Saturday mornings in the summer were for "garage sale-ing" when I was a kid growing up. I was always on the hunt for sports equipment - hockey gear, baseball bats, and my first set of golf clubs. My mom was a pretty savvy garage sale negotiator too. Very rarely did we pay the price that was on the sticker.
When I was a kid if you found the thing you were looking for at a garage sale, you would get the best price you could from the seller and buy it. If you were the person selling the item, you would likely negotiate with the first person who expressed real interest and get the best price you could.
Today, Kijiji and Craigslist have become the new Saturday morning garage sale. Instead of spending hours on Saturday morning looking for an old bag of golf clubs at 10 different yard sales, someone can do a quick search for "used golf clubs" and pull up dozens or hundreds of listings. Armed with a host of different listings to compare against, it's highly unlikely that a seller or a buyer will be able to command an unfair price for that set of used golf clubs. The market for my used golf clubs is now far more efficient than it was when I was hunting for them at garage sales.
A similar evolution has happened to stock and bond markets. For people actively choosing stocks and bonds for their portfolio, they are looking for deals. They are trying to buy or sell something that is mis-priced in the belief that they possess some special insight or skill to be able to find deals that other people have missed. They are trying to find incorrectly priced stocks and bonds.
The problem is that, just like what Craigslist did to yard sales, the market has become much more efficient at finding the right and fair price for stocks and bonds. Today there are far more participants, faster technology, real-time information that is widely available to everyone. In 2017 alone, the daily average dollar value of stocks traded was $529.2 Billion. What does this mean? This means that deals are hard to find. Really hard to find.
So if the market is mostly efficient, what should we do to succeed as investors? Should try to beat the market? Or, try to find someone who can? No. Find an investment philosophy that allows you to participate in the growth of stocks and bonds in a diversified and cost-effective way and let the markets work for you. If you want to search for deals in the market anyways, ask yourself: What do I know that the person I'm buying/selling against doesn't know?
Photo by Alvaro Reyes on Unsplash and Graphic from Dimensional Fund Advisors
The information in this material is not intended as investment, tax, or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.