The securities markets provide an evolving consensus of the risk-adjusted value of particular securities. By understanding how the markets value securities, individual investors can chose more durable investment strategies
Judging the potential usefulness of different investment strategies requires some understanding of what the public securities markets really do. This article discusses how the markets price financial securities from the standpoints of risk and return. This description generally characterizes the behavior of modern securities markets in industrialized countries around the world.
Securities markets provide a continually adjusting balance of trading order supply and demand, wherein price changes enable this evolving balance. Important observations about securities markets from investment science are that:
By understanding these critical investment subjects and being aware of the associated scientific evidence, investors can adopt investment strategies that are potentially more profitable. Scientific evidence indicating which strategies are preferable reduces confusion and reinforces the confidence needed to ride out market volatility.
Value fluctuations and conflicting opinions can challenge anyone to formulate and stick with a set of investment principles. Market fluctuations over time and across business cycles, industries, asset classes, geographies, etc. can raise significant doubts. The maelstrom of media and commentator truth, noise, and rubbish increases investor confusion. This very volatility and conflict of opinion requires investors to strive for an objective basis for choosing their investment strategies.
The Skilled Investor can help individual investors to understand some of the important “whys” of investing. Many investors want to jump immediately to investment tactics and may avoid thinking more deeply about the underlying logic or validity of those tactics. Shooting prior to aiming generally leads to poor results. Given the astonishing amount of erroneous investment information and fallacious theories circulating, tactical action without a scientific anchor can be hard on your wallet. (See: How can individual investors trust, when so much investment information is rubbish?)
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