My wasted years studying finance

Note to the reader: The original article was written on November 11, 2013. Since then, I have changed my views on many things. Read to the bottom to find out how I changed my views on the Efficient Market Hypothesis.

Original article

What inspired me to come to Montreal

Many years ago, I was reading an issue of the National Geographic magazine. The main story was the Quebec referendum (the possible separation of Quebec from Canada). La Fleur de Lis was displayed on the front cover with thousands of people on either side of the debate waving their flags. It was at that time that the idea of coming to Quebec was planted in my head. If history was to be made, I wanted to be there.

My University years and Frustrations

One day I applied for a student visa, even if I didn’t have enough money to sustain myself as a student, I wanted to have the Montreal experience.

I went to Concordia University and I started resenting my university studies from the first semester. Within a few weeks, I considered it to be a waste of the money that I didn’t have and a horrible way to spend the limited time that I have on this earth. I quickly calculated that if I worked at McDonald’s for minimum wage and put that money in a savings account until age 65, I would get a better return for my time and money than sitting through one more calculus class.

The Efficient Market Hypothesis

One proof that my university education was a complete waste of time was that I had to memorize the “Efficient Market Hypothesis” created by Nobel prize winner Eugene Fama.

Fama and his colleagues tell us that no one can earn more than the average return of the stock market over a long period of time. He suggests that even if a person, has insider’s information, in the long run, their return would not be higher than the general market index. Well, Fama, in the long run, everyone will be dead, but from here to there, a lot of amazing things can happen.

Studies like Fama’s encourages us to have a herd mentality. He that leads us to think that the highest financial aspiration that we can have is mediocrity. He wants all of us to buy the mutual funds pushed by the financial industry and hold them until we die. Ironically, another Nobel prize winner, Robert Shiller, dismissed the entire Efficient Market Hypothesis as “one of the most remarkable errors in the history of economic thought.” What is more ironic still it that they both won the Nobel prize in the same year for studies that totally contradict each other. If one of them is correct, obviously the other must be false.

Of course, the mutual fund industry loves Fama’s studies and encourages the regular Joe to surrender all his hard-earned cash to the nearest mutual fund franchise. However, Fama cannot explain the above average return of people like Warren Buffet, George Soros, David Harding and many other successful investors who continue having above average market returns.

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Updated views February 2018

I still believe that, for the most part, my university years were a waste of time. I can hardly remember 5% of all the things that I studied for 5 years. Yet the agony to have money to pay rent, to pay for tuition, to feed me, that agony is still vivid. Another thing that bothers me is all the time I spent in the library, learning things that I knew I would not use in real life. I remember burying my head inside of a calculus book knowing that I would never use that. All those negative sentiments are very much alive.

How my belief about investing have changed

I no longer believe that being a passive investor is settling for less. Why?

Passive investing is not really passive. Indexes as the S & P are more active than we tend to believe. The index is constantly getting rid of the companies that no longer meet the criteria, and adding new companies who meet those criteria. In a way Index investing is, in fact, active investing in disguise.
The returns from Index investing are not bad at all. The overall market continues providing a long-term return of about 8%. This is quite nice. I invest in Real Estate and I earn about 10% but it comes along with bigger risk, responsibilities and a lot more stress. The 2% extra return is not worth it.
Passive investing allows the investor to have a life. I spent many years following the stock market, tic by tic. The market took over all my mental energy and it gave very little back in the form of extra returns. Now, by doing passive investing, I can go on and live my life. I can concentrate on other money-making ventures or in other recreational activities.
Anyone can do passive investing. Just put your money there and forget it. Not everyone can do active investing.

Conclusion

My view about my wasted years in University is still solid. My views about investing have changed. It will be interesting to come back to this article a few years into the future to see if there is any additional change.

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