Espejo, Kristal Joy M.

BSAccountancy 5
11:30-12:30 TThS

August 25, 2015

Myth 1: EMH claims that investors cannot outperform the market. Yet can see that some
of the successful analysis is able to do exactly that. Therefore, EMH must be incorrect.
According to the EMH, as prices respond only to information available in the market, and because all
market participants are privy to the same information, no one will have the ability to out-profit anyone
else.
In efficient markets, prices become not predictable but random, so no investment pattern can be
discerned. A planned approach to investment, therefore, cannot be successful.
This "random walk" of prices, commonly spoken about in the EMH school of thought, results in the
failure of any investment strategy that aims to beat the market consistently. In fact, the EMH suggests that
given the transaction costs involved in portfolio management, it would be more profitable for an investor
to put his or her money into an index fund.
In the real world of investment, however, there are obvious arguments against the EMH. There are
investors who have beaten the market - Warren Buffett, whose investment strategy focuses on
undervalued stocks, made billions and set an example for numerous followers.
Warren Buffett has beaten the market to such an extreme degree that comparing his success to everyone
else can't be done using a normal line chart.
Berkshire Hathaway's stock price increased by a mind-blowing 1,800,000% between 1964 and 2014. The
S&P 500, on the other hand, increased by "only" about 2,300% over that time.
Another way to look at Buffett's superhuman investing powers is to compare annual growth rates of
Berkshire stock and the broader stock market. Since year to year changes are extremely noisy and
volatile, through the end of the 20th century, Buffett handily outperformed equities as a whole. Since
1999, he's still tended to beat the market, but by a more modest amount.
There are portfolio managers who have better track records than others, and there are investment houses
with more renowned research analysis than others. So how can performance be random when people are
clearly profiting from and beating the market?
Counter arguments to the EMH state that consistent patterns are present. For example, the January
effect is a pattern that shows higher returns tend to be earned in the first month of the year; and
the weekend effect is the tendency for stock returns on Monday to be lower than those of the immediately
preceding Friday.
Studies in behavioral finance, which look into the effects of investor psychology on stock prices, also
reveal that investors are subject to many biases such as confirmation, loss-aversion and overconfidence
biases.

According to Laura, the sad reality is, the average individual investor has little chance of beating the
market. He says the common investor uses mutual funds, are stuck in 401(k) plans which essentially track
the broader index, and pay higher fees as compared to stock, index funds or ETFs. Also many mutual
fund type investments don't use stop loss order to protect gains and thus do not always provide the type of
protection individualized portfolios can perform. As he puts it, "investors are set-up to fail from the getgo."
Investing in 401(k)s is no better. "Most 401(k)s aren't benchmarked and most companies don't have a
good investment policy for selecting funds within the program. You can't even get some asset classes in
many and most advisors are sales people, not fiduciaries and just taught how to sell funds," he adds.
The good thing is many more investors are taking responsibility and interest in their investments. They
are taking the initiative to learn how their investments work and are less intimidated. Laura says investors
are learning that individual stocks aren't as scary as everyone suggests and there is valuable information
available to everyone if they know where to find it and how to apply it.
What can an investor do to increase their chances of "beating" the market? Laura says there are several
things:

Use low cost funds and/or a low cost platform for trades. The best way to make money is to save
money.

Establish and follow a discipline which translates into just doing what you said you are going to
do.

Give every investment in your portfolio a buy price, hold price and sell price along with one or
two reasons to buy, hold or sell at that value. This gives you specific criteria to act and provides
your portfolio with purpose and specific direction.

Watch for headline risk. Set up email alerts for your investments so as new information comes out
about them, you are aware of it in the early stages to consider changes. Mark your calendar for
things to watch like earning dates, intellectual property timelines and industry reports like Federal
Reserve meetings, unemployment numbers, new housing starts and other information that will
affect the specific sector or security.

Sarna suggests investing in what you know and understand, such as solid, profitable small-caps and even
microcaps in niches you can monitor and understand. These can appreciate much more rapidly than
equivalently-priced large-caps.
The only way to get above market returns is to develop a competitive advantage says Tresidder. "It is
either developed through knowledge and information flow, or it is developed through extensive research
resulting in an investment strategy that exploits irregular market behavior."
According to Tresidder, the only way to outperform the markets is to develop a competitive advantage
that
exceeds transaction
costs and
passive
market
return.

References: http://www.investopedia.com/articles/02/101502.asp
http://www.businessinsider.com/warren-buffett-berkshire-hathaway-vs-sp-500-2015-3#ixzz3jgz0KgGN
http://www.investopedia.com/articles/trading/10/beat-the-market.asp