Guess what? I found a $2 bill on the floor of a busy shopping centre the other day. Admittedly a $2 windfall is not going to change my life. But it was enough to make me think. In theory, free money shouldn’t really exist, especially not in a bustling shopping mall on Orchard Road. By rights, any freebies should have been snapped up long before I had a chance to clap eyes on it. That is according to those who believe that markets are efficient. A serious flaw But for whatever reason the $2 note was definitely real. That suggests…
Guess what? I found a $2 bill on the floor of a busy shopping centre the other day. Admittedly a $2 windfall is not going to change my life. But it was enough to make me think.
In theory, free money shouldn’t really exist, especially not in a bustling shopping mall on Orchard Road. By rights, any freebies should have been snapped up long before I had a chance to clap eyes on it. That is according to those who believe that markets are efficient.
A serious flaw
But for whatever reason the $2 note was definitely real. That suggests to me that there might be flaws behind the idea of the efficient market. And there are.
Perhaps other shoppers in the mall were not too bothered about picking up something as trivial as $2. Perhaps they were just too busy to even notice. Or maybe they were too embarrassed to do so.
Something similar goes on in the stock market.
Many investors believe that the stock market should be efficient. Consequently, they do not believe that there can possibly be any bargains to be had. Otherwise, professional investors would long have snapped them up before us.
They believe that everything we could possibly need to know about stocks should already have been factored into the price. So we private investors should have no realistic chance of beating market professionals.
But nothing could be further from the truth.
Firstly, professional investors are fallible. For a start, they are judged on their short-term performances.
If professionals should underperform for a year or two, then jumpy investors are likely to ask awkward questions. And if they underperform for more than a couple of years, they could quite easily be looking for another job.
We private investors have a great advantage over our professional rivals.
That’s easy. We can’t be fired. Consequently, we can focus on the long term rather than on how we might perform quarter by quarter. That is a massive advantage, which we should never forget.
Without the pressure of quarterly performance reviews, we can focus, instead, on more important things – the long term. We don’t have to constantly switch out of our best ideas into the latest fad just because others are doing so.
It is important to remember that even Warren Buffett – yes, Warren Buffett – has lost to the market in the past. But that didn’t bother him. So, it shouldn’t bother us either.
Keep things simple
We private investors have another big advantage – we can keep things simple.
Let’s face it. We don’t exactly have endless hours to spend on in-depth analysis. We have better things to do with our time. We can count ourselves lucky if we spend just a couple of hours a week on our portfolios. So keeping things simple works massively in our favour.
For instance, to us private investors, a company such as Singapore Exchange (SGX: S68) should simply be a place where investors and traders can buy and sell stocks, shares and, if we like, deal in derivatives.
It has a proven track record. It is also, lest we forget, the main provider of these services in Singapore. And as Peter Lynch once noted: “In business, competition is never as healthy as total domination”.
However professional investors are likely to fret over daily trading volumes, a possible dearth of flotations, the impact of high-frequency trading, a lack of interest in penny stocks, the effects of the Shanghai-HK Stock Connect etc…
In other words, if there is something to worry about, then professional investors will worry about it. But do any of these concerns impact the company’s all-round strength over the long term?
Over the last 13 years, Singapore Exchange has delivered a total return of around 20%. Put another way, every $1,000 invested in 2001 would have turned into over $13,000, if you had reinvested the dividends.
So focus on the long haul rather than the short term. That is where you will find the best source of free money. That has always been our greatest advantage as private investors. And it will remain our biggest advantage.
This article first appeared in Take Stock Singapore.
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