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Thanks for the link. Actually, I've been watching a finance class given by the infamous Martin Shkreli (I came across it in an other HN comment recently). https

Thanks for the link. Actually, I've been watching a finance class given by the infamous Martin Shkreli (I came across it in an other HN comment recently). https://www.youtube.com/watch?v=ARrNYyJEnFI https://www.youtube.com/watch?v=ARrNYyJEnFI and I've been pondering this efficiency hypothesis. Basically, he explains how to pick stocks by fundamental analysis. Very entertaining to watch how this type of investors works. However, I can't help thinking that despite the rather sophisticated analysis, it just amounts to throwing random guesses. He always has to guesstimate some percentages (business future income over a decade and various other parameters) that can't be known precisely and little variation in them totally change the decision. What he says it that 20% of stocks are badly priced by the market, it's just a matter of working hard enough to find them. Could it be that the market is only mostly efficient? or those successful investors are just the lucky ones and they are biased to interpret their success on great skills when it really is luck? (Nicholas Taleb's "fooled by randomness" is all about this idea). I also watched a finance class on coursera (from Prof. Shiller) where this was discussed. A guest speaker (Andrew Redleaf) explained that the efficiency hypothesis was a thing of the past, essentially popular in academia, and he gave several reasons why it couldn't be true (you can find the video if you're interested) and it was convincing.

svantana 10y ago
It's inevitable that the market will have some inefficiencies, the question is: how can you tell whether you found one? Mark Cuban claims he got rich because he found stock price anomalies in a business he was knowledgeable about, namely network equipment [1]. But he also warns that every stock trade has a sucker involved, and how do you know that you're not the sucker (i.e. the other party knows the stock is going to go down and that's why they're selling)? 1. http://blogmaverick.com/2013/01/10/the-stock-market-2/ http://blogmaverick.com/2013/01/10/the-stock-market-2/
- freyr 10y ago
  He might have made some money picking stocks, but he got rich by selling an overvalued company at the peak of the dotcom bubble. I suppose this is an example of a market inefficiency as well.
Marazan 10y ago
The market is irrational but it can stay irrational longer than you can stay solvent.
enibundo 10y ago
You misspelled that asshole's name. Find another teacher.
- Shanea93 10y ago
  I'm not really sure you understand the situation. A pharmaceutical company makes a drug which they priced when they acquired it a long time ago, they're the only company which makes a drug for that specific condition. The drug is priced at $13.50 per pill, which is sold in bottles of 80 pills and is covered by insurance, with a co-pay of $20. Most bottles actually cost only $1, which is a federally mandated amount for a prescription for those on medicaid. The company (which only has margins of 8%, which is a very low amount) realises that the costs of their only successful drug are going to put them out of business and that they need to raise the price of the drug or stop selling it. This would mean no longer selling the only cure to toxoplasmosis. They decide that raising the cost by 50x would allow them to continue R&D in to other rare diseases, so they could make other pills. When they raise the costs to $750 per pill, everyone can still get their pills. The insurance co-pay of $20 per bottle is still exactly the same. The medicaid prescription cost of $1 per bottle is still exactly the same. Nothing changes for the end user, it costs the exact same, the insurance company picks up the extra tab for the pills and the 2,000 people yearly who need this drug are able to survive. You should really investigate the situation fully before blindly believing the story the media has sold to you.
  - lotsofpulp 10y ago
    How can nothing change for the end user? If the insurance company is picking up the tab, then the cost of insurance has to rise and/or the insurance benefits have to be cut (i.e. drug is no longer covered or co pay rises).
    - Shanea93 10y ago
      Well, the good thing about Daraprim, the drug for toxoplasmosis, is that it completely cures you of the condition. So sure, your insurance will rise because you made a claim, but it won't raise that much, since you don't have any medical conditions going forward. Your insurance going up by 20/30% a year is definitely preferable to the actual medical costs you would incur in hospitals if the company who sell Daraprim went out of business.
sumedh 10y ago
> or those successful investors are just the lucky ones Buffett directly answers this question http://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984.pdf http://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984....
hohenheim 10y ago
I started watching his videos as well. Interesting stuff. But one thing that stood out for me was what he said once along the lines: "I recommend many stocks, I rarely buy stocks myself".
- yodsanklai 10y ago
  He says at the very beginning that he doesn't recommend investing one's own money. It's better to do it professionally with other people's money because if you mess up one year, you keep your bonuses from previous years. It makes sense!
thebasuboy 10y ago
Taleb's "fooled by randomness" is often misquoted as attributing performance to luck rather than skill, but it actually explores the idea that returns are affected more by variability rather than the return itself in the short run. That is, one will not do oneself better by watching the market, but rather investing for the long run. I've worked in the investments industry a long time now, and I've come to realize that the market is great at coming to a consensus, not necessarily the right one. It's the job of an investor (much like an entrepreneur) to have a different thesis from the rest of the market, have conviction that they are right, and then be right. That being said, the market, especially the US equity markets, are predominantly efficient. Alpha can be found outside the mainstream, however.

