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> discover all possible information Plenty of market participants are not actually doing this. Day traders, high speed traders, even index funds come to mind.

> discover all possible information Plenty of market participants are not actually doing this. Day traders, high speed traders, even index funds come to mind. And even "real" investors are influenced by psychology that has little to do with an impartial analysis of all possible information. (It's not what you know, but what "everybody knows that everybody knows" [1]) [1] http://www.epsilontheory.com/the-fundamentals-are-sound/ http://www.epsilontheory.com/the-fundamentals-are-sound/

nostrademons 8y ago
Sure, but markets ensure that traders who don't effectively do this lose money and get flushed out. That's the case with most day-traders, who are losing money they would otherwise put into consumption and using it to get an emotional high off price movements. Gambling, basically. Quant high-speed traders (and arbitragers) are using information in a different way. Typically, the way these strategies work is that they discover correlations between prices. For example, when China enacts tariffs on soybeans in response to Trump's tariffs on steel & aluminum, that's going to depress demand (and hence prices) on soybeans. However, it will also have a lot of knock-on effects on other industries: shipping companies transporting soybeans will lose money, railroads connecting soybean farms to the Great Lakes will lose money, railroads connecting soybean farms to domestic demand will gain money, ranchers and chicken farms and other domestic food producers who use soybeans as feed will gain money, commodity traders could go either way, house prices in wealthy Chicago neighborhoods might increase if commodity traders are making a killing, etc. Say that the inside information entering the market is "China is enacting tariffs on soybeans". A bunch of people with that information will short soybean futures, and then it's the job of an HFT to spread that information through all the other markets that it may affect, updating the relevant prices on their securities before the profits actually trickle down through the economy. Index funds are the freeriders of the markets. The philosophy there is that all of the work that people do is going to produce some value, and the shareholders will capture some of that value as returns to equity. And if the rest of the financial system is functioning effectively, all of this will be reflected in prices. So rather than worry about what the price will be, just buy & hold securities in proportion to their value, let the price mechanism do its job, and profit in proportion to the initial amount of capital you put in.

nostrademons 8y ago

Sure, but markets ensure that traders who don't effectively do this lose money and get flushed out. That's the case with most day-traders, who are losing money they would otherwise put into consumption and using it to get an emotional high off price movements. Gambling, basically. Quant high-speed traders (and arbitragers) are using information in a different way. Typically, the way these strategies work is that they discover correlations between prices. For example, when China enacts tariffs on soybeans in response to Trump's tariffs on steel & aluminum, that's going to depress demand (and hence prices) on soybeans. However, it will also have a lot of knock-on effects on other industries: shipping companies transporting soybeans will lose money, railroads connecting soybean farms to the Great Lakes will lose money, railroads connecting soybean farms to domestic demand will gain money, ranchers and chicken farms and other domestic food producers who use soybeans as feed will gain money, commodity traders could go either way, house prices in wealthy Chicago neighborhoods might increase if commodity traders are making a killing, etc. Say that the inside information entering the market is "China is enacting tariffs on soybeans". A bunch of people with that information will short soybean futures, and then it's the job of an HFT to spread that information through all the other markets that it may affect, updating the relevant prices on their securities before the profits actually trickle down through the economy. Index funds are the freeriders of the markets. The philosophy there is that all of the work that people do is going to produce some value, and the shareholders will capture some of that value as returns to equity. And if the rest of the financial system is functioning effectively, all of this will be reflected in prices. So rather than worry about what the price will be, just buy & hold securities in proportion to their value, let the price mechanism do its job, and profit in proportion to the initial amount of capital you put in.