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The Most Important Thing IlluminatedUncommon Sense for the Thoughtful Investor$
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Howard Marks

Print publication date: 2013

Print ISBN-13: 9780231162845

Published to Columbia Scholarship Online: November 2015

DOI: 10.7312/columbia/9780231162845.001.0001

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The Most Important Thing Is … Understanding Market Efficiency (and Its Limitations)

The Most Important Thing Is … Understanding Market Efficiency (and Its Limitations)

(p.8) 2 The Most Important Thing Is … Understanding Market Efficiency (and Its Limitations)
The Most Important Thing Illuminated

Howard Marks

Columbia University Press

This chapter considers an important need for successful investing: understanding market efficiency and its limitations. The 1960s saw the emergence of a new theory of finance and investing, a body of thought known as the “Chicago School.” The theory included concepts that went on to become important elements in investment dialogue: risk aversion, volatility as the definition of risk, risk-adjusted returns, systematic and nonsystematic risk, alpha, beta, the random walk hypothesis and the efficient market hypothesis. The efficient market hypothesis has proved to be particularly influential in the field of investing. This chapter links market efficiency with second-level thinking and market inefficiency. It argues that investors should look for markets or assets that are not fully efficiently priced rather than chase after the false god of completely inefficient markets. It also contains comments and insights from four renowned investors and investment teachers.

Keywords:   market efficiency, Chicago School, investment, efficient market hypothesis, second-level thinking, market inefficiency, investors

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