Why Everyone Can Beat the Market (plus presentation tonight)

Is there anyone out there who still believes in the Efficient Market Theory?

If you're unaware of what that is:

The efficient market hypothesis (EMH) is 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.

This was taught by famous people in famous schools for a long time.

But nobody still believes this, right?

Nobody still believes that all information is already "priced in" and the market is always trading at fair value. That just doesn't make sense.

For example, if you think that markets are always efficient, take a look at the 52-week high and low of any stock you like.

How about Amazon (AMZN)? If the efficient market hypothesis is true, then Amazon's fair value fluctuated by 76% within a year.

Think about that, in the past 52 weeks, Amazon the company saw its value change by 76%.

Its assets changed that much? Really?

In short, if markets are efficient, in March, 2018, Amazon was worth $9 billion and then by April, 2018 it was only worth $7.75 billion.

Whoa, that must have been some month!

Did a fire destroy  $1.25 billion worth of inventory? Did all of its workforce quit? Did no one buy anything for 30 days?

Before you answer, please know that three weeks later it was worth $9 billion again.

So either Amazon lost and found over a billion dollar of assets in a few weeks or the markets are inefficient.

It's one or the other.

And if you believe in the latter, guess what? The markets can be beat.

Let's do another example.

From 2000-2010, the SPY (the ETF that tracks "The Market") actually decreased in value.

From December 31, 1999 to December 31, 2009, the market was down 24%. Here's a picture:

https://www.screencast.com/t/yu2iFovN

That's a decade of investing in the market and ending up with a lot less than you started with.

If you believe we can't beat the market, then the only thing we can do is accept it. Tough cookies for us!

We can't beat efficient markets, so we'll get nothing and like it.

Or, if you believe people are crazy and that markets constantly give us opportunities, then you believe it's possible to not have a decade of lost money.

Or, we could just use our eyeballs and look at that chart again. See how price quickly falls and then rises and then falls again? Every time irrational people make those moves happen, we have a chance to beat the market.

"Fine, opportunities are available. How can we take advantage?"

Any way we like!

I'm sure there are at least a dozen different systems out there that could take advantage of those inefficient moves.

Here's just one way.

I love the RSI indicator, so let's use that.

Just using the standard settings for the RSI (14 length, Overbought at 70, Oversold at 30) on a monthly chart of SPY, you can see that RSI went into Oversold twice in the 2000s.

https://www.screencast.com/t/F8exksNpCQM

If we bought the first time RSI closed into Oversold, we would've finished the decade with a 36% gain instead of a 24% loss.

If we missed that one and bought the second time RSI went into Oversold, we would've finished with a 15% gain instead of a 24% loss.

But if we like short-selling better, we could have sold when the market went into Overbought and ended up making 19% for the decade. See that here:

https://www.screencast.com/t/DJ6tPdvu

Either way, by preying on irrational behavior and making trades when things got extreme, we could have beaten the market handily.

And this is true for all markets.

The first step to beating the market is believing we can beat the market.

The second step is much harder (but doable).

And we'll talk about that step in Thursday's YouTube video.

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Lesson: How to Beat the Market with the Templeton Strategy
Speaker: Scott Welsh
Date: Wednesday, May 2, 2018
Time: 7:00 p.m. U.S. Eastern Time (4:00 p.m. Pacific)

  • Learn a Depression-era stock picking strategy that is still used today.
  • Learn how to improve the strategy for the modern market.
  • Learn where you can find these stocks to replicate the strategy.

Click here to attend and receive the video recording.

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