Chapter 10. What Have We Learned After Fifty Years?

In the fable of the blind men and the elephant, the group tries to understand and explain the animal through the sense of touch. The effort is doomed, of course, because each man touches a different part without recognizing that it's just one piece of a larger creature. In the end, no one fully comprehends the elephant, although everyone thinks they've solved the mystery. To one man, the animal is a leathery wall; to another, a fat, long snake; and so on.

Investors face a similar challenge in trying to overcome limited knowledge and decode the market's obscure rules for pricing securities. We have some information for judging how the system works, thanks to decades of economic research and careful analysis of real-world track records. But it's an incomplete knowledge and it falls far short of a full explanation. That leaves us to generalize the internal workings of a complex organism using imperfect information based on what we can discern from looking at the past. No wonder, then, that investment results are volatile at times and often less than satisfactory. How could it be otherwise when we're effectively playing chess with only a partial understanding of the rules while our opponent—a grandmaster—knows all?

In some respects, the market's a black box. There are almost certainly a set of laws that govern how the market prices securities, but we understand only a fraction of those rules and perhaps poorly. As investors, we're the ...

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