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Split Thread Are markets rational?

catsmate

No longer the 1
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The “Efficient Market Hypothesis” would have the stock “fairly valued” at $124 a share.

Over valued or under valued only make sense from a historical perspective. I could go into more detail and why I hold to the hypothesis but Google is your friend.
But the "Efficient Market Hypothesis" is nonsense.
 
The “Efficient Market Hypothesis” would have the stock “fairly valued” at $124 a share.

Over valued or under valued only make sense from a historical perspective. I could go into more detail and why I hold to the hypothesis but Google is your friend.

EMH makes a lot asaumptions that even its creator knew couldn't be justified. It is an invalid assertion.
 
ETA: if you believe the market is perfectly efficient there is of course no reason to pick stocks. Just buy an index fund.

I’ve come to believe that the market is essentially efficient. Of course, that assumes no inside information being acted upon, not market manipulation.

Beyond that it assumes that everyone in the market has access to the same information, and what makes a market is people acting on that information given their personal interpretation of that information. I do believe there’s a place for superior intuition or interpretation of the publicly available information. I believe that’s served me well over my investment career, with the caveat that I may be “Fooled by Randomness” a good read by Taleb.
 
I’ve come to believe that the market is essentially efficient. Of course, that assumes no inside information being acted upon, not market manipulation.

Beyond that it assumes that everyone in the market has access to the same information, and what makes a market is people acting on that information given their personal interpretation of that information. I do believe there’s a place for superior intuition or interpretation of the publicly available information. I believe that’s served me well over my investment career, with the caveat that I may be “Fooled by Randomness” a good read by Taleb.

I'm not sure one way or the other actually. But, I do know I'm never going to beat some professional trader. So I only rarely take a small position here and there in an individual company.
 
I’ve come to believe that the market is essentially efficient. Of course, that assumes no inside information being acted upon, not market manipulation.

Beyond that it assumes that everyone in the market has access to the same information, and what makes a market is people acting on that information given their personal interpretation of that information. I do believe there’s a place for superior intuition or interpretation of the publicly available information. I believe that’s served me well over my investment career, with the caveat that I may be “Fooled by Randomness” a good read by Taleb.

One single reason why markets will never be efficient: people are not rational for anywhere near enough of the time.

A second reason why markets will never be efficient: not all actors will ever have parity of information. Forget perfect information (as classical economists insists is already the case), even parity of information between parties will not happen.

A third reason why markets will never be efficient: not all actors will act in their best interests. That would take long term planning, which as we see all too often is beyond most actors in a market.

Each of these three alone are sufficient to ensure that markets do not work as advertised. Take all three together and you get situations like internet startups with no chance of ever making a profit being valued in billions, or Tesla.
 
I see your point.

But the counter-argument is that irrationality, disparity in information availability and people acting against their interests all combine to make markets inherently unpredictable. I think that’s why whether using fundamentals or some form of technical analysis, it’s so maddeningly difficult for even the experts to predict market trends - or the movement of individual stocks.

So, maybe the market is not 100% efficient. But I think efficiency is a safe working assumption and a way to avoid a lot of the nonsense seen in business news - and certainly in spades in this very forum.
 
I see your point.

But the counter-argument is that irrationality, disparity in information availability and people acting against their interests all combine to make markets inherently unpredictable. I think that’s why whether using fundamentals or some form of technical analysis, it’s so maddeningly difficult for even the experts to predict market trends - or the movement of individual stocks.

So, maybe the market is not 100% efficient. But I think efficiency is a safe working assumption and a way to avoid a lot of the nonsense seen in business news - and certainly in spades in this very forum.

It's gambling - once you look at the stock markets through that lens it all becomes much more understandable - the behaviours are all the same.
 
I'm not sure one way or the other actually. But, I do know I'm never going to beat some professional trader. So I only rarely take a small position here and there in an individual company.
A blindfolded monkey could, and has, beaten professional investors.
 
I see your point.

But the counter-argument is that irrationality, disparity in information availability and people acting against their interests all combine to make markets inherently unpredictable. I think that’s why whether using fundamentals or some form of technical analysis, it’s so maddeningly difficult for even the experts to predict market trends - or the movement of individual stocks.

So, maybe the market is not 100% efficient. But I think efficiency is a safe working assumption and a way to avoid a lot of the nonsense seen in business news - and certainly in spades in this very forum.

