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Efficient Market Theory

During and after her career as a global market analyst, Herma Koornwinder constantly gave alerts, both in the media and at conferences and seminars that the Efficient Market Theory, despite a major role in the economy since 1970, was incorrect and that financial markets could indeed perform better, as long as an active approach to investing was applied.

Numerous answers possible to what private investors should do, but…
one thing is clear: value of advices is extremely relative

Beursplein 5

As a consequence almost all private investors are looking for an investment strategy that systematically yields high returns. In scientific circles extensive research has been conducted on the profitability of such investment strategies. The extent to which these are able to achieve a surplus or extraordinary result has been reviewed.

And guess what?
Wijmenga: ‘All research indicates the same thing: investors should consider the stock markets as being efficient when it comes to practical applications, i.e. that the so-called efficient market hypothesis – according to which all publicly available information is already incorporated in the rates – is valid. Therefore, no investment strategy exists that enables investors to systematically outperform ‘the market’, on the basis of aforementioned publicly available data.
Fund selection and a creative buy and sell policy may, because of the higher transaction costs involved, yield even less return than simple buy and keep strategies.

Stan Beckers, professor in investment management at the Vrije Universiteit in Amsterdam and CEO of Banca International, a firm that advises institutional investors in their investments, told Beursplein 5 last year: ‘It goes without saying that, in practice, the market is never perfectly efficient. There are regularities and irregularities: anomalies. In the Netherlands, for example, shares of smaller companies did better than those of bigger ones. Our research has shown that a portfolio composed of the twenty smallest companies at the Amsterdam stock exchange performed no less than seventeen times better than the collected indices of Statistics Netherlands. On average the difference was 4 to 5 percent. There are, therefore, ample possibilities to yield extra profit and there are always investors who have outperformed the market significantly.’

Active management certainly has a future
Groundbreaking Theory for Financial Markets

Beleggers Belangen

In ‘Beleggers Belangen’ of 19 March, Mrs. Angelien Kemna wonders, in her column titled ‘Groundbreaking theory for financial markets’ if active capital management is useful. After all, research has shown that nobody is capable of systematically gaining more return on an actively managed portfolio than on a stock index. This could lead to write off active management as an expensive, unrewarding form of portfolio management.

However, she immediately indicates that this is a unilateral way of thinking. After all, based on empirical work, a number of cracks, if not tears, have emerged in the stronghold of efficient markets in the past couple of months.

I would like to invite the researcher, who ‘proved’ that nobody is able to systematically achieve more return on an actively managed portfolio than on a stock index, to study the outcome of my analyses. After the cracks and tears we have seen emerging in the stronghold of efficient markets the past couple of years due to empiric work, we can now see a giant rift.

Herma Koornwinder, a Dutch guru
Outperforming the market is possible

Beleggers Belangen

Outperforming the markets the desire of every investor. Countless theories have been developed and tested in the course of the years. In that respect, a stock market is not so different from a casino and the weather. By now, everyone agrees that, as an investor, you need a system and that you should follow it consistently. But the question remains: which system?

For financial economical research and consultancy agency Koornwinder Global Market Navigation (KGMN) that is no longer a question. From the Dutch town of Heeze, analyst Herma Koornwinder has been achieving remarkable investment performances again and again for years. Of course it is possible to outperform the market on a regular basis. Big names such as Peter Lynch, who even wrote a book about it, and Warren Buffet are good examples of funds managers with performances the average individual investor can only dream of. But virtually everyone in the investor world is convinced that you cannot always outperform the market as a whole.

Original thinking
Herma Koornwinder clearly disagrees and does not hide it. She has been interested in investing for years. In an early stage she read investment magazines, newspapers and annual reports. She attended annual meetings, consulted banks and analysts, but she soon discovered that the analysis of the market based on that, hardly ever came true. Positive signals and prognoses hardly ever led to a positive investment result and vice versa.

