IFA.tv - Galton Board and the Hebner Model - Fair Price = Fair Return in a Fair Period

http://hebnermodel.com - http://ifa.com - http://ifarcs.com - http://ifabt.com - Mark Hebner explains how his model attempts to simplify free market forces into 3 simple variables: Price, Expected Return and Economic Uncertainty (News). In short, prices move in the opposite direction of economic uncertainty so that expected returns at a specified level of risk can remain essentially constant and the only way to alter the expected return is to alter the risk of a diversified portfolio held and rebalanced to maintain the risk of the whole portfolio over time.

At the foundation of the model is Eugene Fama's Efficient Market Hypothesis, which says that market prices are fair. This implies the price fully reflects all available information or news, including economic uncertainty at the moment of the trade, new information concerning the investment, and the predictions on the probabilities of future information.

Fair prices lead to fair returns, which means that investors should be compensated for their risk exposure over a risk related appropriate period of time and that in the short term future prices are just as likely to go up as to go down. There is a slight advantage for the buyer of risk, with about 51% of the daily equitiy index returns being positive returns and 49% being negative, over about 30,000 days. Investors are primarily investing to get a return, so a future fair return for the risk is an indication of the fairness of the price at the time of the trade. However, nobody can see the future with certainty, so there will be an approximate normal distribution (bell shaped curve) of Simulated Passive Investor Experiences over the long term.

To summarize the above statement: Fair Price = Fair Return. So, before you trade, ask yourself, "Who is on the other side of this trade, why do you know more than they do and is this a fair price?" If there are many willing buyers and sellers, by definition, it is a fair price.

From a fair price investors should expect:

(1) a fair outcome, which would be a risk-appropriate or fair return.
(2) an equal chance of being greater than or less than that fair return.
(3) the further the return is from a fair return the lower the probability of the event.

IFA.tv provides webcasts explaining the investing strategies of IFA.com and Mark Hebner's book, Index Funds: The 12-Step Recovery Program for Active Investors. See here: http://indexfundsbook.com.

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