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We have had some recent ponzi schemes here in Tennessee lately. It seems that one of my friends is being investigated now. I was talking about this with anothe

by jaxn 16y ago

We have had some recent ponzi schemes here in Tennessee lately. It seems that one of my friends is being investigated now. I was talking about this with another friend and he said "I am starting to wonder if every investor who beats the market does it by cheating?" The general theme of that list seems to be that you can't beat the market with much consistency.

philwelch 16y ago
By definition, an efficient market has all the publicly known information already encoded in its prices. Hence, even theoretically it's impossible to beat the market without doing insider trading, which is considered illegal and hence "cheating". Conversely, if insider trading were considered acceptable, the market would actually contain more information than was publicly accessible, and we could infer things from stock prices that we didn't actually know.
- d2viant 16y ago
  It's not impossible. Examples that prove this are outliers like Warren Buffett and Peter Lynch. Just because the information is public doesn't mean people are interpreting or acting on it correctly.
  - philwelch 16y ago
    No, even with a perfect market there will be, randomly, some people with significantly better luck than others ;) Seriously though, crucial the assumption is a perfectly efficient market, and inefficiencies exist everywhere.
    - jaxn 16y ago
      Sure, some people get lucky. Hence the "with much consistency".
      - philwelch 16y ago
        Consistent luck is still luck, and Warren Buffett and Peter Lynch are 2 out of millions. Likewise, 0.47 of people who bet it all on black at the roulette table are lucky, but 0.47^N of people who bet it all on black at the roulette table are consistently lucky. Seriously though, there are real inefficiencies as well, and someone like Warren Buffett is probably exploiting them rather than being really lucky. (Also, I hasten to point out that Berkshire Hathaway currently invests by M&A'ing smaller companies, which is considerably less of an efficient market than the stock market, which is likely more efficient now than it was decades ago--and often, M&A'ing a company can be a value add.)
        d2viant 16y ago
        Consistent luck? Over decades and decades? At what point does the success become attributable to the person? Investing isn't really a fair comparison to gambling. Gambling is essentially random -- investing you're much more in control of how you do, especially when you make larger and larger investments. Acquiring smaller companies is a relative term, they just bought BNSF for $44 billion. Berkshire rarely purchases smaller companies, they simply don't make a material difference on the balance sheet -- even if they do very well financially.
        philwelch 16y ago
        Did you read the part of my comment where I said Buffett probably gets better-than-market gains because the market isn't perfectly efficient, or that Berkshire Hathaway acquisition can be a legitimate value-add to the invested-in company qualitatively different from just picking the right stock? I don't think you're arguing in good faith if you ignore everything after the words "seriously though" in all of my comments.
- anamax 16y ago
  > By definition, an efficient market has all the publicly known information already encoded in its prices. Hence, even theoretically it's impossible to beat the market without doing insider trading, which is considered illegal and hence "cheating". Umm, no. Illegal insider trading is defined as trading on information that is not yours. There is relevant non-public information that doesn't qualify as "not yours".

by jaxn 16y ago

philwelch 16y ago

By definition, an efficient market has all the publicly known information already encoded in its prices. Hence, even theoretically it's impossible to beat the market without doing insider trading, which is considered illegal and hence "cheating". Conversely, if insider trading were considered acceptable, the market would actually contain more information than was publicly accessible, and we could infer things from stock prices that we didn't actually know.

d2viant 16y ago
It's not impossible. Examples that prove this are outliers like Warren Buffett and Peter Lynch. Just because the information is public doesn't mean people are interpreting or acting on it correctly.
- philwelch 16y ago
  No, even with a perfect market there will be, randomly, some people with significantly better luck than others ;) Seriously though, crucial the assumption is a perfectly efficient market, and inefficiencies exist everywhere.
  - jaxn 16y ago
    Sure, some people get lucky. Hence the "with much consistency".
    - philwelch 16y ago
      Consistent luck is still luck, and Warren Buffett and Peter Lynch are 2 out of millions. Likewise, 0.47 of people who bet it all on black at the roulette table are lucky, but 0.47^N of people who bet it all on black at the roulette table are consistently lucky. Seriously though, there are real inefficiencies as well, and someone like Warren Buffett is probably exploiting them rather than being really lucky. (Also, I hasten to point out that Berkshire Hathaway currently invests by M&A'ing smaller companies, which is considerably less of an efficient market than the stock market, which is likely more efficient now than it was decades ago--and often, M&A'ing a company can be a value add.)
      - d2viant 16y ago
        Consistent luck? Over decades and decades? At what point does the success become attributable to the person? Investing isn't really a fair comparison to gambling. Gambling is essentially random -- investing you're much more in control of how you do, especially when you make larger and larger investments. Acquiring smaller companies is a relative term, they just bought BNSF for $44 billion. Berkshire rarely purchases smaller companies, they simply don't make a material difference on the balance sheet -- even if they do very well financially.
        philwelch 16y ago
        Did you read the part of my comment where I said Buffett probably gets better-than-market gains because the market isn't perfectly efficient, or that Berkshire Hathaway acquisition can be a legitimate value-add to the invested-in company qualitatively different from just picking the right stock? I don't think you're arguing in good faith if you ignore everything after the words "seriously though" in all of my comments.
anamax 16y ago
> By definition, an efficient market has all the publicly known information already encoded in its prices. Hence, even theoretically it's impossible to beat the market without doing insider trading, which is considered illegal and hence "cheating". Umm, no. Illegal insider trading is defined as trading on information that is not yours. There is relevant non-public information that doesn't qualify as "not yours".