But she did not accept it; statements such as ‘the market is always right’ did not go down well with her. Back then her self-righteousness was already apparent. In the eighties, she started an economy study, but soon she got stuck in the set pattern of reading books and adopting established visions. Simply accepting the material that thousands of students had accepted before her, was not something Herma Koornwinder was prepared to do. Economy is the result of thousands and thousands of decisions.

Rules that are being used by countless of economists, simply because that is how it has always been done. But Koornwinder questioned this and started looking for the how and why herself and locked herself in the study, not just to learn the matter in the study books, but rather to try and understand the how and why of the rules – what could one do with them? Economy is psychology as well, it can even be considered to be a natural science. Economy is a part of a greater whole, so she started thinking big and developed new insights. She is convinced, for instance, that the market is not efficient.

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'The market is efficient'
It is simply not true that the market is always right. People actively participating in the market are rarely aware of all relevant factors. Furthermore, many an analyst’s questionnaire focuses too much on business factors and too little on market forces. Markets have their own dynamics and therefore need to be appraised on their own merits. A good example is the crash of October 1987 which had nothing to do with changes in trade and industry, but everything with the financial markets themselves. Apparently the value of shares does not necessarily reflect the correct company value.

The market is supposed to be efficient; the price-earnings ratio is supposed to indicate if a share price is high or low; the stock market is supposed to go up when the dollar does; and so on, a long list of “stock market truths”, and none of these truths consistently holds true.

This is why people have noted on several occasions that investment consultants have got it wrong with their advice.

In 1989, I read “A Random Walk down Wall Street” by Burton Malkiel, a professor at Princeton University. I also read the “Luchtkastelen en gouden Bergen” (Pie in the Sky and Mountains of Gold) by Wijmenga. Their vision may be briefly summarised as follows: the market is (more or less) efficient; which is why it is impossible to predict market developments, and to outperform the index – barring the occasional fluke. (I later learned that as early as 1900 Bachelier, a Frenchman, wrote in his PhD thesis that one cannot come to a proper appraisal of the market by analysing annual reports and price behaviour).

I hereby quote Wijmenga (p. 22-23): “We did not reach the conclusion lightly that the financial markets are so efficient that investment strategies cannot systematically yield an extraordinary return above the market return. It was based on extensive and thorough scientific research.” It slowly dawned on me that I was on a completely different track and that my approach was fundamentally different from that of the established academics. My reaction was to lock myself up in my study, determined to subject my model to substantial testing as well as considerable extension. This involved studying some thousand official stocks worldwide; if possible all the way back to1900.

This is how the KGMN “Investment Scan & Navigation System” came into being, which trains itself on the financial world like a super-telescope in search of its possibilities and impossibilities.

Many interviews, lectures and publications. Took a stand against the “efficient market theory”, the Modern Portfolio Theory, index investments and random dispersion when the risk is not known.

Spreading of portfolio does not reduce risk at all
Investment analyst Herma Koornwinder overthrows traditional investment wisdom

De Tijd (België)

‘Another observation is that the markets are all but efficient’, Koornwinder continues. ‘I attended a seminar in 1989 themed ‘sense and nonsense of rate predictions’. The major fund managers decided there and then that rate predictions were futile, because all data had already been processed in the rates. What rubbish. If I, as an analyst, am of no added value, how do you explain the fact that my model systematically outperforms the market?’ Six out of the seven portfolios KGMN put together outperformed the index. The seventh equalled it.

Investing on the crest of a wave
According to Herma Koornwinder: diginomy catches up with old models

Het Financieele Dagblad

We all grew up with the myth of the Nobel Prize winners Sharpe and Markowitz, according to whom the market is an efficient mechanism. This would imply that in the long run no portfolio can do better than the index as no-one has better long-term information. This makes the index always right, which is actually a serious misconception.

With such an approach one misses out on returns which can, according to Koornwinder, actually be achieved with other methods.

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