Investing rationally in an irrational market

More and more, the old axioms of rational, efficient economic markets have given way to admissions of irrational behaviour pervasive in world markets. Short term price momentums are common, bouts of extreme volatility have become more frequent and a herd mentality has insidiously taken hold of the investing psyche. As value investors, we find ourselves in a bipolar market oscillating between extremes of fear and greed which can make stock picking seem frustrating or even futile.

 In many ways however, value investing relies on such irrationality. If markets were 100% efficient, there would be no material price departures from fundamental value and it would be impossible to beat the market through active investment (stock picking). Being aware of inherent biases, and removing as much emotion, subjectivity and complacency from your decision making, is therefore vital in today’s market. Today, I go through some of the most widespread biases I have witnessed as an analyst to date. (VIEW LINK)