Value Investing: Never Be a Price Taker or Presume the Market to be Right Always

When building their own portfolios, investors would do well to keep in mind that even a sub-optimal investing strategy can be more efficient than one that relies on complex analyses. The most proficient way to deal with changing market sentiment is to try to build a well-researched portfolio. By creating an investment process that is straightforward and easy to follow, investors can ultimately succeed and reach your financial goals.

For many investors, a simple investment thought process that can be easily followed and consistently implemented could perform immensely better that an investment strategy that will be abandoned at the first sign of under-performance. In Berkshire Hathaway’s 1988 Chairman’s letter and annual report, Warren Buffett wrote,

Naturally the disservice done to students and gullible investment professionals who have swallowed Efficient Market Theory has been an extraordinary service to us and other followers of Graham. In any sort of a contest—financial, mental, or physical—it’s an enormous advantage to have opponents who have been taught that it’s useless to even try.

The typical holding period of any stock is nine months which implies that, over such a short term, the average investor is merely betting on the general direction of the market or laying a wager on the next quarterly earnings. A lot of day-to-day “noise” in the financial markets often has little bearing on the actual value of an investors holdings—in spite of the cycles of excitement and panic that the financial media might push us to believe. In Berkshire Hathaway’s 1987 Chairman’s letter and annual report, Warren Buffett wrote,

Ben [Graham]’s Mr. Market allegory may seem out-of-date in today’s investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins”?

Often, even the best-trained and the most experienced of investors can make the same errors that investors have been making forever and the reason is that errors are simply a natural outcome of the learning process and therefore investors simply cannot help it, irrespective of how experienced they are in the investment process.

In the extreme, investors could simplify their investment choices by using the indexing approach: where investments tend to track the market’s return. Indexing is the ideal way to make sure that investors get your “fair share” of the overall stock market’s return rather than relying on complex investment analyses processes or forking it over to investment advisors and other intermediaries.

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