Golden formula for investment – it’s a secret!

Is there a formula that can find out whether a security is bullish/bearish thereby generating trade signal of going long or short? Most probably there is! How do I get access to it? You never will. Or even if you do, it will never be the chicken that lays golden eggs.

Why? Efficient market hypothesis – An investment theory that states it is impossible to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. (Investopedia, n.d.)

Suppose there is an insider information about a company that is exclusively available only to you. What do you do? If the information is positive, you go long and vice versa. Now say that the same information is available to 100 investors. Will you be able to generate same amount of return? NO. Because someone else will bank on it and drive prices up/down, decreasing your return or in some cases you won’t get any return at all because prices already reflect the information.

Same thing goes for an algorithm that you have figured out to generate you returns. If you keep it to yourself, you will earn hefty returns. The moment you leak it out, you are sacrificing your earnings. Or even if you keep it a secret, someone will figure it out as there are plenty of creative brains working day and night trying to figure out on beating the market.

A recent article featured in WSJ talks about how Elements Capital Management LLC is betting on earning handsome returns through arbitrage. If things go as planned, yes it will bring Elements Capital Management and its clients huge return. It might work for other early market entrants looking to follow its footstep. But soon it will become so common that the inefficient becomes the efficient and the arbitrage no longer exist.

Thus if you have the “Golden Formula” that lays golden eggs, keep it a secret. Unless you want to make contribution sacrificing your returns.