Friday, August 05, 2011

Myth of a rational market: Day Three at the FSC

A walk through investing history with Justin Fox (Harvard Business Review Editorial Director) wound up with this: it's really hard to beat the markets.

The index managers may well have been cheering as Fox took delegates through generations of investment thinking.

On the way from Markowitz to Sharpe HBR's Fox says some ideas have stood the test of time, while others have proven to be myths - and less than helpful to investment performance.

So which ideas stand up, post GFC?

1. There is a trade off between risk and return
2. There is merit in diversifying
3. Black Scholes (looking at volatility) works

The myths are these:

1. The price is right
2. Risk can always be quantified
3. Risk is equivalent to historical volatility
4. Financial markets are inherently stable
5. Corporations should do what what markets say they should

Fox defends the value of thinking for ourselves. Many a listed company CEO will be glad to hear it - setting a course they judge to be the right one, rather than leading by the judgement of analysts.

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