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Efficient Market Hypothesis and its Discontents II October 7, 2017

Posted by shaferfinancial in Uncategorized.
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In October of 2009 I wrote a post titled Efficient Market Theory and its Discontents.

Here is a sample:

Regular readers know that I am not a believer in the efficient market theory.  Facts are, I am a social scientist and understand the huge amount of data that tells us we generally act upon our emotions and are not rational, especially in times of stress.  The percentage of folks that can remain completely rational at all times is extremely small.

For me it all started with reading Warren Buffett, but he is far from the only EMT discontent.  Unfortunately, the media, the financial planning world, and most of the internet media are big  fans of EMT and its associated strategies.  What that has led to is the vast majority of folks losing out on a once in an investors lifetime opportunity.  Because so many people were either panicking or convinced that their asset allocation, mutual fund, strategy was solid the vast amount of people missed it.  What is it?  If you had been paying attention you could have bought solid companies at rock bottom prices back in March and April.  Want examples?  General Electric went below $7 [currently at $16.16].  Wells Fargo below $9 [currently $29.26].   Goldman Sacks below $60 [currently at $190.48] and Berkshire Hathaway went down below $73,000 [currently at $100,400].  Apple below $80 [currently $190.25].

Now my point isn’t to play Monday Morning Quarterback with stock picking.  Only to point out that if you had followed Warren Buffett’s investing theories instead of some academic’s or what Wall Street wants you to believe in, there really were “once in a investing lifetime” opportunities.  And if you were following those bobble heads or mutual fund sales folks or financial planners or any of the other so called experts you missed it.

My only regret was that I was not more liquid in order to buy more than I did.

So I thought an update would be interesting.  Note I didn’t pick obscure, small growth companies, but big, well known mature companies that most people were talking about at that time.

 

General Electric currently sits at $24.39 a total return of 348% plus 8 years of dividends

Apple currently sits at $155.30 a split adjusted return of 634% plus 8 years of dividends

Wells Fargo sits at $55.58, a total return of 615% plus 8 years of dividends

Goldman Sacks sits at $246.10, a total return of 410%, plus 8 years of dividends

Berkshire Hathaway sits at $281,000 a total return of 385%.

Now here is the kicker.  I didn’t completely follow my own advice.  Yes, I bought more Berkshire Hathaway and some Goldman Sacks.  But, I failed to buy Apple, even thought I loved the company and had money and even came within seconds of clicking on a buy bottom for my brokerage [My biggest regret yet].   Now I bought several other stocks that did really well, and 2 that didn’t.  But, I knew they were more risky than the ones listed above.

So here is the bottom line.  The market wasn’t rationally evaluating those companies in 2007.  It was reacting to the fear of the day.  It might not be rationally evaluating the companies now.  Most people can’t emotionally look at the market and not act in the face of fear or excitement [of major movements up].  So, the result is fear pushes people to sell when stocks are dropping and excitement causes people to buy when the market is seemingly going endlessly up causing these large movements up and down.  This happens to professionals and amateurs alike.  It happens to me, even though I am conscious of it.  It happens to folks that invest in mutual funds the same way as if they were in individual stocks.  Right now, people are buying into funds at record pace.  This probably means we are at the end of a bull market.

Meanwhile, myself and others who have bought Equity Index life insurance have had solid returns over the last 10 years [around 8%] and since we aren’t relegated to the whims of the market sleep well and don’t react to fear or excitement in the ways others with full market exposure do. EIULs is an effective strategy for us because it keeps us from reacting the way our brain insists we do in the face of fear or excitement.

 

 

 

 

 

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