This is kind of stock-trading talk, but it's also something that I think will interest serious investors as well.
Question: Can market inefficiencies be exploited?
Better question: Do I know anyone that can?
Even better question: Can *I* exploit it?
Short answer: I highly doubt it.
That's the sad but short truth. Now, for those who are still interested, please read on.
Imagine a deceptively simple and seemingly "sure-fire" premise. You see something that is currently running for a very low price, what do you do? You buy it. You see something that is currently running for a very high price, what do you do? You sell or short it.
Buy low. Sell (or short) high. Simple right?
So, why are so many smart people having such a hard time with this seemingly simple concept?
The more I learn, the more I am realizing the following: Most people don't know where the lows and the highs are. And for that matter, we don't know if current lows could go lower, or if current highs could go higher.
At least, not I.
And when you think about it, most trading strategies have to do with covering the possibility of a trade going wrong. Risk mitigation. Or is that loss mitigation? There's a difference there.
But to answer my own second question, the only person who I can think of that can seem to beat the market is Warren Buffett. I even have a link in this blog, linking to a white paper that claims he isn't just lucky.
So what is he doing that makes him succeed where everyone else has failed? After all, everybody knows about value investing by now. A whole lot of smart people are practicing it. So, why not others? Why only Warren? I don't know.
If you're wondering what brought this up, consider this interview with Jeremy Grantham of GMO investing. When you read that article, you get the sense that he is indeed a pretty smart man and he talks a lot of sense. Now consider this rebuttal by Larry Swedroe of Buckingham Family Financial Services.
Granted the rebuttal itself is not without some criticism, but if Swedroe is correct, then why is Grantham himself isn't able to exploit the market based on that simple premise? Yes, the same premise as my own that I am hoping to exploit?
I think it's not so much that zigging when everybody is zagging isn't a bad idea. But rather, the problem is we really can't tell when the market is zigging or zagging at all. Even when the valuations seem so "obvious".
Well, either way, I am still not fully convinced that this is impossible. I mean, even if it is, I'd like to keep trying for now. But peering into others who are obviously smarter and more experienced than I am, and yet having just as much of a hard time with the same basic thesis I'm using, it does give one pause.
Can market inefficiencies be exploited?