Problem is some poeple in this thread basically hate capitialism, though they don't want to say so in so many words.
Yes, there is anelement of chance in investing in stocks, but saying it to no better the a trip to the casino is stupid.
 
You really don't like private enteprise, do you?

Though that interpretation is probably what you want to go with...it isn't true. What people don't like is a lack of ethics, a tendency to avoid and even subvert checks and balances, and predatory tactics in the name of private enterprise.
 
Problem is some poeple in this thread basically hate capitialism, though they don't want to say so in so many words.
Yes, there is anelement of chance in investing in stocks, but saying it to no better the a trip to the casino is stupid.

To be more accurate, there are some people who, despite all the evidence, think that capitalism is a good basis for an economy. And no, I am not neccessarily against private enterprise; in the correct place and with the correct constraints it is a powerful tool to be used.

But that's the problem with capitalism, its one rule dictates that no constraints should be placed on the owners of capital and that all rewards from said capital should be solely theirs to dispose of.

Why else do you think that all major economies are a mixture of private and public? Capitalism has been tried, multiple times (most notably in Soviet Russia) and has always been found wanting.
 
Monkey? That sounds like it's Tragic.

This monkey invests, but only in mutual funds. Investing directly in individual stocks is too risky a gamble for any being of sense-- unless they're playing with someone else's money instead of their own.
 
You really don't like private enteprise, do you?

No there has been at least one experiment that I recall, where fund managers were competing against a literal monkey with a dart.

Which, the efficient market hypothesis would suggest should be the case. Unless some have knowledge that is not available to the general market.
 
No there has been at least one experiment that I recall, where fund managers were competing against a literal monkey with a dart.

Which, the efficient market hypothesis would suggest should be the case. Unless some have knowledge that is not available to the general market.

On a quick search for that, I came up with this, for example.

What is all this monkey business? It started in 1973 when Princeton University professor Burton Malkiel claimed in his bestselling book, A Random Walk Down Wall Street, that “A blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by experts.”

“Malkiel was wrong,” stated Rob Arnott, CEO of Research Affiliates, while speaking at the IMN Global Indexing and ETFs conference earlier this month. “The monkeys have done a much better job than both the experts and the stock market.”

In their yet-to-be-published article, the company randomly selected 100 portfolios containing 30 stocks from a 1,000 stock universe. They repeated this processes every year, from 1964 to 2010, and tracked the results. The process replicated 100 monkeys throwing darts at the stock pages each year. Amazingly, on average, 98 of the 100 monkey portfolios beat the 1,000 stock capitalization weighted stock universe each year.

Not actually literal monkeys with darts, then, in this case, but similar concept... and the rate of outperforming is massive. The explanation given is a bit different from the efficient market discussion, though.
 
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One single reason why markets will never be efficient: people are not rational for anywhere near enough of the time.

A second reason why markets will never be efficient: not all actors will ever have parity of information. Forget perfect information (as classical economists insists is already the case), even parity of information between parties will not happen.

A third reason why markets will never be efficient: not all actors will act in their best interests. That would take long term planning, which as we see all too often is beyond most actors in a market.

Market failures are a thing, and they mean markets will never be perfectly efficient, but they don't need to be perfect to be effective and you can improve their efficiency by addressing underlying market failures.


Each of these three alone are sufficient to ensure that markets do not work as advertised. Take all three together and you get situations like internet startups with no chance of ever making a profit being valued in billions, or Tesla.

Market efficiency usually refers to long term, not point in time. Overvalued companies come back to earth eventually even if it takes a while in some cases.
 
"A Random Walk Down Wall Street" helped shape my investment philosophy decades ago. I still have a copy on my bookshelf. Another was "One Up on Wall Street" by Peter Lynch.

More recently "Fooled by Randomness" by Nassim Taleb helped shore up my beliefs.

I don't think Technical Analysis does or even can work. Yes, some may get lucky and go on winning streaks, but I don't think any fortunes have been built using such techniques - or day trading for that matter. Happy to expound at more length if anyone is interested.
 
Though that interpretation is probably what you want to go with...it isn't true. What people don't like is a lack of ethics, a tendency to avoid and even subvert checks and balances, and predatory tactics in the name of private enterprise.

Free markets are, at the end of the day, a problem solving algorithm. They determine, within some error margin, the most efficient price, productions, etc for the existing conditions.

GIGO is a problem for any algorithm. If you don't have effective regulation you won't end up with the results you want because your preconditions favor some other market state. This isn't a market issue, it's a regulatory, and ultimately a political, issue.

