February Client Letter: Back to Basics

Below, a snippet from my latest letter to Ritholtz Wealth Management clients…

For this month’s missive, I wanted to get back to basics and remind you of some of our core investment beliefs. All of these ideas are represented in the way we manage our core strategies and in the holdings that make up your portfolio. The first idea I want to hit upon is that we believe markets work. Markets are imperfect systems, as they must be considering the fact that they are made up of individuals displaying varied levels of rationalism. They are not perfectly efficient at all times but they are always on the way toward becoming more efficient as information is disseminated and processed by the masses. Asset prices get to where they belong even if they don’t take a direct route to get there. Think of a big jar with an indeterminate quantity of jellybeans inside. The empirical data suggests that so long as there are more than a few dozen people guessing, the crowd’s average guess as to how many jelly beans there are will usually turn out to be shockingly accurate. The individual guesses of the contest participants will vary wildly but the collective average will be extremely close to the truth. So it is with securities markets – thousands or even millions of educated guessers producing a mean estimate of the value of a security with their buys and sells.

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