Wednesday, September 24, 2014

Jack Bogle On The Efficient Market Theory & Index Funds

During cyclical market highs the Efficient Market Theory becomes the dominant mantra in the financial markets. Investopedia defines this theory as:

"An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments."

I do not follow this theory, and for a good understanding of why I would highly recommend reading the excellent book Contrarian Investment Strategies. It provides an illustrated walk through history with examples of how the Efficient Market Theory has failed investors time and time again.

In addition to discussing the EMT in the video below, John Bogle (the founder of Vanguard) also discusses the importance of seeking out low fee vehicles when investing. On this topic I am with him 100%. Fees, along with taxes (for those trying to trade the market over the short term), end up being an often overlooked part of the average investor's portfolio, and the losses become enormous when compounded over many years. Vanguard has revolutionized the business with low fee investment funds, and their share of the market has grown substantially because of this strategy.

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