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I’m going through the entire UK market to try and find a company meeting the criteria for a net current asset value investment. If I find one I’ll buy it and write a report for you. I have to say that I’m not too hopeful. NCAV investments seem few and far between these days – maybe that’s a sign of a market that is getting on the high side?
After that I’ll search for a company meeting the standards for the modified price earnings ratio portfolio. If that fails I’ll move onto other value investing approaches.
This will take a few days, so, in the meantime, I hope you enjoy a few posts on the paradigm of stock market pricing efficiency – or to put it in ordinary terms “can you beat the stock market?”
(By the way: the series I wrote for you on Warren Buffett’s deals has now been collated and is at the printers to be published as a book in English (Harriman House). Already I have agreed to a number of translation rights, in Korean, Thai, Japanese, Simple Chinese, Traditional Chinese, Vietnamese and an Indian English version – so when you see the book on your travels in Asia you can say that you remember its beginnings here on ADVFN!!)
What is efficiency?
I’ll start with the basic idea – later Newsletters will describe some evidence of approaches that seem to work.
Even academics are attracted by the thought of discovering a stock market inefficiency which is sufficiently exploitable to make them very rich, or at least, to make their name in the academic community.
In an efficient market systematic undervaluing or overvaluing of shares does not occur, and therefore it is not possible to develop trading rules which will ‘beat the market’ by, say, buying identifiable under-priced shares, except by chance.
However, if the market is inefficient it regularly prices shares incorrectly, allowing a perceptive investor to identify profitable trading opportunities.
The search for Eldorado
Millions are spent trying to find ‘nuggets of gold’ in the price movements of securities. A small amount of this money has been allocated to university departments, with the vast majority being spent by major securities houses around the world and by people buying investment advice from professional analysts offering to ‘pick winners’.
Money has also been taken from the computer literati paying for real-time stock market prices and analytical software to be piped into their personal computer, and by the millions of buyers of books which promise riches beyond imagining if the reader follows a few simple stock market trading rules.
They do say that a fool and his money are soon parted – never was this so true as in the world of stock market investment with its fringe of charlatans selling investment potions to cure all financial worries.
The market is MOSTLY efficient
For most of the people and for most of the time the stock market prices shares in an unbiased way given the information available (and it is extremely difficult to make more than normal returns).
This leads to profound implications for business leaders and their interaction with the share markets, for professional fund managers, and for small investors.
In an efficient capital market, security (for example shares) prices rationally reflect available information.
The Efficient Market Hypothesis
The efficient market hypothesis (EMH) implies that, if new information is revealed about a firm, it will be incorporated into the share price rapidly and rationally, with respect to the direction of the share price movement and the size of that movement.
In an efficient market no trader will be presented with………..
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