There are no perfect people. Why do we expect perfect markets?
Among the supposed lessons learned in the financial crisis was the “fact” that markets aren’t efficient. Since so many people clearly mispriced sub-prime, Alt-A, and Home Equity mortgage-backed securities, that market—and by extension, all markets—cannot be efficient.
But an efficient market doesn’t mean that all prices always reflect fair value. It means that it’s really hard to beat the market. It’s hard to go with the crowd when they’re all running the same way, because you feel like a lemming headed over a cliff. But it’s hard to run against the herd, because that’s a good way to get stomped on.
Financial markets are made up of people. Just as there are no perfect people, there are no perfect markets. Markets can be manic, depressed, schizophrenic, or can be in denial. They reflect the people that make them up. The answer isn’t to look for the perfect stock or the perfect opportunity. The key is to have some fundamental values and to stick with them.
Some people only buy individual stocks. Others use mutual funds with a solid track record. Some remain fully invested. Others time the market. The key is finding a discipline that fits your life and to get started. The one sure way to fail at investing is never to start. Rather than waiting for the perfect opportunity, settling for good enough is a realistic option.
It’s important to realize that we don’t live in a fairy-tale world, and we have to deal with reality. Half the time the market is irrational. It’s just hard to tell which half.
Douglas R. Tengdin, CFA
Chief Investment Officer
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