Comments on: Is the Market Efficient? – Part II http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm Building Wealth through Saving and Investing Fri, 19 Mar 2010 10:48:38 -0400 http://wordpress.org/?v=abc hourly 1 By: Is the Market Efficient? - Part III | Million Dollar Journey http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm/comment-page-1#comment-17639 Is the Market Efficient? - Part III | Million Dollar Journey Thu, 22 Nov 2007 07:31:38 +0000 http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm#comment-17639 [...] November FrugalTrader05:00 amAdd comment This is the final installment of Ed Rempel's "Is the Market Efficient?" series.  In case you missed the other articles, here you find Part 1 and Part 2.  [...]

[...] November FrugalTrader05:00 amAdd comment This is the final installment of Ed Rempel's "Is the Market Efficient?" series.  In case you missed the other articles, here you find Part 1 and Part 2.  [...]

]]> By: Nabloid http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm/comment-page-1#comment-16901 Nabloid Thu, 15 Nov 2007 07:58:06 +0000 http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm#comment-16901 If the markets were efficient than it wouldn't decide that a company was worth $1 million one day and the very next day $800,000... only to decide the company was worth $1.2 million three days later... all with no company news coming out... The big players are doing such volume that smaller stocks get wild swings that have very little to do with their intrinsic value. Just becaus some large hedge fund goes bankrupt on some leveraged bet and then is forced to liquidate a bunch of stock all on one day... well the prices plunge, but a few weeks later they all recover... and all the while it had nothing to do with those company values. Though if you think about it, a stock is worth what someone will pay... and in that sense I guess the market is efficient on each particular day... But IMO, the market has never been 100% efficient. If the markets were efficient than it wouldn’t decide that a company was worth $1 million one day and the very next day $800,000… only to decide the company was worth $1.2 million three days later… all with no company news coming out… The big players are doing such volume that smaller stocks get wild swings that have very little to do with their intrinsic value. Just becaus some large hedge fund goes bankrupt on some leveraged bet and then is forced to liquidate a bunch of stock all on one day… well the prices plunge, but a few weeks later they all recover… and all the while it had nothing to do with those company values.

Though if you think about it, a stock is worth what someone will pay… and in that sense I guess the market is efficient on each particular day… But IMO, the market has never been 100% efficient.

]]> By: FrugalTrader http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm/comment-page-1#comment-16832 FrugalTrader Wed, 14 Nov 2007 20:12:59 +0000 http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm#comment-16832 Telly, do you index with ETF's or mutual funds? Telly, do you index with ETF’s or mutual funds?

]]> By: Telly http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm/comment-page-1#comment-16828 Telly Wed, 14 Nov 2007 19:25:39 +0000 http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm#comment-16828 Sounds like a good post Mike. I have to be honest in that I'm in the camp that doesn't. :( Yes, our contributions outweigh our gains right now and we're about 90% indexed but it still makes sense to do so. Sounds like a good post Mike. I have to be honest in that I’m in the camp that doesn’t. :( Yes, our contributions outweigh our gains right now and we’re about 90% indexed but it still makes sense to do so.

]]> By: FourPillars http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm/comment-page-1#comment-16811 FourPillars Wed, 14 Nov 2007 15:43:40 +0000 http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm#comment-16811 Ed & Telly - I'm amazed that more investors don't keep track of their performance. Even most of the Cdn bloggers I've talked to don't keep track, although in their defence most of them make contributions that outweigh their investment returns which makes measurement not as useful. Regardless I think everyone should measure their performance - at least to approximate it (which is what I do). Ed & Telly – I’m amazed that more investors don’t keep track of their performance. Even most of the Cdn bloggers I’ve talked to don’t keep track, although in their defence most of them make contributions that outweigh their investment returns which makes measurement not as useful.

Regardless I think everyone should measure their performance – at least to approximate it (which is what I do).

