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« Institutional Investor | 8 Mistakes Series – Final Installment Released Today | Main | Correlation and Macro Investing »

September 13, 2010

The Inefficient Market Theory

I was listening to Bloomberg TV this morning and they had a floor trader talking about "the market." He was articulating his S&P 500 trading strategy of being a buyer at 1116 and a big seller at 1125, but if the market rose much above 1125, he and the rest of the traders he knew would probably reverse course and get long (S&P 500 was trading at 1118 at the time of his comments). In essence, he's saying that the S&P 500 at 1125 was a sell and at 1128 it was a buy? CNBC, Fox Business News, and Bloomberg TV are loaded with hours of "trader insight" just like this every day. Their philosophy on investing seems to permeate the reporters, retail investors, and many professional investors.

As a fundamental investor, these kinds of comments make me very happy because it gives me insight into the primary reason that investments can become mispriced. There are billions upon trillions of dollars that are being actively managed with this trading mentality which means they have profound impacts on many underlying assets. So when I see my great long idea trade down 5% for no apparent reason, I can make the assumption that it is not 100% guaranteed that someone knows something that I do not. It may just be a different investing philosophy (momentum / technical in this case) influencing the price. That being said, I should always question my thesis in a never-ending quest for the Devil's Advocate's point of view, but I should also appreciate that stocks move irrationally over short-to-intermediate periods of time and I hope to remain solvent for the long-term to benefit from a more rational valuation.

Here's a big thanks to all non-fundamental investors, without whom, I would rarely be able to find investable opportunities.

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