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Take Advantage Of Inefficiencies In Stock Prices

October 22nd, 2013

warren-buffett: This week the Royal Swedish Academy of Sciences awarded the 2013 Nobel Prize to three deserving American economists: Eugene Fama, Lars Peter Hansen and Robert Shiller. Fama, of the University of Chicago, famously wrote the 1965 paper “Random Walks in Stock Market Prices,” demonstrating that the stock market is highly efficient at rapidly pricing all publicly available information into stock prices.

How does this happen? Simple. Every day, investors, analysts and other curious people are out there talking with employees, suppliers, customers and competitors of publicly traded companies. The information they glean as rational, self-interested individuals filters into the stock market through their buying and selling decisions.

A Sensible Strategy

Burton Malkiel took this knowledge and turned it into a classic investment book, A Random Walk Down Wall Street, where he argued that it is not only futile but nearly impossible to beat the stock market averages over the long term.

Vanguard founder John Bogle, in turn, took these insights and created the first S&P 500 Index Fund, an easy way to track the market’s performance with minimal expenses or annual tax consequences.

Much of what Fama, Malkiel and Bogle have done is smart and sensible. In fact, I used part of their findings to write a book, The Gone Fishin’ Portfolio, showing investors how to create a diversified low-cost, tax-efficient portfolio for superior long-term growth.

A Gone Fishin’ strategy should be the core of your investing approach. But, ideally,

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