May 23, 2013

What Stock to Buy? Hey, Mom, Don’t Ask Me

A recent New York Times article, written by Harvard economist Gregory Mankiw, offers a great synthesis of the investment principles upon which FSIA manages client portfolios.

  • Efficient Market Hypothesis:  Stock prices quickly reflect publicly available news and information so attempts to outperform the market through individual stock selection are a fruitless exercise.
  • Random Walk: Stock price changes are (close) to a random process akin to coin flips so forecasting short-term stock or market moves is equally fruitless.
  • Equity Risk Premium:  Since equities are riskier than bonds, equities must have a higher expected return to induce investors to hold stocks over bonds.
  • Diversification:  Holding a variety of issues within an asset class minimizes the potential damage from owning the next Enron or Bear Stearns while maintaining exposure to the equity risk premium.
  • Global Investing:  By maintaining exposure to equities in every significant market, investors maximize the diversification effect.