Picking a good stock is not as easy as picking a good dish at your favorite restaurant. It involves high risk and careful consideration on many metrics. Financial analysts at hedge funds and investment banks typically analyze different multiples to run valuation of a company to decide whether its current stock price offers a good investment opportunity. However, there is an interesting theory that says all public information is readily available for every single investor. This theory is called, “The Efficient Market Hypothesis”. The theory assumes, since insider trading (using private information) is strictly prohibited by the Securities Exchange Commission, everyone only uses public information to make investment decisions.
This theory shares a meaningful insight with IMT. Although the information is available for everyone, not everyone picks it up and whoever has more information wins at the end. Individual investors often make investment decisions just because they like a certain company or want to take a stake at the company. This not only increases the risk of losing money, but also puts individual investors in a bad position compared to experts. Hedge fund managers and experienced investors rely more on statistical data rather than to use their gut feeling, and therefore generally achieve higher returns given the same risk profile. Some people do have very good gut feelings that often leads to successful investment, but it is not reliable over time nor better than simply playing lottery.
According to IMT, we can utilize our time better when we seek expertise from experts. Investing in the stock market holds the same principle. If you are not confident that the information you are using to make investment choices is strong, then you will have a better edge by simply going to an investment adviser and seeking expertise. When you are solely relying on your gut feelings and a few pieces of information available on google, how can you beat other professional investors who use a much more sophisticated database to pull more information more quickly? More information does not always guarantee better results, but at least you can minimize the risk by excluding stocks with bad outlook. When you don’t want to do your studies before picking a stock, then you might have better luck playing a slot machine at a local casino.