Odds On by Matt Hall

Author:Matt Hall
Language: eng
Format: epub
ISBN: 9781626342576
Publisher: Greenleaf Book Group Press
Published: 2016-04-07T04:00:00+00:00

People were losing money every day and failing to achieve their goals because they had a warped—or at least inaccurate—picture of reality. They needed to know the truth.

Still, I could see how Larry’s critique of a traditional, active investment approach seemed almost, well . . . un-American. The American dream is the idea that you can get ahead if you’re smart and willing to work harder than everyone else. We were telling people that no matter how smart they were or how hard they worked, they had little chance of getting better-than-average returns from a traditional active investing approach—and almost no chance of doing it year after year.

The primary explanation for this, of course, was the efficient market hypothesis. Larry would diligently explain that it is difficult to find truly undervalued or overvalued investments, chiefly because the markets are so good at incorporating relevant information into the price of an asset. In other words, he’d tell these folks, you don’t know anything the market doesn’t already know.

Larry would then immediately wade further into the theory, exploring some of the technical details behind it. That’s when I could sense people going numb. Some would squint at Larry’s terrible slides; others just looked dumbfounded. They had come to the event expecting wine and cheese and a sales pitch. Instead, they found themselves in a graduate school seminar on finance.

It wasn’t just the data overload. People were also taken aback by the implications of what Larry was saying. He had systematically demolished the common belief that investment success comes from picking stocks and trying to predict where the market is going. A lot of the folks in our audience were wondering what in the world they were supposed to do if we were right. Should they just give up and stop investing?

Not at all. Larry would explain that there is a better way to invest—one based on data and evidence about how the markets really work. That evidence shows us that predictions and guesses are worthless. But while that might feel unsettling at first, a whole world of new possibilities opens up once you embrace the fact that the markets are efficient.

Rather than trying to pick winners and time the market’s ups and downs, you can harness the growth of the global economy. You do that by investing in funds similar to index funds that target different areas of the market (and their expected returns)—small company stocks, large company stocks, international stocks, and so on. The right mix of such funds depends on your unique circumstances, but once you make a plan, you stick with it, letting the financial markets do their job.

When you do this, you significantly improve your odds of success by avoiding losses on bad bets. You also avoid the classic market-timing mistake of buying high and selling low. You don’t get whipsawed trying to keep pace with the fluctuating fortunes of a particular investment or short-term changes in market conditions. And by turning down the volume on your investing activity, you reduce the brokerage fees and taxes that accompany every useless transaction.

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