Diverging and Converging Investments

Recently the Stock-Poll group is discussing about the investment styles. Basically there are two major opinions. One is about investing in S&P 500 will produce excellent results. This way of investing will outperform most of the mutual fund investors.

Another way of thinking is about market timing. One can achieve the above market return if one can predict the short time trend of the market. Buy when the market is low while sell when the market is high.

So I think that investing philosophy is discussed here between Yong and Alan. Basically, there are two believe in investing. One is about diverging while another one is about converging. Interestingly, diverging is often applied by technical analysts while converging is the basic assumption for fundamental analysts.

In the converging market, whatever is deviated from its long-term trend will converge back. That is why investing in S&P 500 can be an excellent choice for long term investment.

In the diverging market, the current trend (up or down) can persistently continue for an extended period of time. And that period is long enough for investors to take advantage of the market. So these investors can achieve the above market return.

The converging investors will have the long-term return similar to the market return. The diverging investors overall will have the long-term return also similar to the market return. The only difference is that about 50% of the diverging investors will have returns above the market return while another 50% of the diverging investors will have returns below the market return. This result is governed by the laws of mathematics,