Handle With Care

I think Barry’s post, while on point, misses the forest for the trees for 99% of investors (I appreciate the fact that Barry has a large “pro” readership). Sure, there is a lot of talk, academic research and otherwise, that refutes the Efficient Market Hypothesis. But if you’re an individual investor with a full time job/career and perhaps a spouse and/or family, it is going to be well nigh impossible for you to capture these inefficiencies. There just isn’t enough time in the day to be master of all these things on top of what’s already on your plate.
Are there short term (I consider the one year Enron event short term for an investment horizon) inefficiencies? Certainly. But for the vast majority of people, the path to outperformance is to craft a well diversified portfolio capturing asset class returns that incorporates systematic rebalancing, while hammering expenses as far to the floor as possible. Your chances of producing a porfolio that graphs up and to the right over a reasonably long investment horizon are much greater following this type of investment game plan than almost anything else.

It has been my experience that, while inefficiencies are rampant, many times they are glaring only after the fact. Also, don’t discount the importanct of time and timing. To exploit inefficiencies you have to be able to weather sometimes long periods of being wrong or else have impeccable timing – both are difficult not only financially, but more importantly psychologically. It is the latter that more often than not destroys a portfolio’s performance. You will invariably be caught over- or under-invested at precisely the wrong moment.

And the advent of trading platforms that make crafting and rebalancing a portfolio as easy as a mouse click, along with the rise of ETFs, make the argument for a program that pursues diversified allocation and rebalancing even stronger. Remember, Wall Street is always selling something. The approach I’ve outlined is beyond boring, but quite effective. Effectiveness aside, boring doesn’t lend itself to a flashy sales pitch.

If you want to exploit market inefficiencies it is best to handle with care.

PS – funny story about ENE. I was all over the chart at the time as a short. The day I was going to pull the trigger my system was down for the day. The stock broke down from a topping pattern as I watched. I was too pissed to short thereafter thinking I’d missed the opportunity. If I only knew the rest of the story! C’est la Vie. And don’t get me started about stalking the FNM breakdown. In a word, maddening. It all goes back to time and timing.


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