 Good day, fellow investors. Can we beat the market? Whenever I discuss about investing in individual stocks, I get a lot of comments. You can't beat the market. The best thing to do is to invest in index funds. Don't waste time on beating the market. Don't waste time on thinking about investing. And I really want to give you my opinion on this efficient market hypothesis, efficient market theory, investment style, so not thinking versus investing in individual businesses. And I think it's not about beating the market. It's about controlling your risk and reward, which is something that we'll come to discuss later. And when you control your risk and reward, you end up beating the market. You end up beating the crowd. So in this video, I'll explain what it is that I do managing risk and reward and how it eventually leads to destroying the market. Let me be blunt in this case, because that's what I've been doing over the last 18 years. So let's start. So it all starts with the efficient market hypothesis and that you can't beat the market because it's simple statement that security prices fully reflect all available information. Eugene Fama, Kenneth French, he got a Nobel Prize for it, the Chicago Business School. And there is no point in doing anything because if you look at stock prices, those reflect all available information so you cannot have an advantage on the market. However, I think that's extremely dangerous because the efficient market hypothesis works well for a period and then doesn't work well for a period. And it's simply about not thinking versus thinking. Let me explain. Over the last 45 years, the SAP 500 exploded 40 times up from 100 to 3000. But that's mostly due to luck. Interest rates went down, discount rates went down, so valuations went up. If we just take a look at valuations, the SAP 500 price earnings ratio was 7 in 1980s, 1950s, begin 1920s, so much, much lower than now. And now it is 22. So if I would bring the SAP 500 current earnings to an SAP 500 price earnings ratio of 7, that was the case in 1982, the SAP would be at 945 points, thus down 66% over that time. Plus, if you look at the Dow in this case from Pabrai borrowed from his presentation, there were 22 years of zero returns, 25 years of zero returns, 17, 12 years of zero returns. Or if you look at 35 years, very good returns. So what do you expect will happen next? Will it replicate like the efficient market hypothesis says? Probably not. But if it is smart to invest in markets by not thinking, okay, if you do 0%, is that what you want? No, I want more. And it is likely that real returns will be close to zero or negative as Ray Dalio uses to say. So I think it's extremely dangerous to think that what worked well in the past, which fuels the efficient market theory overfueled over the last 45 years, will work in the future. And therefore, we have to think differently. But even over the last 45 years, some people did extremely well because they were thinking. Let me quote Buffett. So the investment professionals who have swallowed efficient market theory has been an extraordinary service to us and other followers of Graham. So this service to those students, a service to Buffett and Manger. In any sort of contest, financial, mental or physical, it is an enormous advantage to have opponents who have been taught that it is useless to even try. From a selfish point of view, Graham, it should probably endow chairs to ensure the perpetual teaching of efficient market theory. So we have opponents that are not thinking. Thank you. Thank you, Eugene Fama. I think you deserve another Nobel Prize so that I can continue to do my own thing. And actually, the key finding when I did my PhD is that in the short term, yes, I agree, markets are efficient. But the more you look at longer periods, the more you see irrationalities. Because humans are short term, short term oriented, they are discounting, hyperbolic discounting. So everything that happens in the future or might happen in the future is much less valuable than what you have now. If you take Canaan man, thinking slow, thinking fast, this is the book that will explain you how the markets are irrational. Because humans are irrational, not because of the markets. And I have found also in my PhD based on behavioral finance and efficient market theory that short term, yes, I agree with Fama and French, long term, the discrepancy between rationality and efficient market theory is bigger, bigger and bigger. And you can take advantage of that because the market is wrongly pricing what will happen in the future. And here is where you can balance yourself and take advantage of inefficient markets and also the market that might be zero return over the next 20 years. If you get higher return to that, you will beat the market and you think about risk. When the market is risky, the key is now to invest now in this IP 500 and 30 years ago when it was 30 yet of where it is now, the risk reward is completely different than the yield was much higher. The price earnings ratio was 7 not 22. So this is what my message is when you think you can do much better or you can do better for yourself. Whatever the market does, you manage your risk and reward. So to answer the question whether we can beat the market, I think it's a completely wrong way of thinking. The key is that we reach our financial goals with no risk. And therefore you have to look at the investments that will lead to your investment goals with no risk. No matter what the market does, okay, check the SAP 500. What's the risk? 25 years of zero returns and dividend yields of 1.5%. That's the risk. What's the upside? Protection against inflation, 4% yield, 1.8% dividend yield, etc. So compare that, compare that to other opportunities. Compare that to the credit card debt of 15% that you might be paying to the 7% loan on student debt that you might be paying. And then put everything into perspective. Look globally, look around the world, what can happen, what are the best economies, what are the best businesses. And I'm sure you'll find ways to reach your financial goals. If at the end you do equally at the market or you destroy the market even better. But when thinking about risk, so limiting your downsides, margin of safety, value investing, then you allow much more space for the upside. And the differences are usually happen when there is a crisis. When the market is doing good, like it did over the last 10 years, it's very hard to beat it. But when there is a crisis, then thinking about risk is extremely important. So subscribe to this channel, because here we try to take advantage of what's going on. We are not stupid. We will invest in stocks, especially lower interest rates and everybody prints more money. But we'll always keep in mind the risk so that we protect ourselves from the downside. And we'll try to take advantage of the long-term market irrationalities. So to conclude the performance of index funds over the last 35 years is mostly luck. The dividend yields are low and the crowd is pushing all the cool investments up, up and up. At some point the cycle will break. It has been the case over the last 100 years. It will happen again. So be ready for that. And the solution is to think about risk. What happens if things go wrong? What is my protection? What is my downside? What do I do in case of the downside? Don't lose money. Don't lose money. Have some cash. Take advantage of the opportunities. Be diversified and you will reach your long-term investment goals. Thank you for watching. Subscribe to this channel. This is what we do. We try to think in a way to be ready for everything and take advantage of the irrationalities of the market. See you in the next video.