The primary value of experts is that they give us confidence. Confidence is a great thing. Confidence bolsters our courage. Confidence is neccessary to start new, productive habits --like saving for the future. Confidence allows you to get a good night's sleep!

This article is intended to be an introduction to "Efficient Market Theory"

Efficient Market Theory:
Imagine you go to a farmer's market. You want to buy some Roma tomatoes. Surprise, each of the twenty vendors charges exactly the same price per pound for freshly picked Roma tomatoes. Is it conspiracy or collusion? No, it is an example of an efficient market. Buyers can easily compare the price of a commodity and then buy from the least expensive alternative. This fact is not lost on the vendors. As vendors, they must price at the market rate or watch their produce rot on the stand.

Key points: easy-to-compare and commodity.

Commodity - Articles of commerce that are sufficiently alike that it is easy for consumers to substitute between them and difficult for suppliers to differentiate between them. Examples, a gallon of gasoline, a bushel of wheat.

The fact that commodities are interchangable means that they can be easily compared as cost is the only meaningful basis of comparison.

Are stocks, bonds and mutual funds a commodity? When you were shopping for Roma tomatos you had a use in mind. It is possible, even likely, that any tomato could have been substituted. You chose Roma tomatos because that is what the recipe called for, or perhaps you had a good outcome the last time you used them. Had there been a significant price differential, you might very well have substituted a different kind of tomato.

Investment vehicles are similar. We buy them with the intention of increasing our wealth over time. There are variations in their fluctuation characteristics, but we could probably tolerate those differences if there were sufficient difference in their initial prices. That argument paints with a very broad brush. One can go into a catagory like common stocks and make the same argument....that the fluctuation characteristics will vary but we can probably tolerate the differences if there is a large enough a price differential. Cheap enough requires some clarification. The vehicle must be cheap when compared to the potential to increase wealth over time. No stock is cheap if the company goes out of business. Rotten tomatos are never cheap. OK, maybe you grow your own penicillin....but I mean for those of us who qualify as the great thundering masses.

But can investment vehicles be compared "cheaply and easily" by average customer? Think back to the farmer's market. Did you really price out the tomatos at every table, or did you automatically go to the vendor you find easiest to deal with, or who has the best selection? The prices stay fairly level because enough other people do shop competitively. It is not necessary to have 100% of the customers making every decision on the basis of one cent swings to flatten the price structure. Think back to your mental picture of the farmer's market. Did you see any retired people? Did you see any young, growing families. Those groups tend to be very cost conscious. Thank them the next time you go to the market.

A quarter million MBAs with their labtop computers serve the same function in the stock market that pensioners do in the farmer's market. The primary difference is that pensioners tend to be more civil.

The elegance of the situation is that these MBAs level the price structure at no cost to you.

So why do we pay stockbrokers and listen to analysts pontificate? Frankly, there is a fair amount of unpredictable volitility in the stockmarket. The stockmarket has two components. One is the fundemental component that is based on the strength of the underlying economy. Cantilevered off that are people's beliefs regarding the future. This is called the speculative component. The speculative component attempts to comprehend the collective hopes and fears of the market and compress it into today's price. The fundemental component is the depth of the ocean while the speculative component are the waves. It is easy to become fixated by the waves as they are vastly more entertaining than the underlieing depth.

We hire experts so we can maintain the illusion of predictability and control. We hire experts so we can get a good night's sleep.