« Encouraging recycling | Main | The worst economic downturn »

June 16, 2010

Efficient markets

The widespread collapse in investment markets a few years ago, the view that smart investors can beat the average has come into question. Indeed, some investment gurus say a person shouldn't even try to beat the broader market. What is this assertion based on?

Dr. Mike Walden, a North Carolina Cooperative Extension economist at N.C. State University, responds:

"Based on the idea ... that if there are some investment opportunities out there that pay a rate of return higher than their risk level, they are not going to be left on the table for very long because they are going to be snatched up by professional investors and there is going to be nothing left for the average investor.

"In factm to use one author's description of this, it is like meat being thrown in the water where piranhas reside. That meat will be quickly devoured. And so the notion here is that investments that do better than others are going to be eaten up devoured if you will by those professional investors.

"There is actually a fancy economics term for this; it is called the efficient market hypothesis. It says that the current price of any investment, like a stock, already incorporates all the information out there about it. Especially when it filters down -- that stock filters down -- is made available to the average investor, there are no good bargains out there. The only way, this idea says, to beat the market is to be one of those piranhas."

Posted by deeshore at June 16, 2010 10:15 AM