This past week featured an interesting event……..the plunge and rebound of Morningstar’s Stock price. It’s all related to the value of their highly regarded Star system for mutual funds.
Is this new? To those of us who believe in Market Efficiency (the concept that all public news is reflected in current stock prices. To beat the market, you will need material non-public information – an activity which is illegal.)……this was a non-event. There is a wealth of research showing that markets are efficient.
So why the fuss? Turns out many in the investing public do not believe and/or understand the concept of market efficiency. If they did, they would be skeptical of ratings and not let them hold sway over their investment decisions. But they don’t. The ratings do have a meaningful impact on investment activity. So when the WSJ did some analysis and found the predictive power of the ratings to be …er….um……..not as powerful as many believe, it caused the value of Morningstar’s Stock to fall. (and it bounced back the next day – who is going to remember this stuff in 6 months anyway?)
For an individual the lessons are clear: if professional managers have trouble beating a market on a consistent basis, what chance does a part-timer (individual investor with another job) have? I’d say very little.
However, Capitalism and our financial markets are a great creator of wealth. Spend your time focused on issues that have a greater probability of increasing your wealth. In other words….make a budget, save a fixed % of your earnings year after year, invest in an efficient manner (this will mean avoiding looking at active mutual fund Star rankings), and get an advisor who can help coach you through these issues. Life is short, get out and enjoy it!