To be more accurate, there are some people who, despite all the evidence, think that capitalism is a good basis for an economy.

On the contrary, the evidence shows that well regulated capitalism is the best and probably best possible, economic system.

But that's the problem with capitalism, its one rule dictates that no constraints should be placed on the owners of capital

Since when is that a rule? Occasionally you get some libertarian promoting the idea that it should be, but this isn't mainstream economic theory (and make no mistake mainstream economic theory is all free market based these days)
 
It's gambling - once you look at the stock markets through that lens it all becomes much more understandable - the behaviours are all the same.

Do casino's in Las Vegas gamble? The underlying odds favor certain results, eventually. All you need to do is play enough times and you will get some approximation of those underlying odds. The Stock Market isn't much different.
 
A blindfolded monkey could, and has, beaten professional investors.

You really don't like private enteprise, do you?
There have been a couple of "experiments" where monkeys, darts, or children have beaten professionally managed funds. That doesn't really say anything about capitalism it just says something about professional investors. Index funds tend to beat pretty much any managed fund.

Free markets are, at the end of the day, a problem solving algorithm. They determine, within some error margin, the most efficient price, productions, etc for the existing conditions.

GIGO is a problem for any algorithm. If you don't have effective regulation you won't end up with the results you want because your preconditions favor some other market state. This isn't a market issue, it's a regulatory, and ultimately a political, issue.



On the contrary, the evidence shows that well regulated capitalism is the best and probably best possible, economic system.



Since when is that a rule? Occasionally you get some libertarian promoting the idea that it should be, but this isn't mainstream economic theory (and make no mistake mainstream economic theory is all free market based these days)
I tend to agree with this. I mean that there is no such rule that capitalism requires a complete lack of regulation of capitalists and generally that markets perform better than the alternatives at determining prices.

Not to mention that stocks, stock markets, and what not are not all there is to capitalism, its not even really necessary. I'm pretty sure it would still be capitalism if all private companies were family owned businesses, sole properitor or otherwise privately owned.
 
"A Random Walk Down Wall Street" helped shape my investment philosophy decades ago. I still have a copy on my bookshelf. Another was "One Up on Wall Street" by Peter Lynch.

More recently "Fooled by Randomness" by Nassim Taleb helped shore up my beliefs.

I don't think Technical Analysis does or even can work. Yes, some may get lucky and go on winning streaks, but I don't think any fortunes have been built using such techniques - or day trading for that matter. Happy to expound at more length if anyone is interested.

Indeed not. Supposing someone did discover a method of technical analysis that did work and which they published (as opposed to making a silent killing).

People would start trying to predict when the graphs were aligned properly and that would affect the price. At best you'd get unstable equilibria.
 
Indeed not. Supposing someone did discover a method of technical analysis that did work and which they published (as opposed to making a silent killing).

People would start trying to predict when the graphs were aligned properly and that would affect the price. At best you'd get unstable equilibria.

That’s one of my arguments against.

Another begins by stipulating there might just be subtle patterns that indicate a good time to buy or sell. In that case, an investor searching out patterns in charts on his computer screen is up against supercomputers executing trades in nanoseconds at the slightest blip of a market signal. An individual investor operating in meat space is bound to be late to the party regardless.

On point, there’s a Radiolab episode from 2013 that touches upon the “flash crash” and how outgunned an individual investor would be trying to play that game. https://radiolab.org/episodes/speed-2202
 
It's gambling - once you look at the stock markets through that lens it all becomes much more understandable - the behaviours are all the same.

I once worked on the options floor of the Pacific exchange. The main underlying stock had frozen trading on the stock floor, so the options traders, not legally allowed to do much, started making four and five figure personal bets on what the opening price would be when the stock resumed trading.
 
You really don't like private enteprise, do you?

Seriously?! It’s literally a statement supporting free-market-economics. If someone can consistently outperform the market they have information others don’t. Not in a modern insider-trading sense, but in an inefficient sense.
The market is efficient, the people participating may not be.
 
There have been a couple of "experiments" where monkeys, darts, or children have beaten professionally managed funds. That doesn't really say anything about capitalism it just says something about professional investors. Index funds tend to beat pretty much any managed fund.

I tend to agree with this. I mean that there is no such rule that capitalism requires a complete lack of regulation of capitalists and generally that markets perform better than the alternatives at determining prices.

