Are Our Financial Markets Efficient?

We live in a capitalist society; however there is a growing trend to regard the word “capitalist” negatively. However there is nothing negative about it. The root word for capitalist is capital. There are many definitions for this word, however in the financial community it is used to define “assets”. To take this thought a bit further; a capitalist society is one based on assets under the control of the individual. So, perhaps some of the negative connotation may be negated by substituting the phrase “capitalist society” with “free market society”. It’s the notion that the market, not government regulation, ultimately determines success or failure. It’s just that simple.
One cannot have a genuine discussion on any topic without reviewing the opposing point of view. In 1886 Karl Marx published his first edition of Das Kapital. Marx believed that the wealthy were only wealthy because they suppressed the lower classes of effectively took the assets from those who had less.
The truth: in our society, if you want a candy bar, you will buy one. The store who sold you the candy bar profits from your purchase. The manufacturer who produced the candy bar profits from your purchase. It may be true that the owners of companies involved profited the most, however they assumed the most risk as well. Wages were paid to the store clerk, delivery driver and factory workers. In addition, there are overhead costs: appeal of the store where the candy bar was purchased, insurance on the property, and costs for equipment, maintenance, etc.
What if you decided to buy a different candy bar from a different store? The clerk would still get paid, until the free market decided that the store is unfit. The one assuming the most risk should profit the most. There is nothing wrong with factory workers, they work very hard. However, factory workers typically don't fret over the commodities pricing of cocoa six months from now.
Marx believed that if the state controlled all commerce, then all of society would be equal and thrive as a unit together. Furthermore, as a society, all assets would be shared and citizens would work harder to have an equal share in more assets. Sounds good in theory, doesn’t it? But we have yet to see a society that has taken this concept and thrived. All one has to do is look at Russia, North Korea, Venezuela, Cuba, etc.
The market will decide what candy bars are to be on the market and how they should be priced. Furthermore, the market will decide what store to buy the bar's from. The market will work correctly if we let it. the retail market works the same as the stock market.

Most of us would agree that one would want to be in stocks or equities in order to outpace inflation. The Coached Investor knows how free markets work. They know that if our markets are left untouched they will operate efficiently. They are certain that the market knows all that is known and only new and unpredictable news and events affect market prices. Coached Investors know that individuals by themselves may not always be correct concerning the market, but as a whole the market is always right.
The Coached investor is not concerned with the price of Cocoa Futures or the popularity of the latest candy bar. The Coached Investor does not try to chase the latest fad or run from the newest fear with their investment holdings. The Coached Investor understands these things and knows how invest in the efficient market; our market.

Efficient Markets Work: The Media Feed

An efficient market is just that: Efficient. It comes with the belief that all known facts are already represented in the current price. If a company has a new product coming; it's already in the price. If a manufacture discontinues a product; it's already in the price.

What does that mean? It means there are no hidden tidbits, or hot stock tips; everyone has equal access to all information. There was a time where information was available but you had to be in the know to find it. We now live in the information age where it's all a Google search away. There is an entire world of consumers who are "plugged in", and looking for the next hot tip. This has lead to the next phenomenon, "MARKETING".

You might wonder what marketing has to do with the stock market, or how the flow of information regarding stock prices is effected by marketing. The myth: the news reporting hubs (be it online, in print, or televised) are selling information. The truth: They are selling marketing spots. The big question is, "How many viewers could I deliver if you wanted to advertise on my TV program?" This has lead to flood of entertaining "investment programs", where the rating of viewership is more important than the actual information. They bring in the talking heads to argue and yell, they bring in outlandish "experts" to make stock selections and market predictions. They give entire programs to guys with funny noise buttons who will scream and yell and get red in the face. Anything to get you to tune in. The information has been lost.
It's simply not possible to know everything there is to know. Efficient markets are just not that complicated, yet people continue to disagree. The fact is that there are too many variables and too much information. No one can (or should) keep up with it. The Coached investor knows what is important. don't reach for all the information, grasp the right information.

My advice: Trust that free markets work and stay away from the talking heads and their stock picking. Unless you're looking for a laugh, then the guy with the funny noises tickles me from time to time. (Is he for real?)

Time Value of Money

Many don't understand "Time Value of Money" (TVM), but it is simple...it is the value of your time. Some homeowners would rather pay a premium in home maintenance to gain more a little more time for recreation. Other home owners would not dream of spending a dime on something as simple as mowing the yard.

Time Value of Money = I'll pay you for my free time

My favorite example of this: My wife and I were flipping a home. We bought a 1900Sq/ft house with a 1000Sq/ft unfinished basement. We were simply going to spruce it up, and finish out the basement w/ family room and 2 additional bedrooms. Meanwhile, our neighbor had the same idea and more or less the same house of the same age, with a 1 year head start. He was his own contractor, and was determined to turn a profit. He went with the cheapest subs and product, and did lots of the work himself. He rented heavy equipment, bought every tool and had a crew from the local temp agency. He worked on his house the whole time I lived there, and was forced to do many of the improvements twice, due to poor craftsmanship or incompleat sub work.

Me? I found the best remodeling contractor I could. The Contractor had a 12 month wait, and it was worth it. He was turn-key with ideas and perfection. Even allowed me to paint and tile, which I enjoy. He was in and out in 3 weeks, and I wrote him a big check. House was listed with a realtor and we sold it 26 months to the day after we purchased it, 3 months after we started our remodel.

My neighbor could not believe the money I spent on the contractor or the percentage to the realtor.

When we moved out, he was still working on the house, and guess what.... the housing bubble popped. He is probably still living in it, with a "for sale by owner" sign in his yard.

Did I leave money on the table? Yep. Did I leave the table with money? YEP!

Moral of the story: Not all bargains are time savers, not all time savers are worth the cost.

My question to you: What other places in your life are draining your time or money?

The coached investor is probably losing the TVM battle when it comes to oil changes or yard work... I can't help you with that, and I do both myself. I can coach you to understand the Time Value of Money and know that your retirement account is operating efficiently with written objectives.

Evan Morrison
Investor Coach
Waco TX

My new Blog

use this as a platform to discuss efficiencies.

It is a known fact that you can have the cheapest, quickest, and best; you just can't have all three. To me, efficiency is picking the perfect combination of the two. Efficiency is not always cheep or best, and contrary to popular belief, it is not always quick. However, it is almost always the most correct.

My little theory here is applicable to almost everything, including your investment strategy. You can have the BEST investment portfolio, but it will not be the cheapest. Truth is, there may be a factor in your life that inhibits one of these. What if you don't have the time required for what you can afford? These are decisions the coached investor is aware of.

Please check back often. I will keep it short, sarcastic, and efficient. I may even throw in a video.

Evan Morrison
Castle Investor Coaching
Waco TX