Trading Realities: The Truth, the Lies, and the Hype In-Between

Chapter 7. Strategies for a New Market

The Most Common Mistake

Investors often make the mistake of assuming that they have unique insights that the market has failed to recognize. They buy stocks that they believe are underpriced, or they purchase high-yielding corporate bonds because their instincts tell them that the risk of default is exaggerated. In the worst cases, these mistakes evolve into an investment strategy.

Unfortunately, the investment community tends to overuse the words “underpriced” and “overpriced.” Strictly speaking, a financial instrument cannot be underpriced unless the market is inefficient. The opposite is generally true; markets tend to be very efficient, especially with regard to the pricing of heavily traded stocks ...