Monday, March 15, 2010

Inefficient Markets Are Still Hard to Beat

by  Jason Zweig, THE INTELLIGENT INVESTOR - The Wall Street Journal, 09/01/10

Can't anyone here play this game?

With the market so erratic at pricing stocks, it is tempting to think you can do better.

Between the Dow Jones Industrial Average's record in October 2007 and the bear-market low in March 2009, Bank of America's stock fell 94%. Then, by year-end 2009, it went up 380%. It wasn't just financial stocks that acted like yo-yos: Over the same period, Alcoa's stock fell 87%, then more than tripled.

How can such crazy swings in price be "efficient"? As millions of smart buyers and sellers compete to maximize their wealth, they update stock prices with all the relevant information that's available. That's what an "efficient market" means. It presumes that the market price is the best estimate of a stock's intrinsic value, or what all its current and future cash flows are worth.

But the fact that the market price is the best available estimate doesn't mean that the market price is right...