Every day we happily pay the market price for all sorts of goods and services.
But many of us see the financial markets differently.
We assume, for example, that shares are either undervalued or overvalued.
We try to be clever and buy before prices rise and sell as they’re about to fall.
But academic research has consistently shown that markets are actually very efficient.
It’s all down to what statisticians call the wisdom of the crowd.
Imagine you invited two people to estimate the number of sweets in a jar. They’d probably come up with two very different numbers.
But if you asked, say, two hundred people to guess, then took the average number, it’s likely to be pretty close to the correct answer.
Now apply that to the markets. There are millions of trades made every hour, and each one represents the very latest estimate of the entire market as to how much an asset is worth.
Of course prices change all the time. But it’s unexpected news that causes them to rise and fall. And, by definition, the unexpected is impossible to predict.
Also, markets react to new information in milliseconds. So by the time you’ve processed the news yourself it’s probably too late... The new information is already reflected in the price.
So the first step to successful investing is to accept the price.