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Rule #1 - Do not lose money! Rule #2 - Never forget rule number 1! ( by: Warren Buffet )For comments or questions please email: : admin@equityresearch.com |
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Market EfficienciesMany academics and others state that the market is efficient. However, if the market is 100% efficient there would be no place for money managers and investment professionals. A purely efficient market would be impossible to beat.This theory is precisely the idea of index investing. Since, most fund managers can't beat the market, it is better to just join the market. In fact, you will beat 80% of fund managers just by being in a low fee index fund. People Do Beat the MarketThe market is efficient, but there are still securities out there that are priced below their true value. That means that the market is not 100% efficient. It is the goal of every investment professional to exploit the market inefficiencies for superior returns. Reasons Why Equities are UndervaluedDoes anybody ever sell for a stupid or illogical reason. If that statement is true, then you simply look for stocks that are behaving in irrational ways. Institutional MispricingMany large funds cause mispricing. A large fund may sell a smaller company because it no longer meets the investment criteria. This could create the stock to become greatly undervalued because the amount the institution held was so large. Some institutions will sell stocks simply because they stopped paying a dividend for a quarter. It may be that the fund manager only wants dividend paying stocks in the portfolio. As many fund managers dump the stock for not paying dividends it creates an undervalued stock. An institution may sell a large bond because it was just downgraded and they don't hold that particular rating in their portfolio. If many fund managers sell the bond because it was downgraded it could produce a good buying opportunity. Other Mindless Reasons to SellPeople also sell stocks because for tax purposes. They sell them because of negative news. They sell them because they are short on cash. They sell them because they just didn't want it anymore. Many many reasons to sell have nothing to do with the intrinsic value of the security. When people buy or sell on whims that aren't rooted in value and mathematics it creates a mispriced security. What that spells for you is opportunity. Urgent, Panicked, and Mindless selling are all things to look for because they all create opportunity for you. When the market tops out there is a lot of mindless selling. People are forced to sell just to stay afloat. It becomes urgent and their years of being in the portfolio vanish in an instant. People get so panicked they don't look at the fundamentals anymore. They just want out any way they can. These kind of people create good buying opportunities. It is important to keep your wits about you. Being objective is what will make you money. Don't buy securities from smart informed buyers. Instead purchase them from the uninformed and emotional.
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