Over the years, we've heard of dozens of different investment theories and systems.
From what we can tell, almost all of them work – sometimes.
When you are investing in a market in which stock prices have gone up 17 times (judged by the Dow) over the last 32 years, almost any approach should have positive results.
The real test of an investment system is during a bear market. Then almost nothing works!
But our purpose today is to introduce you to the world of investing… as we understand it.
Which is worth a warning…
Many people are far better investors. We are interested in investing only because we have to be. And we try to understand it in its simplest terms… because we don't want to spend much time on the practical details.
Still, we've thought a lot about the theory behind it…
Throwing Darts
That was why the Efficient Market Hypothesis was so attractive to us.
In the 1960s, finance academics started using computers to crunch large amounts of stock market data.
They noticed that markets were remarkably “efficient” at reflecting publicly available information about companies in stock market prices.
As a result, they thought there was no point in trying to beat the market using publicly available information. By the time that information made its way to you, it was already reflected in the price.
You were as likely to make money by throwing darts at a page of the Wall Street Journal as by doing painstaking analysis.
We were happy to believe it; we like to throw darts.
But then we discovered the truth: Hard work and discipline pay off when you are investing, just as they do almost everywhere else.
But one of the perversities of investing is that a little bit of work is probably worse than none at all. Throwing darts at a page of the Wall Street Journal will still probably beat your average stock picker.
How could that be?
A Fat Seal in a Sea of Sharks
When you pay a little attention you become caught up in the fads and fashions of the investment world. The next thing you know you are wearing the same thing other investors are wearing… and voicing the same opinions.
That is when you will get the worst returns possible. You will buy high and sell low. You will be at the bottom of Wall Street's food chain – a fat seal in a sea of sharks.
