MORE IDEAS FROM The Most Important Thing
Inefficiency is a necessary condition for superior investing. Attempting to outperform in a perfectly efficient market is like flipping a fair coin: the best you can hope for is fifty-fifty. For investors to get an edge, there have to be inefficiencies in the underlying process - imperfections, mispricings-to take advantage of.
The random walk hypothesis says a stock's price movements are of absolutely no help in predicting future movements. In other words, it's a random process, like tossing a coin. The hypothesis says, the fact that a stock's price has risen for the last ten days tells you nothing about what it will do tomorrow.
An excellent investor may be one who - rather than reporting higher returns than others - achieves the same return but does so with less risk or even achieves a slightly lower return with far less risk.
When it comes to wealth creation in equity market, investing and trading are the two genres of the field. However, investing and trading are very different approaches of wealth creation or generating profits in the financial market. Imagine, today, you and your friend bought equal amount of seeds to sow in your fields but you sold them to someone in a day because you could earn profit. And your friend sowed the seeds and let them grow for a few years till they gave new seeds. He sowed the new seeds and continued this for years and sold a lot more seeds eventually than were bought.
"The investing business is not the same as investing in a business"
Forces that are not related to day-to-day business that can affect the price of stock:
Buffett follows the Benjamin Graham school of value investing, which are :
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