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> Yea, he built an amazing track record well before he started to buying businesses outright He himself has said that the easy days are long over. The actual s

> Yea, he built an amazing track record well before he started to buying businesses outright He himself has said that the easy days are long over. The actual stock market continues to form a closer and closer approximation of weak EMH. > But despite his very infrequent mistakes, he's beat the market by well over 10% a year during his investment career, and there is almost no luck in that. He beat the stock market, by and large, by not participating in it. Owning insurance companies and buying companies outright is not a strategy I can pursue with my 401(k). I like Warren Buffett. I've read the first 50 Berkshire Hathaway letters. I think both he and EMH proponents are "correct", but largely they talk past each other. Where they agree is that what works for Warren Buffett only really works for Warren Buffett. His literal advice to regular investors is to buy index funds.

dsacco 10y ago
I somewhat agree with you, but I don't think the market is necessarily converging to weak EMH. I think it's more fair to say that as the market changes over time, the skills required to reliably beat the market fundamentally change. It used to be that you could spot market inefficiencies with an MBA and a solid understanding of specific domains. Nowadays, you model the market as a physical system and look for obscure phenomenon. On the one hand that sounds like what you're saying - the market is becoming more efficient. On the other hand, I propose that there is no evidence the market will become more efficient continually, and the new normal is due to the rise of software eating the industry.
- logicallee 10y ago
  I agree with you and disagree with other posters here. It's physically impossible for the market to be efficient.* Just try to use the efficiency for anything (set up any series of steps where one of the steps is "...because the market is efficient, therefore...") and whatever you've just set up just plain won't work. Since it's impossible, instead of any version of the efficient market hypothesis people should just say "God's will" (as in God's will that prices should reflect available information), and it will show how silly they are. * you can email me if you'd like a rigorous proof that it is impossible
  - jacques_chester 10y ago
    It depends on what you mean by "efficient". The weak EMH is pretty simple: there's money to be made in arbitrage, but the act of arbitrage spreads information. So a price quickly converges to reflect available information. The harder participants try to beat the market, the harder it becomes. What's left is the lurch of prices upon truly novel information arriving. Stocks appear to move up and down at random, because future events are not fully predictable. If they were, prices would stabilise around the "true" price and remain stuck there. A similar argument has been used to show that time travel has not and will never be invented. Arbitrage across time would be even more profitable than arbitrage across space.
- jacques_chester 10y ago
  > On the other hand, I propose that there is no evidence the market will become more efficient continually, and the new normal is due to the rise of software eating the industry. Could you elaborate? I'm not sure I follow.
  - dsacco 10y ago
    Sorry, I guess I wasn't clear. What I meant was that while finding alpha has indeed gotten harder over the past several decades, there are different candidate hypotheses to explore what will happen in the future. I interpreted your comment as a hypothesis that the market will continue to become more efficient as it essentially achieves weak EMH. However, I believe that you could consider the hyper-efficiency of recent times to be a natural byproduct of software and automation becoming ubiquitous. Information gets cheaper, faster and more accessible over time but I believe that there's a diminishing return in how much more efficient the market can get without another huge jump in technology. For example, HFT (specifically, the sort where you're actually thinking about the speed of light) is not categorically improving dramatically year after year anymore. The market is getting more efficient, sure, but it's getting more efficient very slowly, and would argue the rate of efficiency increases is decreasing. Without another categorical jump in technology (e.g. significant AI, quantum computing, etc) that dramatically improves data cleanliness or accessibility, I don't see the market getting significantly more efficient than it is now. And I don't agree that the market is yet at weak EMH.

dsacco 10y ago

I somewhat agree with you, but I don't think the market is necessarily converging to weak EMH. I think it's more fair to say that as the market changes over time, the skills required to reliably beat the market fundamentally change. It used to be that you could spot market inefficiencies with an MBA and a solid understanding of specific domains. Nowadays, you model the market as a physical system and look for obscure phenomenon. On the one hand that sounds like what you're saying - the market is becoming more efficient. On the other hand, I propose that there is no evidence the market will become more efficient continually, and the new normal is due to the rise of software eating the industry.

logicallee 10y ago
I agree with you and disagree with other posters here. It's physically impossible for the market to be efficient.* Just try to use the efficiency for anything (set up any series of steps where one of the steps is "...because the market is efficient, therefore...") and whatever you've just set up just plain won't work. Since it's impossible, instead of any version of the efficient market hypothesis people should just say "God's will" (as in God's will that prices should reflect available information), and it will show how silly they are. * you can email me if you'd like a rigorous proof that it is impossible
- jacques_chester 10y ago
  It depends on what you mean by "efficient". The weak EMH is pretty simple: there's money to be made in arbitrage, but the act of arbitrage spreads information. So a price quickly converges to reflect available information. The harder participants try to beat the market, the harder it becomes. What's left is the lurch of prices upon truly novel information arriving. Stocks appear to move up and down at random, because future events are not fully predictable. If they were, prices would stabilise around the "true" price and remain stuck there. A similar argument has been used to show that time travel has not and will never be invented. Arbitrage across time would be even more profitable than arbitrage across space.
jacques_chester 10y ago
> On the other hand, I propose that there is no evidence the market will become more efficient continually, and the new normal is due to the rise of software eating the industry. Could you elaborate? I'm not sure I follow.
- dsacco 10y ago
  Sorry, I guess I wasn't clear. What I meant was that while finding alpha has indeed gotten harder over the past several decades, there are different candidate hypotheses to explore what will happen in the future. I interpreted your comment as a hypothesis that the market will continue to become more efficient as it essentially achieves weak EMH. However, I believe that you could consider the hyper-efficiency of recent times to be a natural byproduct of software and automation becoming ubiquitous. Information gets cheaper, faster and more accessible over time but I believe that there's a diminishing return in how much more efficient the market can get without another huge jump in technology. For example, HFT (specifically, the sort where you're actually thinking about the speed of light) is not categorically improving dramatically year after year anymore. The market is getting more efficient, sure, but it's getting more efficient very slowly, and would argue the rate of efficiency increases is decreasing. Without another categorical jump in technology (e.g. significant AI, quantum computing, etc) that dramatically improves data cleanliness or accessibility, I don't see the market getting significantly more efficient than it is now. And I don't agree that the market is yet at weak EMH.