Caroline Ritchie: No one formula for life, investing

The Efficient Market Hypothesis (EMH) is a premise on which a great deal of investing is done and yet, strangely, something of which there is very little actual evidence.
In a nutshell, this theory says that over the long term, stock pickers cannot beat the index and that share prices reflect all available information at any given time.
It pushes the idea that professional investors can't beat the market return over the longer term. This, of course, is clearly rubbish. If it were true then these industries would cease to exist and the investing landscape would look very different.
If EMH was actually alive and well in reality, we'd all be sunk deep into the same identical fund with nary a care in the world.
It suggests that neither timing, preferring some companies over others nor being an experienced or qualified market professional makes any difference to long term returns. Clearly not true, but this theory, as you can imagine, may appear to be the ultimate panacea for those individuals who wake up in the middle of the night sweating about share prices and driving themselves to nervous distraction over their portfolios on a daily basis. EMH, which gained major traction in the 1960's, provided such a neat answer to all these niggles that you have to wonder if it wasn't actually made up deliberately by the passive mutual fund managers who also gained enormous prominence at the same time. One tidy formula to sweep away all those nagging doubts, to make investing life as simple and utopic as possible.
One more sales pitch. However, just as there is no simple formula for life, there is no simple formula for investing either. It just isn't logical, possible nor proven to lump everything into one bag and release responsibility because some boffin says we can't do better than the market average.
Of course we can do better than average, and in most cases much better, but it takes skill, nerve and experience. There is no easy answer with capital markets and it is fairly unlikely that there will ever be one.
But subscribing to a theory that says as long as you are diversified then you don't have to worry about anything else because investments always fatalistically resort to the long term average is pushing the boundaries of simplicity too far. Warren Buffet, and a number of the world's most successful investment billionaires, agree with me.
Caroline Ritchie is an NZX adviser for Forsyth Barr in Napier and holds an NZX Diploma, BCom and BSc. For sharemarket advice contact her on (06) 835 3111 or caroline.ritchie@forbar.co.nz
The comments in this note are for general information purposes only. This article is not intended to constitute investment advice under the Securities Markets Act 1988. If you wish to receive specific investment advice, please contact your investment adviser. Disclosure Statements for Forsyth Barr and any of its investment advisers are available on request and free of charge.