Sunday, June 8, 2008

Educate thyself, part 7. Investment theory

Depending on what investment theory you're subscribe to, you can either immerse yourself in so-called fundamental analysis of each company you might buy (and be the next Graham or Buffett), do a technical analysis ( has to do with the prevailing trends in the market), or believe in Efficient Market Theory, stipulating that by en large, the markets are efficient, and there are almost no exploitable opportunities to get rich quick off of. Then there's this Modern Portfolio Theory , described by Harry Markowitz (and he got a Nobel Prize for it), according to which you can't really make anything over and above of what market return is, but you can reduce the risk (fluctuations in the value of your portfolio) by proper diversification(at least, that's my understanding of his theory).

Dizzying choices... And all these theories has strong arguments on their side. For instance, fundamental analysis- Warren Buffett made a fortune sticking to this theory.
What an amateur investor to do?
It reminds me of a common issue we all face almost every day- out of multitude of studies, what would we take as a new guideline for our practice? And if in medicine we have a benefit of a prior experience, in investing we're left on our own devices.
I guess, just like in our everyday practice, if we don't know the exact answer, we do what we think is right.

No comments: