Building Wealth They say the market is smarter than you...
The efficient-market hypothesis boils down to this claim: If you know something, everybody else probably knows it too.
For example, you may think one company has a bright future and another is doomed. But the theory claims that if you've figured this out, so has everyone else. The market prices the stock accordingly.
At least, that's according to the theory.
The way I see things, that's not possible. Of course, you know things that nobody else knows.
Take me, for example... I've had a wide-ranging career. I know a lot about medicine – particularly ophthalmology. I've been an entrepreneur, so I know the risks and rewards of starting a business. I have some good insights into the wine and beverage markets. And I even know something about how popular Venezuelan food is in the American Southeast.
You know things, too... You might know about movie box-office numbers, hunting equipment, or a new software used at your job. And you can use that knowledge to profit.
Remember, we're not just trading ticker symbols. Stocks represent a tiny ownership piece of real operating businesses. So to argue that everyone knows what matters in these businesses just isn't true.
I've seen articles and medical journals that pointed to a clear investment opportunity in a stock. But even though the information was out there for anyone who wanted to read it, the stock didn't move until it was covered by 60 Minutes or the broader media.
So yes, you do know things that can help you earn money in the market. You just need to put that knowledge to work.
If you've been reading our work for any length of time, you've seen me quote Peter Lynch. The legendary fund manager directed the Fidelity Magellan Fund from 1977 to 1990. He posted a seemingly impossible annual return of 29%.
Lynch's central thesis is that you can know and see things that Wall Street can't. He calls it "the Power of Common Knowledge." He tells the following story:
There's a famous story about a fireman from New England. Apparently back in the 1950s he couldn't help noticing that a local Tambrands plant (then the company was called Tampax) was expanding at a furious pace. It occurred to him that they wouldn't be expanding so fast unless they were prospering, and on that assumption he and his family invested $2,000. Not only that, they put in another $2,000 each year for the next five years. By 1972 the fireman was a millionaire...
Whether or not our fortunate investor asked any brokers or other experts for advice I'm not certain, but many would have told him his theory was flawed, and if he knew what was good for him, he'd stick with the blue chips the institutions were buying, or with the hot electronics issues that were popular at the time. Luckily the fireman kept his own counsel.
Now, there's more to successful investing. You need to understand how these companies make money, how their shares are valued, and what the market currently expects from them. You shouldn't put your life savings into one stock because you like the company's product.
However, all investors are searching for an edge. You have real-world knowledge about what consumer are out there doing. That's an edge right there.
If you can spot a handful of good opportunities and spread your bets among them... you can post market-beating returns.
You can use your hobbies, your passions, your professional experience, and your common sense to find this edge and buy stocks of growing and successful companies.
It's a stimulating challenge. It also can be a rewarding activity.
Just keep your eyes open and you can gain an edge in the market – no PhD or Wall Street job required.
My team and I use the Power of Common Knowledge in our Retirement Millionaire advisory all the time… It's how we have recommended some of the biggest winners at Stansberry Research.
We of course always back all of our experiences up with data… and that's when hundreds-of-percent winners can be found.
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What We're Reading...
- What is the efficient-market hypothesis?
- The efficient-market hypothesis and its critics.
- Something different: We're in a "housing recession," experts say. Here's what that means for homeowners, sellers, and buyers.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
August 24, 2022