]]> By: FourPillars http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm/comment-page-1#comment-16810 FourPillars Wed, 14 Nov 2007 15:39:40 +0000 http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm#comment-16810 Tough question Ed. The EMH part of me wants to say that we can't predict whether they will beat the market or not. Logically I can't ignore their success so I guess my answer is that although I can't be sure that they will beat the market in the future, I would have more confidence in them than any other managers available. Tough question Ed. The EMH part of me wants to say that we can’t predict whether they will beat the market or not. Logically I can’t ignore their success so I guess my answer is that although I can’t be sure that they will beat the market in the future, I would have more confidence in them than any other managers available.

]]> By: Telly http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm/comment-page-1#comment-16791 Telly Wed, 14 Nov 2007 13:31:01 +0000 http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm#comment-16791 Ed, You make a good point in your last comment. However, even an index / ETF investor would be required to do similar calculations to determine their rate of return. So regardless of what you purchase, WHEN you pruchase is also a factor. Index investors can also be irrational if they deviate from their planned asset allocation or regular contributions. Even Bernstein believes you can boost your returns somewhat by tweaking when you buy certain ETFs / index funds. This, to me, indicates that markets can not be 100% efficient. Ed,

You make a good point in your last comment. However, even an index / ETF investor would be required to do similar calculations to determine their rate of return. So regardless of what you purchase, WHEN you pruchase is also a factor. Index investors can also be irrational if they deviate from their planned asset allocation or regular contributions. Even Bernstein believes you can boost your returns somewhat by tweaking when you buy certain ETFs / index funds. This, to me, indicates that markets can not be 100% efficient.

]]> By: Ed Rempel http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm/comment-page-1#comment-16745 Ed Rempel Wed, 14 Nov 2007 05:12:10 +0000 http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm#comment-16745 Hi Noblea, I think most investors don't even know how to calculate the rate of return. One study I saw claimed that the average individual investor actually made 20% lower return than they believed - as in the average individual investor claimed to be making 15% when they are actually losing 5%. Let's say you start with $10,000 in an investment on January 1 and invest $3,000 on March 17, $5,000 on May 3 & $4,000 on September 27, received $400 in dividends, and borrow $12,000 on margin on August 18 paying $300 in interest. You invest $5,000 of the $12,000. Then you sell $4,000 on November 18. At the end of the year, you have $26,000 in the investment. For simplicity, assume only one investment was purchased. What was the rate of return? My guess is only about 10% of investors would know how to calculate this. And of these 10%, how many would bother? I believe the truth is that the rate of return almost all individual investors claim they made is a "gut feel" and they have not calculated or even estimated it. Or perhaps they claim the rate of return from the internet or the paper on their single best investment. Ed Hi Noblea,

I think most investors don’t even know how to calculate the rate of return.

One study I saw claimed that the average individual investor actually made 20% lower return than they believed – as in the average individual investor claimed to be making 15% when they are actually losing 5%.

Let’s say you start with $10,000 in an investment on January 1 and invest $3,000 on March 17, $5,000 on May 3 & $4,000 on September 27, received $400 in dividends, and borrow $12,000 on margin on August 18 paying $300 in interest. You invest $5,000 of the $12,000. Then you sell $4,000 on November 18. At the end of the year, you have $26,000 in the investment. For simplicity, assume only one investment was purchased. What was the rate of return?

My guess is only about 10% of investors would know how to calculate this. And of these 10%, how many would bother?

I believe the truth is that the rate of return almost all individual investors claim they made is a “gut feel” and they have not calculated or even estimated it. Or perhaps they claim the rate of return from the internet or the paper on their single best investment.

Ed

]]> By: Ed Rempel http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm/comment-page-1#comment-16743 Ed Rempel Wed, 14 Nov 2007 04:52:16 +0000 http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm#comment-16743 Hi Mike, Interesting. Of the managers you mentioned, Buffett and Miller are still active. Do you think they will beat the market from now on? Ed Hi Mike,

Interesting. Of the managers you mentioned, Buffett and Miller are still active. Do you think they will beat the market from now on?

