Comments on: Is the Market Efficient? – Part III http://www.milliondollarjourney.com/is-the-market-efficient-part-iii.htm Building Wealth through Saving and Investing Sun, 14 Mar 2010 05:55:47 -0400 http://wordpress.org/?v=abc hourly 1 By: Gates VP http://www.milliondollarjourney.com/is-the-market-efficient-part-iii.htm/comment-page-1#comment-17707 Gates VP Fri, 23 Nov 2007 04:27:30 +0000 http://www.milliondollarjourney.com/is-the-market-efficient-part-iii.htm#comment-17707 Inhereent to the nature of a system that "beats the market" is that you can't give it to too many other people. That's the very nature of market inefficiencies, if everyone knows about them, they're not inefficient any more. <i>"Dogs of the Dow"</i> is the simple example of this. Without putting on my contrarian hat here, the market is fundamentally a zero-sum game with "the house" chipping in 8-10% / year. You can't outperform if you're not using strategies that beat everyone else. The moment that "everyone" knows what you're doing, it's simply no good any more. And oddly, that's the problem with trying to prove Strong and Semi-strong forms of EMH. Working strategies don't work forever and efficient markets will change the cycles and cause some other strategy to be viable. So it's really easy for academics to "disprove" inefficiencies, you just apply the "practice" to a period where it wasn't applicable. But underneath all of this there are tons of people making tons of stupid decisions and blowing their house-given 10% (and then some). I'm not saying that it's an easy game, but it's a very big game none the less, and there's definitely a lot of leeway for making money. Inhereent to the nature of a system that “beats the market” is that you can’t give it to too many other people. That’s the very nature of market inefficiencies, if everyone knows about them, they’re not inefficient any more.

“Dogs of the Dow” is the simple example of this. Without putting on my contrarian hat here, the market is fundamentally a zero-sum game with “the house” chipping in 8-10% / year. You can’t outperform if you’re not using strategies that beat everyone else. The moment that “everyone” knows what you’re doing, it’s simply no good any more.

And oddly, that’s the problem with trying to prove Strong and Semi-strong forms of EMH. Working strategies don’t work forever and efficient markets will change the cycles and cause some other strategy to be viable. So it’s really easy for academics to “disprove” inefficiencies, you just apply the “practice” to a period where it wasn’t applicable. But underneath all of this there are tons of people making tons of stupid decisions and blowing their house-given 10% (and then some).

I’m not saying that it’s an easy game, but it’s a very big game none the less, and there’s definitely a lot of leeway for making money.

]]> By: Plan Your Escape http://www.milliondollarjourney.com/is-the-market-efficient-part-iii.htm/comment-page-1#comment-17681 Plan Your Escape Thu, 22 Nov 2007 17:31:25 +0000 http://www.milliondollarjourney.com/is-the-market-efficient-part-iii.htm#comment-17681 I tend to believe that markets are efficient in the long term and irrational in the short term ... largely based on what I've read and what I've observed in my investing career. I totally agree with your theory that if someone had "a system" then they would not market it. If you can make more money selling your system than using it, it isn't that great of a system. I tend to believe that markets are efficient in the long term and irrational in the short term … largely based on what I’ve read and what I’ve observed in my investing career.

I totally agree with your theory that if someone had “a system” then they would not market it. If you can make more money selling your system than using it, it isn’t that great of a system.

]]> By: FourPillars http://www.milliondollarjourney.com/is-the-market-efficient-part-iii.htm/comment-page-1#comment-17677 FourPillars Thu, 22 Nov 2007 15:47:32 +0000 http://www.milliondollarjourney.com/is-the-market-efficient-part-iii.htm#comment-17677 One point about irrational investors - over the last few decades the percentage of trades on the stock markets has gone from 10% institutions/ 90% (irrational) investors to the opposite today - 90% institutions and only 10% investors. My point is that the irrationality of investors (which I don't disagree with) may not be a big factor in today's markets although you could argue that professional money managers aren't necessarily more rational. I couldn't agree more with your technical analysis opinion (sorry FT!) and your point about different types of markets and large cap/small cap is also very good. I still have to disagree with you that some fund managers can beat the index on a regular basis - I need solid proof. I know you've given some great examples of this but the list didn't include any Canadian managers which would be of more relevance to Canadians. Thanks for a great series, I really enjoyed reading it! Mike One point about irrational investors – over the last few decades the percentage of trades on the stock markets has gone from 10% institutions/ 90% (irrational) investors to the opposite today – 90% institutions and only 10% investors.

My point is that the irrationality of investors (which I don’t disagree with) may not be a big factor in today’s markets although you could argue that professional money managers aren’t necessarily more rational.

I couldn’t agree more with your technical analysis opinion (sorry FT!) and your point about different types of markets and large cap/small cap is also very good.

I still have to disagree with you that some fund managers can beat the index on a regular basis – I need solid proof. I know you’ve given some great examples of this but the list didn’t include any Canadian managers which would be of more relevance to Canadians.

Thanks for a great series, I really enjoyed reading it!

Mike

]]>