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I mostly agree, but what of stocks with clear value (say utilities stocks with consistent dividends) that are underpriced due to a market downturn? The market

I mostly agree, but what of stocks with clear value (say utilities stocks with consistent dividends) that are underpriced due to a market downturn? The market isn't 100% efficient and there are plenty of dumb investors who follow herd mentality. EDIT: To clarify, this is a question; the article seems to be based on the assumption that the market is perfectly efficient; I am wondering how does the fact that it isn't factor in? I would think that one could make money by being reasonable in the face of unreason.

grmarcil 13y ago
The same logic applies from the OP's article. You are assuming in these situations that you know better than the entire brain trust and computational resources of every Wall Street firm that these "stocks of clear value" are underpriced.
- colanderman 13y ago
  But if that – the unstated assumption that the market is 100% efficient – is true, why do we see herd mentality in the stock market? (Why are SEC regulations in place to prevent runs on a stock?) Is your claim that there is enough "smart" capital to more than counter whatever "dumb" capital exists, and that it is fruitless for individual investors to make any money by betting against moves that seem largely caused by "dumb" capital? I'm not claiming I personally am smarter than every Wall Street investor combined. I'm claiming that every smart Wall Street investor combined might not have enough total capital to counter all the dumb investors out there, and hence there's money on the table. I don't know whether my claim is true, but the article doesn't address the effect of "dumb" money.
  - nickff 13y ago
    I would compare the stock market to a race track; not every betting man (or woman) is familiar with the horses and track, but if there are a few gamblers who have a reasonably good idea of the odds, they can 'correct' the odds by strategically betting for horses that are under-valued. This works for race tracks, and has never been disproved (or proved) in the stock market.
  - grmarcil 13y ago
    It seems like you are equating the author's argument with the efficient market hypothesis. A few others on this thread have made a similar indication. While conclusions of both the OP and the EMH are similar (you will not/cannot beat the market), the underlying arguments are really pretty different. The OP really doesn't invoke an efficient market at all in his arguments. His argument follows the line of statistical studies (eg http://www.umass.edu/preferen/You%20Must%20Read%20This/Barber-Odean%202011.pdf http://www.umass.edu/preferen/You%20Must%20Read%20This/Barbe...) of individual investor performance, which conclude fairly uniformly that the average individual investor underperforms the market average, for a variety of emotional, strategic, and competitive (dis)advantage based reasons. The bottom line of this sort of study/argument is that individual investors tend to act on the belief that they have better information than the market. But, when your opponent is a professional, and you are an amateur, you are going to get beaten more often than not. See evidence in your own comment the belief that you could, in certain situations, understand market behavior just by looking at it: "betting against moves that seem largely caused by "dumb" capital". How could you possibly know that a market move was caused by "dumb" capital? Even if you could, how could you expect to know this better than professionals? All of this, to be clear, is talking about long term, population-wide averages. Everyone can get lucky once, and some outliers get lucky more than average.
dkasper 13y ago
There are plenty of ways to generate a consistent return with high dividend stocks, but do they outperform the market as a whole (eg an index fund)?
- nickff 13y ago
  Some investors may outperform the market, but it has never been proven this is because of skill rather than simple luck. This is similar to a situation where thousands of 'investors' bet on a pseudo-random outcome such as flips of the coin or rolls of dice; an observer would expect that some will win big, and some will lose their entire 'investment', but it is not due to ability or strategy.

grmarcil 13y ago

The same logic applies from the OP's article. You are assuming in these situations that you know better than the entire brain trust and computational resources of every Wall Street firm that these "stocks of clear value" are underpriced.

colanderman 13y ago
But if that – the unstated assumption that the market is 100% efficient – is true, why do we see herd mentality in the stock market? (Why are SEC regulations in place to prevent runs on a stock?) Is your claim that there is enough "smart" capital to more than counter whatever "dumb" capital exists, and that it is fruitless for individual investors to make any money by betting against moves that seem largely caused by "dumb" capital? I'm not claiming I personally am smarter than every Wall Street investor combined. I'm claiming that every smart Wall Street investor combined might not have enough total capital to counter all the dumb investors out there, and hence there's money on the table. I don't know whether my claim is true, but the article doesn't address the effect of "dumb" money.
- nickff 13y ago
  I would compare the stock market to a race track; not every betting man (or woman) is familiar with the horses and track, but if there are a few gamblers who have a reasonably good idea of the odds, they can 'correct' the odds by strategically betting for horses that are under-valued. This works for race tracks, and has never been disproved (or proved) in the stock market.
- grmarcil 13y ago
  It seems like you are equating the author's argument with the efficient market hypothesis. A few others on this thread have made a similar indication. While conclusions of both the OP and the EMH are similar (you will not/cannot beat the market), the underlying arguments are really pretty different. The OP really doesn't invoke an efficient market at all in his arguments. His argument follows the line of statistical studies (eg http://www.umass.edu/preferen/You%20Must%20Read%20This/Barber-Odean%202011.pdf http://www.umass.edu/preferen/You%20Must%20Read%20This/Barbe...) of individual investor performance, which conclude fairly uniformly that the average individual investor underperforms the market average, for a variety of emotional, strategic, and competitive (dis)advantage based reasons. The bottom line of this sort of study/argument is that individual investors tend to act on the belief that they have better information than the market. But, when your opponent is a professional, and you are an amateur, you are going to get beaten more often than not. See evidence in your own comment the belief that you could, in certain situations, understand market behavior just by looking at it: "betting against moves that seem largely caused by "dumb" capital". How could you possibly know that a market move was caused by "dumb" capital? Even if you could, how could you expect to know this better than professionals? All of this, to be clear, is talking about long term, population-wide averages. Everyone can get lucky once, and some outliers get lucky more than average.

dkasper 13y ago

There are plenty of ways to generate a consistent return with high dividend stocks, but do they outperform the market as a whole (eg an index fund)?

nickff 13y ago
Some investors may outperform the market, but it has never been proven this is because of skill rather than simple luck. This is similar to a situation where thousands of 'investors' bet on a pseudo-random outcome such as flips of the coin or rolls of dice; an observer would expect that some will win big, and some will lose their entire 'investment', but it is not due to ability or strategy.