“You can only get high returns on your investments if you are also taking a higher risk” Is that true? Or are there potential loopholes?
It seems more and more people are getting introduced to the efficient markets hypothesis in some form or another. There is as such a common understanding that you can only obtain higher returns by taking more risk.
As educated in finance we have been taught about efficient markets as well – and actually almost believe it. If there was an investment that was better than other investments the money would flow to it and wash away the extraordinary returns in a splitsecond right? But do we actually live in a world where the Eye of Sauron watches all financial options? Wether you we believe it or not we will use this post and its follow ups to challenge this view.
What could cause extraordinary investment opportunities?
Extraordinary investments won’t just be lying around, else big money would flow to them and wash away the unnatural return. They therefore need to be rare or protected or something like that. Some reasons explaining extraordinary investments could be:
- Rare – The investments might be rare and hard to find like a needle in a haystack. There might be investments out there that provides extraordinary returns, but the cost of the research to find it scares away potential investors.
- New – The investments might be new in some kind of way and therefore not known to the broader investment community. The returns could as such be higher than normally for a period of time until all of big money knows about it.
- Not scalable – Small private investors aren’t moving markets up or down – the institutional investors are. The efficient market hypothesis are therefore most applicable on large scalable investments. A riskfree investment limited to max $100 paying $120 in a year might just get our attention, but an investment manager in an international pension fund can’t be bothered with that investment unless its in millions or billions.
- Inaccessible for the public – As written above its the masses that washes away the extraordinary returns. Investment opportunities that are restricted to you as an individual or to a small group could include extraordinary returns.
There are probably more factors that can explain potential extraordinary investment opportunities, but we can’t think of any more right now. If one pops up we will edit it in.
Just as show episodes on Netflix ends right at the exciting moment, we will end this post just before we get to examples of potential extraordinary investment opportunities. But maybe you have already thought of one after reading this? Feel free to share it in the comments – this is a topic where you can get our interest quite easily!