A few myths to bust- personal reflections which I had to learn over time; only experience as your teacher:
Benjamin Graham was one of the first to illustrate that market efficiency was an illusion. Mispricing assets was common and he was known to have written a chapter in Intelligent Investor that marked the career of several people to value the market correctly. He posited that Mr Market was moody. He was sometimes overpaying for assets and sometimes becomes extremely fearful selling the assets down. This was academic exercise for Graham and technicians have always known this emotional pendulum to be the ardent cause of opportunities because of human biases. The technicians saw this explanation early on and profited from human foibles. To recall, it was guys like Jesse Livermore who was known to have said that the tickers May change but the charts would behave the same because human emotions rarely changes. Richard Wyckoff and Edwards and Magee have successfully made themselves rich simply because they realised early on how to exploit these cases.
In this regard, one should not consider the market as a god. In fact the market is merely a useless slave which you have to sometimes be in your command. This goes against the notion by some traders that “respecting the market” meant that the market was an all knowing god. To others, it is sacrilegious to tell the market “what it ought to do” versus “what it is doing.”
However, we discuss evidence that the role of market efficiency is to essentially recognise that the implications of people’s bias over momentum strategies over value investing is the primary cause of this anomaly. People will buy anything as long as it goes up. People will sell anything regardless of value as long as it helps them sleep well at night causing constant sentiment driven mispricing.
In the first place, the market has to be recognised as inefficient because the market is made of people who are habitually irrational instead of rational thinkers. Man is fallible. This is a human which has emotions not different from lab rats who cannot think for themselves. When one hands a human a quick gain, one acts like having a marshmallow who wants to eat that altogether resulting to locking gains early and never holding their winners as this is a short term weakness of many humans.
Attributing humans as if they are heavenly beings capable of suppressing short term gains for the prospect of longterm investing shows the reason why so few managers who are human beings outperform a simple index average fund who is essentially an emotionless robot just following orders and works only due to time and investing in regular fashion versus humans who think they know better. This is why timing was debunked but actually timing well knowing the human weakness always provides these alpha generating rewards and Hime runs. Knowing winners win but that people generally sell their winners mean that there is constant undervaluation for successful companies in the short term. We tend to habitually underpay for excellence while also hoping that mediocre companies can turn around even when they have fundamental flaws to begin with.
The notion of academic mindset that humans will not be ruining themselves is an assumption that is wrong which is debunked by many behavioural scientists. In fact George soros taught his theory of reflexivity that the markets was just an animal to be tamed and enslaved but that one’s actions constantly alters the future which makes the market a constantly changing being.
The fact that humans are psycho and can be abnormal will explain the aberrations of the markets. The fact that humans are inherently disillusioned with several facets of greed and fear and depression (what I call in my own manner to be the DFAGEI emotions- terms I coined myself
Despair
Fear
Apathy
Greed
Euphoria
Insanity
Are the reasons for economic booms and busts rather than stable laboratory valuation theories. Economists such as Keynes have long told the markets can remain irrational longer than one could remain solvent which reasons how man can be sufficiently underpricing many assets for long periods of time due to depression or lack of incentives.
This gives me the evidence and confirms my view point on why several companies in the Philippines are not to be considered as empirical losers simply attributable to their past price performance because there is an illusion in that assumption that Philippines was valuing assets correctly in the first place.
Risks such as lack of liquidity, idiosyncratic country or political risk, currency risk or even simply lack of market knowledge means that the Philippines could stay irrationally cheap for factors such as these.
In this light, the market efficiency debate is an illusion because while people take strides following academic theories; the public markets is little more than a beauty contest where what is perceived as the latest trends and hottest names are the ones that catch fancy whether in the industrial era the Oil barons or the Railroads which are in current times the 5G or artificial intelligence prospects or the electric cars and million mile batteries
People love stories and hence hear and buy up “story stocks” from 1800s Until the end of time.
If you are convinced that Value investing methods are outperforming growth oriented strategies, it should be a shocker to you that the prices are inefficient (hence highly overvalued SaaS names with unprofitable track records can continue to attract investors because of the message of behavioural finance.)
People who want to get rich quick are many
People who want to invest longterm are few
This is why many people lose against index funds and very few people exploiting the system are the winners.
This is my personal observation.
