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That’s a bit disingenuous. Efficient market theory gives clear reasons to believe that rational investors would produce a market valuation of the stock, based o
by mlthoughts2018 7y ago
That’s a bit disingenuous. Efficient market theory gives clear reasons to believe that rational investors would produce a market valuation of the stock, based on net present value of future income streams, that reflects marginal utility in putting a dollar into the stock vs not.
Obviously, rational & efficient market behavior breaks down in reality. But tell me, how does it break down exactly? What alternative measurement of intrinsic value is better, and in what sense?
If you have special knowledge of what subjective / behavioral differences current trading patterns exhibit in contrast to rational or efficient behavior, then by all means share it, or make trading decisions with it, because it means you can measure / predict something pretty much no one else can.
But if you don’t have that special knowledge, then how exactly can you know the prevailing market prices are not actually reflecting intrinsic value?
- b_tterc_p 7y agoyou can suggest that true stock values are both unknowable and that the market is a weak approximation at the same time. Requiring one to know the true answer to challenge the status quo isn’t all that different from poor religious reasonings. The stock market exhibits massive changes without much new information except information about the actions of other investors. You can similarly believe something is basically worthless (e.g. crypto) and simultaneously believe the price will not go down in the next long while due to investor behavior. The opposite is especially true for non dividend stocks.
- mlthoughts2018 7y ago> Requiring one to know the true answer to challenge the status quo isn’t all that different from poor religious reasonings. Dismissing something obvious and derived by a large-scale aggregation of views in favor of something contrarian and unsubstantiated is much more similar to religious arguments.
- mruts 7y agoThe market incorporates information into the price, not the other way around. Or in other words the price is the total aggregate of the information.
- baddox 7y agoIsn’t it somewhat cyclical? It seems to me that the market price is also information about what the market thinks about the company, and what the market thinks about the company can certainly affect the performance of the company.
- b_tterc_p 7y agoThe market does incorporate new information into the price, but that doesn’t mean new business information is the only driver of the price, the largest driver of the price, or that the price is well set to begin with. Consider the current state of the economy. People have lots of money with fewer places to put it. Lots of people just dump it into index funds. That means more shares of large companies are bought, which means the price of those shares is going to go up. This is happening as a fixed function based on total market cap. Did we really get any new information to believe that npv of future cash flows had gone up? Nah.
- mlthoughts2018 7y agoThe market inpounds any new, publicly available information into the price, not merely business information. If you have a reason to think for example that “dumping money into index funds” is somehow inefficient, please share! If the resulting price of companies in the index is a mispricing opportunity, let us know!
- b_tterc_p 7y ago> The market inpounds any new, publicly available information into the price, not merely business information. Yes, and the “price” is not the expected net value of future cash flows, it’s an estimate of what people are going to pay for it. The price and the value are two distinct concepts. > If you have a reason to think for example that “dumping money into index funds” is somehow inefficient, please share! If the resulting price of companies in the index is a mispricing opportunity, let us know! I know that you’re taking a positive “well show me” kind of stance to imply that I don’t know the market better than the people actively involved in it. But I’m not claiming to know where prices should be. I’m claiming prices are driven by a variety of things, one of which is value, but much of which is just various unsubstantiated assumptions. Many of those assumptions could be entirely incorrect. That does not mean the market will realize this soon, or ever, so assuming that any particular world view of what’s incorrect will materialize in a price change isn’t the wisest decision. For capital gains oriented growth tech stocks especially, significant money has been invested because of a simple lack of alternatives, which has inflated prices. Should those prices fall? Irrelevant question, because value is not the sole driver of price. Irrationality is a part of the system.
- rolltiide 7y agoEfficient market theory is unfalsifiable That should say everything you need to know
- mlthoughts2018 7y agoThis is just wrong. For example consider CAPM, and then look at persistent evidence of the low-beta anomaly. It’s totally falsifiable.