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Can you beat the stock market?

In short, no, says Gary Trennepohl, president of the University of Oklahoma-Tulsa.

Speaking to Strictly Financial fellows, he says that the market is so efficient that it’s almost impossible to beat it.  New information is widely, quickly and cheaply available and is rapidly reflected in security prices.

There are two main camps of analysts of stocks:

  • Technical analysts believe that all information about a security is reflected in its previous prices. They use past prices in an attempt to predict future price movements in the stock. They tend to be short-term traders and are sometimes called “the elves.”
  • Fundamental analysts focus on accounting data and economic factors to calculate the true value of a stock. Most brokerage research reports are fundamental analysis. Warren Buffett is a fundamental analyst. They believe that the market is rational and that value is derived from expected earnings, dividends and cash flow.

In both cases, he says, the information that both rely on has already been incorporated in security prices.

He says investment income is maximized by holding a well-diversified portfolio over time and minimizing trading costs and search costs.

“The market is so scrutinized and so well-followed, it’s almost impossible to generate” a return greater than the market over time, he says.

“Nobody who is doing a legitimate investment business is going to be doing 20 percent a year” in returns every year, he says.

He also notes that daily stock stories that attempt to show a causal relationship between events and market movements are jumping to conclusions. He suggests stating what the market did that day and what other events occurred that day, but not saying one is the result of the other.




In Strictly Financials Seminar, Training.

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