If you are interested in pursuing a better investment experience these principles may help you. This is the first in a series of short conversations that describe what we believe are 10 important concepts every investor should consider.
#1 Embrace Market Pricing
The market is an effective information-processing machine. Each day, the world equity markets process billions of dollars in trades between buyers and sellers—and the real-time information they bring helps set prices.
With each trade, buyers and sellers bring new information to the market, which helps set those prices. No one knows what the next bit of new information will be. The future is uncertain, but prices will adjust accordingly.
"The efficient market theory is one of the better models in the sense that it can be taken as true for every purpose I can think of. For investment purposes, there are very few investors that shouldn't behave as if markets are totally efficient."
- Eugene F. Fama, 2013 Nobel laureate in economic sciences.
This doesn’t mean that a price is always right—there’s no way to prove that. But investors can accept the market price as the best estimate of actual value.
If you don’t believe that market prices are good estimates—if you believe that the market has it wrong—you are pitting your beliefs and hunches against the collective knowledge of all market participants.
A person should not believe they have more information about a stock than is already reflected in it's current price. . .unless they are looking to be a commentator on a financial network.
In USD. Source: Dimensional, using data from Bloomberg LP. Includes primary and secondary exchange trading volume globally for equities. ETFs and funds are excluded. Daily averages were computed by calculating the trading volume of each stock daily as the closing price multiplied by shares traded that day. All such trading volume is summed up and divided by 252 as an approximate number of annual trading days.