Do you think you’re a good investor?
You keep up with ASX company news, read up on economic and social trends, and don’t speculate on penny stocks.
Unfortunately, regardless of how much effort you put in, the chances are you’re no better than anyone else.
The dilemma is that, unless you have illegal insider information, everyone has access to the same company and economic data.
It’s the old efficient market hypothesis.
“Anything that is expected is in the [share] price and the only thing that moves a price is the unexpected,” Marcus Today director Marcus Padley said in a memo to clients.
“It is the Catch-22 of investment. You have to know the unknown, because that’s the only thing that moves a share price — the unexpected.”
Study the numbers as much as you want, it’s useless
In the old days, even basic information like company financials had to be purchased and mailed out to investors.
Now with the internet, it is freely available in a multitude of places. Instantly.
Padley said that this means the advantage that value investors supposedly had has evaporated.
“The ‘edge’ that the ‘intelligent investor’ identified…, as their smarty-pants point of difference, has been arbitraged away.
“When the market goes to hell, ‘value’ becomes a useful reference point again — but in a bull market it is so 1950s.”
So what do we do then?
Because of this market efficiency, Padley reckons investors never make money from smart asset allocation or portfolio optimisation.
“It’s almost always a few simple events, fads and trends that moved prices.”
So instead of combing through company financials, Padley suggested the best way to spend the end-of-financial-year is by developing “an opinion” and not “following the crowds”.
The best place to start is the trends that already have momentum.
“It’s probably best you respect the current themes and not bet against them until proved otherwise,” said Padley.
“Continuation of the trend is the most likely outcome in the stock market.”
Padley suggested the following 4 themes as the “obvious” starters for the new financial year:
- A continuing bull market
- Real estate prices are going up, so ASX housing shares are “low-risk”
- Interest rates won’t rise significantly, so real estate investment trusts, infrastructure and utility shares will do well
- Electric vehicles are coming, so copper and lithium mining shares to rise
Efficient markets can be beaten
The counter-argument to Padley’s view is that markets aren’t completely efficient and that bargains can be found occasionally.
This was the experience of Forager Funds senior analyst Gareth Brown.
“Markets can be surprisingly ignorant from time to time. Especially at the smaller end of the market,” he said on a company blog in March.
Brown took the example of ThinkSmart Limited (LON: TSL), which was a buy now, pay later business in the UK. After Australian giant Afterpay Ltd (ASX: APT) bought out the business, ThinkSmart shares were effectively a stake in the parent.
Yet a huge discrepancy between Afterpay and ThinkSmart shares appeared.
“Here’s what happened over the first 6 months of 2020. Afterpay shares rose 99%. And ThinkSmart shares fell 11%,” said Brown.
“And what about the almost 9 months since 1 July 2020? Afterpay rose a further 73%, ThinkSmart 🚀 271%.”
So the market doesn’t always see everything, according to Brown.
“There’s still plenty a diligent investor can do to gain an edge over it. Look hard and think smart.”