I’ve posted Entry #434 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Stock Market Is Comprised of Humans.
Juicy Excerpt: John Bogle has written that: “I know of no serious academic, professional money manager, trained security analyst, or intelligent individual investor who would disagree with the thrust of the Efficient Market Hypothesis: The stock market itself is a demanding taskmaster. It sets a high hurdle that few investors can leap.” The headline to this article is my response. The stock market is not a demanding taskmaster. The stock market is comprised of humans. A good number of them know next to nothing about stock investing. Many of the humans who comprise the stock market invest in stocks because they have no choice — they want to be able to retire someday and they have been told that they must invest in stocks to have any hope of doing so. So they invest in stocks. But they have little interest in learning about the subject of stock investing. They are not demanding taskmasters.
Smart people invest in stocks too. Of course. But there is no rule saying that only smart people can invest in stocks. Nor is there any rule saying that smart people must always comprise a majority of investors. I’m not sure that even generally smart people could be smart enough to make the stock market a demanding taskmaster. A good number of the realities of stock investing are counter-intuitive. A smart person could be led to believe that the number on his portfolio statement tells him the real and lasting value of his investment. That’s not so, according to Shiller’s research. When stocks are priced at two times fair value, half of the amount reflected in that portfolio statement number is the product of irrational exuberance and possesses no lasting value. That one trips up lots of generally smart people. Lots of generally smart people do not behave in smart ways in the stock investing realm.
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