This is best piece on investment I have been reading for a long time.
“Indeed, the average result has to be the average result. By definition, everybody can’t beat the market. As I always say, the iron rule of life is that only 20% of people can be in the top fifth. That’s just the way it is. So the answer is that it’s partly efficient and partly inefficient.
And, by the way, I have a name for people who went to extreme efficient market theory – which is “bonkers”. It was an intellectually consistent theory that enabled them to do pretty mathematics. So I understand its seductiveness to people with large mathematical gifts. I just had a difficulty in that the fundamental assumption did not tie properly to reality.
Again, to the man with the hammer, every problem looks like a nail. If you’re good at manipulating higher mathematics in a consistent way, why not make an assumption which enables you to use your tool?
The model I like–to sort of simplify the notion of what goes on in a market for common stocks – is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-mutuel system is a market. Everybody goes there and bets and the odds change based on what’s bet. That’s what happens in the stock market.
It’s not a bit easy of course, 50% will end up in the bottom half and 70% will end up in the bottom 70%. But some people will have an advantage. And its fairly low transaction cost operation, they will get better than average results in stock picking.
It’s not given to human beings to have such a talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it – who look and sift the world for mispriced be – that they occasionally find one.
And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.
That is a very simple concept. And to me it’s obviously right –based on experience not only from the pari-mutuel system, but everywhere else.”
Below the link to his full document: