Efficient Markets

 | October 9, 2008 9:38 PM

With the way the market is crashing it is hard to believe in efficient markets. Yet I still believe in them and it is mostly because of this book, A Random Walk Down Wall Street, as well as The Lazy Person’s Guide to Investing and to a lesser extent, Beating the Street.

One reviewer on Amazon gave a great summary of A Random Walk Down Wall Street.

This book does a very good job reconciling between market efficiency and perceived inefficiencies such as bubbles at different times. The author believes in a weak form of efficient market theory. Simply put, the market may not be perfectly efficient at all times, but it’s efficient enough to make it very difficult and costly trying to beat it. In the end, an investor is better off holding a market index fund that invests in everything under the sun. It’s not worth the cost and effort trying to find the undervalued stocks or high-growth mutual funds.

With the Dow Jones industrial average having dropped 20.8% in the past six trading days one has to wonder if it is time to jump in.  But if you believe in efficient markets you know you can’t time the market, you just have to invest because you have money to invest and that you would invest whether the market is going up or down.  Still it does seem to be short-term fear that is driving people to flee to cash.

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