You’ve probably heard that you should BUY! BUY! BUY! (*NSYNC voice) your stocks right now since the market is down. On the surface, this doesn’t seem to make any sense. Investors are losing money, so why should you put your money into something that is decimating others’ fortunes? I’m here to give you the DL.
I am a believer in the Efficient Markets Hypothesis. This hypothesis says that the market price of a stock reflects all of the available information about that stock. Basically, the market price is a correct reflection of all of the available information on the company, and unless you have insider information, you won’t be able to beat the market.
Warren Buffet is an example that this assumption is not always correct. You can find stocks that are undervalued and buy them at a low price. Later when the price goes up to reflect to true value of the company, you will make money and beat the market. So while it is possible to beat the market without insider info, it is only possible if you dedicate all of the time that Warren Buffet has to finding undervalued stocks. And even most of the financial advisors and fund managers who dedicate this amount of time, produce an average annual return on their hand selected funds that is equal to, or less than the average market return over the long term. If trained professionals rarely beat the market, and Warren Buffet is either the only…