Ed

]]> By: nobleea http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm/comment-page-1#comment-16714 nobleea Tue, 13 Nov 2007 23:56:14 +0000 http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm#comment-16714 I like the comment that amateur investors often exaggerate their returns. I don't think they do, but fail to look at their entire portfolio. Sure, "I had a triple on this stock" is great, but it is usually accompanied by a couple dogs, which in turn averages it out to a less spectacular return. I do think the markets are semi-efficient. I believe that the degree of efficiency increases with the size of the company. The larger the company, the more likely its price will reflect all the information publicly available on the company. I like the comment that amateur investors often exaggerate their returns. I don’t think they do, but fail to look at their entire portfolio. Sure, “I had a triple on this stock” is great, but it is usually accompanied by a couple dogs, which in turn averages it out to a less spectacular return.

I do think the markets are semi-efficient. I believe that the degree of efficiency increases with the size of the company. The larger the company, the more likely its price will reflect all the information publicly available on the company.

]]> By: Gates VP http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm/comment-page-1#comment-16698 Gates VP Tue, 13 Nov 2007 20:55:50 +0000 http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm#comment-16698 I personally would like to go with the markets are <i>reasonably</i> efficient. There simply seem to be too many irrational or poorly educated investors for there not to be some "margin of error". Of course, it's easy to re-enforce the "buy & hold indexes" strategy by citing transaction costs and taxes. And they're right, you can beat the crowd and the beat the market but still lose to "the rake". But then you haven't really proven that the markets are efficient as much as you've proven that the current overhead on the markets eliminates the current "margin of error". There's money to be made out there, there definitely is, but it's not an easy game, and you have a very limited number of "hands". I personally would like to go with the markets are reasonably efficient. There simply seem to be too many irrational or poorly educated investors for there not to be some “margin of error”.

Of course, it’s easy to re-enforce the “buy & hold indexes” strategy by citing transaction costs and taxes. And they’re right, you can beat the crowd and the beat the market but still lose to “the rake”. But then you haven’t really proven that the markets are efficient as much as you’ve proven that the current overhead on the markets eliminates the current “margin of error”.

There’s money to be made out there, there definitely is, but it’s not an easy game, and you have a very limited number of “hands”.

]]> By: FourPillars http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm/comment-page-1#comment-16680 FourPillars Tue, 13 Nov 2007 15:54:16 +0000 http://www.milliondollarjourney.com/is-the-market-efficient-part-ii.htm#comment-16680 Interesting post. I don't disagree with your main point that the market is somewhat efficient however I disagree with your point that the odds of certain investors beating the market for many years in a row are astronomical. According to the "coin flip" analogy, if enough fund managers are involved in the survey, some of them will have incredible records by chance. As to the investors you mentioned, while I do think they are all good fund managers, I'm not sure if they all support your argument. Buffett & Soros - yes, they definitely support the idea that a good fund manager can beat the market. Lynch - great manager but he struggled when his fund got larger. Miller - had a great run for 15 years but what happened to those investors who bought in two years ago? He's done terrible since then. In 2006 he got 5.85% vs 15.79% S&P, in 2007 he's at 2.91% vs 9.13% S&P. I think it's perfectly ok for a long term manager to have down years but to assume they can beat the index every year is unrealistic. Bottom line is that even if some managers can outperform the market for long periods of time - what are the odds of being able to identify those managers in advance? I'm going to say ZERO! Mike Interesting post. I don’t disagree with your main point that the market is somewhat efficient however I disagree with your point that the odds of certain investors beating the market for many years in a row are astronomical. According to the “coin flip” analogy, if enough fund managers are involved in the survey, some of them will have incredible records by chance.

As to the investors you mentioned, while I do think they are all good fund managers, I’m not sure if they all support your argument.

Buffett & Soros – yes, they definitely support the idea that a good fund manager can beat the market.

Lynch – great manager but he struggled when his fund got larger.

Miller – had a great run for 15 years but what happened to those investors who bought in two years ago? He’s done terrible since then. In 2006 he got 5.85% vs 15.79% S&P, in 2007 he’s at 2.91% vs 9.13% S&P. I think it’s perfectly ok for a long term manager to have down years but to assume they can beat the index every year is unrealistic.

Bottom line is that even if some managers can outperform the market for long periods of time – what are the odds of being able to identify those managers in advance? I’m going to say ZERO!

Mike

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