jeffrey Pontiff of Boston College pointed out that the effectiveness of investment strategies declines by more than 50% after publication.
A follow-up document indicated that one-day positive surprises on corporate earnings announcements accounted for virtually all of the ongoing outperformance. Why? Probably because the forecast projections for corporate profits are often positive but flawed.