The Greatest Information Processor in the World

by Randall J. Cloud

Given goals such as not outliving your assets or educating your kids or helping others or building wealth or all the above, it is important to realize who your friends are that can help.

An often overlooked and undervalued friend is known by many as “The Market”.  

“The Market” is the most powerful information processing machine in the world.

With the use of super computers, at any given moment on any given day, “The Market” quickly and efficiently assigns market prices to individual company stocks and bonds around the world.

Who is the market?

“The Market” represents all of the millions of investors and speculators as a group around the world.

As a result, market prices represent the collection of opinions of every investor and speculator around the world.  

Not only do market prices reflect all known information about individual companies, they also represent the opinions as to how current and future world and national events will impact individual companies, industries, and economies.  All this is incorporated into security prices at any given moment on any given today.  

Why is this important?  

Wall Street has marketed the idea and built their businesses on the idea that “The Market” is not efficient.  In other words, we cannot trust market prices.  Therefore, stock picking and market timing is marketed as the way to “invest” when it is actually speculation.  This idea lends itself well to the order-taking service that brokers with Wall Street Firms provide.  They provided a service to facilitate trades.

 
Similarly, “hedge funds” (a sophisticated sounding term for stock picking and market timing) have successfully marketed and promoted the idea that “The Market” is inefficient.  Unfortunately, some have fallen to the marketing wrapper called “hedge fund” which at the end of the day is stock picking and market timing.

Unfortunately for their clients, picking stocks and timing the markets at its core is based on forecasts and predictions and relegates people to being speculators rather than investors.  Bottom line, the unsuspecting public ends up relying on guesswork and emotion which not only results in monetary losses more often than not, it generates stress, worry, and unpleasant surprises.

In many areas of life, being smarter and working harder translates into success.  However, this principle does not work with picking stocks and timing the financial markets consistently.  The reality is that when one believes he or she knows something that no one else knows, he or she is making a bet against the entire investing world.  What does one person or a small group of people know that “The Market”/everyone else does not know?

Why would anyone or a group of people who could successfully predict and forecast consistently share their information and expertise with anyone else?  Would they not be giving their profits away by sharing the information with the others?  

Those attempting to pick stocks and time the markets actually make “The Market” efficient with their labor and money.

How do we use Market Efficiency to our favor?

On the other hand, financial economic science highlights the simple truth that we can use the information processing power of the Market to our favor and see the Market as our friend and ally.

It means we can capture great long-term returns without having to be able to predict the future.

Embracing Market Efficiency empowers us to become investors rather than speculators.  We become investors in Capitalism embodied by the U.S. and Global Economies in their entirety. Our portfolios become Broadly Diversified Globally and afford us the opportunity to capture the higher expected returns generated by the smallest, value, and most profitable companies from around the world.