The Investment Answer by Gordon Murray

Author:Gordon Murray [GOLDIE CFA, CFP, DANIEL C., MURRAY, GORDON S.]
Language: eng
Format: epub
ISBN: 9781455503292
Publisher: Grand Central Publishing
Published: 2011-02-01T16:00:00+00:00

Figure 4-2 Performance of the S&P 500 Index

Data for January 1970-August 2009 provided by CRSP. Data for September 2008-December 2009 provided by Bloomberg. S&P data provided by Standard & Poor’s Index Services Group. CRSP data provided by the Center for Research in Security Prices, University of Chicago. Treasury bills data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago. Indices are not available for direct investment. Performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. There is always a risk an investor will lose money.

The other active management technique is security selection (or stock picking). This involves attempting to identify securities that are mispriced by the market with the hope that the pricing error will soon correct itself and the securities will outperform. In Wall Street parlance, an active manager considers a security to be either undervalued, overvalued, or fairly valued. Active managers buy the securities they think are undervalued (the potential “winners”) and sell those they think are overvalued (the potential “losers”).

You should know that whenever you buy or sell a security, you are making a bet. You are trading against the view of many market participants who may have better information than you do. When markets are working properly, all known information is reflected in market prices, so your bet has about a 50% chance of beating the market (and less after costs are taken into account).

Again, Wall Street and the media have a vested interest in leading us to believe that we can beat the market if we are smarter and harder-working than others. Yet, through today’s technological advances, new information is readily available and becomes almost instantly reflected in securities prices. Markets work because no single investor can reliably profit at the expense of other investors.

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