Is the Stock Market Rigged? Not Exactly, But It’s Not ‘Perfect’ Either.
You’re not just imagining it. And that chaos? It’s actually your biggest advantage as an investor.
The Big Lie The Textbooks Love to Tell 📚
There’s a popular academic theory called the “Efficient Market Hypothesis.“ In simple terms, it says that stock prices always reflect all available information. This means everything is priced perfectly, and there are no bargains to be found. Trying to “beat the market” is a fool’s game.
But as legendary investor Seth Klarman points out, this theory just doesn’t match reality. If it were true, how could investors like Warren Buffett consistently beat the market for decades? Are they just… lucky?
Of course not. They understand a simple truth the academics miss: markets aren’t driven by spreadsheets; they’re driven by people.
The Real Reason for Market Madness: Human Nature 🤪
People are emotional. We get swept up in hype, we panic during crashes, and we love to follow the crowd. This is why markets are inefficient.
Think about the dot-com bubble in the late 90s:
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The Hype: Everyone piled into any company with a “.com” in its name, even if it had no profits or a real business plan. Prices shot to insane levels.
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The Ignored: Meanwhile, solid, profitable “Old Economy” businesses were treated like yesterday’s news, and their stocks became incredibly cheap.
Value investors, the ones who look for bargains, ignored the hype. They bought the unpopular, undervalued stocks. When the bubble burst, the dot-com darlings crashed, while those boring, old companies soared. This was a massive failure of “market efficiency” and a huge win for investors who thought for themselves.
How You Can Use This To Your Advantage 🧠
You don’t need a Ph.D. to be a successful investor. You just need to recognize that the market’s mood swings create opportunities. Klarman compares it to learning to ride a wild horse. You can’t learn it from a book; you have to get in the saddle and understand how it moves and reacts.
Here’s how to start thinking like a smart, independent investor:
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Be a Bargain Hunter: Don’t chase what’s popular. Look for great companies that the market is temporarily ignoring or unfairly punishing. That’s where the real value is.
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Ignore the Noise: The financial news creates a sense of urgency and FOMO (Fear Of Missing Out). Tune it out. Focus on the long-term value of the business, not the short-term stock price wiggles.
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Embrace Patience: The market can stay irrational longer than you can stay solvent. But if you’ve bought a quality asset at a good price, patience is your superpower.
The idea that you can’t beat the market is just an excuse. The market’s inefficiency, driven by human emotion, is the very thing that creates opportunities for patient, rational investors like you.
What do you think? Have you ever seen the market act completely irrational? Share your story in the comments!
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