Not to mention that stocks, stock markets, and what not are not all there is to capitalism, its not even really necessary. I'm pretty sure it would still be capitalism if all private companies were family owned businesses, sole properitor or otherwise privately owned.


All true, but seeing raw capitalism on a trading floor day after day is exciting and disappointing.
It’s neat seeing people staring at a newsfeed to start screaming, but kind of human to see actual physical confrontations every week or two over a two lot option deal.
 
A blindfolded monkey could, and has, beaten professional investors.

Yes and that is exactly what the Efficient Market Hypothesis predicts could happen.

Read Fast Eddie B's link to investopedia, it explains it really well
 
Sigh. I accept realities and the inefficiency and other problems of a market economy are well documented.
I do not fall into the common trap of worshipping the market as if was the cure for all economic.

Also, if you'd bothered to check for yourself, my statement was literally true.

Oh, I agree, but on the whole it works better then a command economy where the State makes all the decisions.
My opinion of market economy is like Churchill on Democracy..it's the worst economic system...except for all the others.
And last time I looked, falling in the common trap or worshipping the State as some infallible cure for all ills is just as bad.
 
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One single reason why markets will never be efficient: people are not rational for anywhere near enough of the time.

A second reason why markets will never be efficient: not all actors will ever have parity of information. Forget perfect information (as classical economists insists is already the case), even parity of information between parties will not happen.

A third reason why markets will never be efficient: not all actors will act in their best interests. That would take long term planning, which as we see all too often is beyond most actors in a market.

Each of these three alone are sufficient to ensure that markets do not work as advertised. Take all three together and you get situations like internet startups with no chance of ever making a profit being valued in billions, or Tesla.

But seems to me that Government Ran Economies perform even worse.
 
To be more accurate, there are some people who, despite all the evidence, think that capitalism is a good basis for an economy. And no, I am not neccessarily against private enterprise; in the correct place and with the correct constraints it is a powerful tool to be used.

But that's the problem with capitalism, its one rule dictates that no constraints should be placed on the owners of capital and that all rewards from said capital should be solely theirs to dispose of.

Why else do you think that all major economies are a mixture of private and public? Capitalism has been tried, multiple times (most notably in Soviet Russia) and has always been found wanting.

Soviet Russia was Capitialistic??????
Please, no the "State Captialism" garbage, which is just an excuse by the true beleivers in Marxism as to why Marxism failed so badly when tried.
AKA "Communism is a wonderful idea, only the right people have not tried it yet".
 
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Yes and that is exactly what the Efficient Market Hypothesis predicts could happen.

Read Fast Eddie B's link to investopedia, it explains it really well

17 years between your two posts.

I hope it's less than 17 years until your next one!
 
But seems to me that Government Ran Economies perform even worse.

Except for Norway, maybe? Im not saying it's a socialist paradise, more like some sort of state capitalism done right, at least in some aspects of its economy. But I guess it's the exception.

Other countries like Denmark have a relatively strong welfare state, where the middle class pay high taxes and the private sector is quite strong because the policies are relatively market friendly (I mean, very market friendly compared to the rest of the world, USA included).

Generally speaking, central planning hasn't worked so well in modern economies. The information is so vast and variable that, for the most part, I think we should let supply and demand do the job.
 
By the way, is this thread about markets in general or just the stock market? I'm a bit confused by the OP and how the thread is evolving.

Although there's obvious overlap, their scope is very different.
 
Apologies if others have already hammered this to death but:

Basic economic theory states that 'perfect markets' require all participants to be trading from a position of 'perfect knowledge'. (i.e. everyone has to know everything)

This, is, of course, not possible.

Therefore all markets are imperfect.

The market mechanisms are 'rational' but the behaviour of investors is anything but.
 
By the way, is this thread about markets in general or just the stock market? I'm a bit confused by the OP and how the thread is evolving.

Although there's obvious overlap, their scope is very different.

Not sure about “very different”.

Markets are markets, whether you’re talking stocks, soybeans, gold or whatever. Or eggs!

My original main point remains that it’s meaningless to say any one of these things is overpriced or undervalued at any given point in time - these labels only make sense looking back. Not much help in predicting future prices.
 
In economics, "efficient market theory" is a very specific hypothesis about the behavior of asset markets. It has nothing to do with capitalism in general or markets in general. Nor does "efficient" mean the same thing as the colloquial usage.

Basically, efficient market hypothesis is that an asset price reflects available information. Therefore it isn't possible to outperform the market unless one has superior information.
 
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