Do stock markets price assets efficiently? The answer is that markets do price assets efficiently – most of the time. During these times most of the traders are professional investors, often fund managers.
At other times, the market is boiling, and in the news, and a different population of stock buyers move in. These amateurs buy stocks which are rising, sell when they are falling, and end up buying high and selling low. Then the market goes off the boil, drops out of the news, the amateurs leave the market and the professional investors return to the market.
The great J P Morgan, a century ago, said that if even the elevator boy is talking about the stock market, that is the time to sell.
I began buying shares in earnest in 1982, and kept buying during the great eighties bull market. I stopped buying about 985, when dividend yields were low, and price to earning ratios were high. Then I noticed the phenomenon of the amateurs moving into the market. I took Morgan’s advice, except for actually selling stock, rode out the great crash of October 1987, and even after that many of my shares were a little above what I had bought them for. Then the stock market boomed again.
An Australian business man, Alan Bond, rode the stock market up during the early eighties, and set his heart on buying a media company. He bought a television station from another rich business man, the late Kerry Packer, for a high price. Kerry Packer famously said at the time, that ‘at the right price, everything is for sale.’ Two years later, after the 1987 crash, Kerry Packer bought his television station back again from Alan Bond for about half the price he had sold. Alan Bond had borrowed too much. Kerry Packer famously said at the time, ‘you only get one Alan Bond in your life, and I have had mine.’ Kerry Packer, old Australian money, was a professional investor.