Sat 26 Aug 2006
How to beat the stock market (really)
In the so called efficient market theory when all investors have access to the same information the stock will automatically be priced at the correct price.
As a result, there is no opportunity for an investor to obtain unique information and thereby beat the market. Case closed.
Consensus of a stock
Most likely if it says so in the news paper it is consensus. Also if all the analyst at XYZ brokers says so it is consensus. It is difficult to say empirically what is the consensus, may 50% think the stock is bad or maybe just 25% think the stock is bad. And are these people actually buying or selling, or just producing pages for some newspaper or website.
The non consensus view that turns out to be correct
The only way to beat the market is to go against the crowd. To think independently.
You can get an “edgeâ€? with thorough research and analysis, leading to non-consensus viewpoints that turn out to be correct. The key words are “turn out to be correct”. If the majority thinks that the stock is bad and going to stay bad, the market will price it like that. You can beat the market by coming up with an analysis for why this stock is not going to be bad in the future. And if this turns out to be correct you will get an advantage.
Then there is the problem of coming up with consecutive wins with this approach. You may be right once, but is this luck or is the stock picker a genius?