Effective Investing: Barons That Beat the Market
Jack Blanding
Professor Jevons Lee
May 18, 2012
ACCN 7200-21
Effective Investing: Barons that Beat the Market
Introduction
The most pertinent question to modern investors is whether it is possible to predict prices and attain arbitrage. Since the time when academics first entered the field of financial investing after World War II, the developments in the stock market have encircled this central question. There have of course been developments on both sides, as men like Alfred Cowles and Eugene Fama have made their cases for market efficiency and random walk. On the other hand, intelligent minds and practitioners such as Warren Buffet have made their living through the stock market, millions of dollars and significantly exceeding market returns. As a result, the question remains whether it is possible, specifically for the average investor, to invest in such a way as to confidently expect to beat the market. It is determined that, in the short run, prices are unpredictable and therefore, short run arbitrage is nearly impossible for the average investor. However, through fundamental analysis of a company and knowledge of the industry, including competitors and growth opportunities, it is possible to confidently estimate the value of a firm in relation to its current market price. In that way, it is reasonable to obtain returns above the market average. However, without the help of an analyst, or some special expertise, this also is nearly impossible for the average investor.
Alfred Cowles and Market Efficiency
In 1933, Alfred Cowles asserted that the boastful attempts of stock market forecasters to predict future stock prices were ineffective and possibly even detrimental to their advisees. Using heaps of data, carefully documented and organized, Cowles showed that over more than four years during which he conducted his research, the results of financial services and insurance companies, rather than handily beating the market as promised, actually
Professor Jevons Lee
May 18, 2012
ACCN 7200-21
Effective Investing: Barons that Beat the Market
Introduction
The most pertinent question to modern investors is whether it is possible to predict prices and attain arbitrage. Since the time when academics first entered the field of financial investing after World War II, the developments in the stock market have encircled this central question. There have of course been developments on both sides, as men like Alfred Cowles and Eugene Fama have made their cases for market efficiency and random walk. On the other hand, intelligent minds and practitioners such as Warren Buffet have made their living through the stock market, millions of dollars and significantly exceeding market returns. As a result, the question remains whether it is possible, specifically for the average investor, to invest in such a way as to confidently expect to beat the market. It is determined that, in the short run, prices are unpredictable and therefore, short run arbitrage is nearly impossible for the average investor. However, through fundamental analysis of a company and knowledge of the industry, including competitors and growth opportunities, it is possible to confidently estimate the value of a firm in relation to its current market price. In that way, it is reasonable to obtain returns above the market average. However, without the help of an analyst, or some special expertise, this also is nearly impossible for the average investor.
Alfred Cowles and Market Efficiency
In 1933, Alfred Cowles asserted that the boastful attempts of stock market forecasters to predict future stock prices were ineffective and possibly even detrimental to their advisees. Using heaps of data, carefully documented and organized, Cowles showed that over more than four years during which he conducted his research, the results of financial services and insurance companies, rather than handily beating the market as promised, actually
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