Clashing stock market theories

Date posted: May 28, 2013

The Stock Market has come all the way back from its lows during the recession. This has generated much more interest in stock investing for more people. For someone new to Stock Market investing what’s one of the first issues they need to address? N.C. State University economist Mike Walden responds.

“I would say the first issue is, What is going to be their philosophy toward investing in the Stock Market?

I know this is new to a lot of folks who are new to the Stock Market and really haven’t thought about it, but there is a difference of opinion among academics and practitioners about philosophies to Stock Market investing.

And I would argue there are basically two philosophies. One philosophy says that you should always be searching for the best stock, that is, the stock that’s low that can go high. This means that you’re going to have to do a lot of research, either you or someone that you trust. Obviously the risk is going to be higher that you might miss, and you’re not going to hit on every one, every stock. But it does say you’re going to be an active investor in the Stock Market, and you’re probably going to do a lot of buying and selling and trading.

The other philosophy says, ‘Look, that may be nice conceptually, but if everyone’s doing it and everyone’s trying to do it, they’re really no bargains out there.’ There’s a lot of information about the Stock Market, and this competition is really going to mean that there are no undervalued stocks. If someone thinks the stock is going to go up in the future, that’s already going to be incorporated in the price.

So this philosophy says that, quite frankly, the best approach to Stock Market investing is number one, buy a diverse set of stocks, and number two, keep them for a long time. That is, these folks would not do a lot of trading, not do a lot of buying and selling, and it really wouldn’t be, perhaps, to many people as interesting because it also means you’re not going to be spending a lot of time doing research on what’s the best stock to buy.

These are very interesting clashes between academics over which approach gives the best overall rate of return. I would argue right now it’s about a tie.”

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