This week on Money and Investing, Mitch Olarenshaw and I dive into the big differences between what you learn in finance school and how the stock market operates in the real world. It’s a revealing conversation, especially for those with a formal finance background.
1. Theory vs. reality
You leave finance school thinking you’ve got the tools to handle the market, but the real world is different. Theory gives you a foundation, but it doesn’t always apply when real money is on the line. Experience and understanding how markets truly move will serve you better than any textbook.
2. Are markets really efficient?
We’re told markets are efficient, meaning all available information is already priced in. In reality, that’s not always the case. Institutional investors, insider information, and various market players often have an edge. Public info is available, but how it’s interpreted, and who gets it first, matters a lot.
3. The power of psychology
More than any theory, understanding human behaviour is what really sets successful investors apart. Markets are driven by fear, greed, and emotion, and those who can read that psychology always have an edge. It’s not just about charts and formulas, but about knowing how people think.
4. Academia vs. the real world
Finance school teaches a lot of theory, but very little prepares you for the reality of market movements. Academic ideas like “Ceteris Paribus” assume everything stays constant, but that’s never the case in the market. You learn far more on the job than in the classroom, and many theories taught don’t hold up under real-world pressure.
One of the core teachings is that a company’s role is to maximise shareholder value. But is that always the case? We look at examples like Qantas, where executive decisions didn’t serve shareholders well.
The bottom line: It’s not always as clear-cut as the textbooks suggest.
6. History repeats itself?
While history offers lessons, every market event’s unique. The circumstances that led to past crashes or rallies won’t repeat exactly the same way. It’s important to learn from history, but even more important to stay adaptable and ready for what’s new.
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