Is the trend really your friend?

Investors are quirky, irrational and prone to 'the madness of crowds' - as demonstrated by recent house price inflation. So how can you turn fellow investors' irrationality to your advantage?

The "efficient market hypothesis" tells us that stockmarkets price shares in a way that perfectly reflect all known information about a firm. It also declares that investors are all rational people who will do whatever delivers them the most profit. Any success in beating the market is the result of luck rather than skill, and apparently successful stockpickers just happen to get lucky frequently.

The trouble is, says The Economist, like many a good academic theory, this one struggles with some rather inconvenient questions. Where were all the rational investors hiding when the dotcom boom put billion-dollar valuations on companies with no profits and barely any sales? Why do stocks often seem to do well at the start of the year and less so during the summer (leading to the well-known advice to, "sell in May and then go away")?

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Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.