svantana 10y ago

It's inevitable that the market will have some inefficiencies, the question is: how can you tell whether you found one? Mark Cuban claims he got rich because he found stock price anomalies in a business he was knowledgeable about, namely network equipment [1]. But he also warns that every stock trade has a sucker involved, and how do you know that you're not the sucker (i.e. the other party knows the stock is going to go down and that's why they're selling)? 1. http://blogmaverick.com/2013/01/10/the-stock-market-2/ http://blogmaverick.com/2013/01/10/the-stock-market-2/

freyr 10y ago
He might have made some money picking stocks, but he got rich by selling an overvalued company at the peak of the dotcom bubble. I suppose this is an example of a market inefficiency as well.

Marazan 10y ago

The market is irrational but it can stay irrational longer than you can stay solvent.

enibundo 10y ago

You misspelled that asshole's name. Find another teacher.

Shanea93 10y ago
I'm not really sure you understand the situation. A pharmaceutical company makes a drug which they priced when they acquired it a long time ago, they're the only company which makes a drug for that specific condition. The drug is priced at $13.50 per pill, which is sold in bottles of 80 pills and is covered by insurance, with a co-pay of $20. Most bottles actually cost only $1, which is a federally mandated amount for a prescription for those on medicaid. The company (which only has margins of 8%, which is a very low amount) realises that the costs of their only successful drug are going to put them out of business and that they need to raise the price of the drug or stop selling it. This would mean no longer selling the only cure to toxoplasmosis. They decide that raising the cost by 50x would allow them to continue R&D in to other rare diseases, so they could make other pills. When they raise the costs to $750 per pill, everyone can still get their pills. The insurance co-pay of $20 per bottle is still exactly the same. The medicaid prescription cost of $1 per bottle is still exactly the same. Nothing changes for the end user, it costs the exact same, the insurance company picks up the extra tab for the pills and the 2,000 people yearly who need this drug are able to survive. You should really investigate the situation fully before blindly believing the story the media has sold to you.
- lotsofpulp 10y ago
  How can nothing change for the end user? If the insurance company is picking up the tab, then the cost of insurance has to rise and/or the insurance benefits have to be cut (i.e. drug is no longer covered or co pay rises).
  - Shanea93 10y ago
    Well, the good thing about Daraprim, the drug for toxoplasmosis, is that it completely cures you of the condition. So sure, your insurance will rise because you made a claim, but it won't raise that much, since you don't have any medical conditions going forward. Your insurance going up by 20/30% a year is definitely preferable to the actual medical costs you would incur in hospitals if the company who sell Daraprim went out of business.

sumedh 10y ago

> or those successful investors are just the lucky ones Buffett directly answers this question http://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984.pdf http://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984....

hohenheim 10y ago

I started watching his videos as well. Interesting stuff. But one thing that stood out for me was what he said once along the lines: "I recommend many stocks, I rarely buy stocks myself".

yodsanklai 10y ago
He says at the very beginning that he doesn't recommend investing one's own money. It's better to do it professionally with other people's money because if you mess up one year, you keep your bonuses from previous years. It makes sense!

thebasuboy 10y ago

Taleb's "fooled by randomness" is often misquoted as attributing performance to luck rather than skill, but it actually explores the idea that returns are affected more by variability rather than the return itself in the short run. That is, one will not do oneself better by watching the market, but rather investing for the long run. I've worked in the investments industry a long time now, and I've come to realize that the market is great at coming to a consensus, not necessarily the right one. It's the job of an investor (much like an entrepreneur) to have a different thesis from the rest of the market, have conviction that they are right, and then be right. That being said, the market, especially the US equity markets, are predominantly efficient. Alpha can be found outside the mainstream, however.