A lot of crap has become accepted in financial and academic circles. Some ideas also end up in investing circles and they are regularly recycled like the theory is fact.  Sometimes the has already been discredited or is logically foolish, but they get pushed on the unsuspecting anyway. Remember if an idea seems illogical, it probably is. Let’s look at a couple these ideas and how they can help us anyway.

Efficient Market Theory- The theory is that all the information about a stock is swiftly and efficiently incorporated into the stock price. That translates into the premise that you can’t beat the overall market for a sustained period of time. Tell that to Templeton, or Klarmann. Not to mention Graham, and Buffett, Greenblatt and…I thought behavioral finance had killed the theory, but I realized right up until the market collapsed last year that their will still adherents to this idea. I would love for more people to cling to this idea, because that would continue to give me an edge over them. I will say that some markets are more efficient than others. Large cap stocks followed by lots on analysts often, thought not always have more efficient pricing than small caps that have no analysts and can often have seriously out of whack pricing. It is a reason I am fan of Penny stocks. They can be great for beginning investors because they are often have simpler business models and finances, which makes them easier to understand. If you don’t understand what a business is doing, don’t invest in it. Smallcaps  and microcaps can great for people investing small amounts of money if you watch your brokerage fees.

Dollar Cost Averaging- This is a patently stupid idea. I am sorry that Suze Orman is fan of it. Here is the idea small money investors- take $100 each month and invest it in the same place say GE each month, no matter what the price. The theory is that you reduce your overall risk, I think. Or it is to level out your costs for an investment over time. The reason this is so misguided is that to follow it means at some point you are buying a stock that is overvalued. So instead of selling it when a stock has reached its fair value, or slightly above, you keep buying it. Why would anyone trying to make money do that. I am not saying you can time the market. But you can calculate whether a stock is still a good investment. And if it isn’t anymore. Get out.

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