4 ms·

The market is not perfectly efficient. Small cap stocks outperform large cap stocks; the S&P500 outperforms leaving money under your mattress. I am more than w

by ddxxdd 7y ago

The market is not perfectly efficient. Small cap stocks outperform large cap stocks; the S&P500 outperforms leaving money under your mattress. I am more than willing to bet that if you combine these methods with an algorithm that estimates a stock's "proper price" with the information, a sophisticated algorithm should be able to at least outperform a layman's "Buy-and-Hold" strategy.

roguecoder 7y ago
You can put your money on that, but you would pretty consistently, it turns out, be wrong. Which you would know if you had read the OP. Profiting off of other people's tendency to trade too much and too confidently is some of the surest money in the market, because regardless of evidence people want to believe that they can positively effect the outcome. Nest eggs are more like soufflés than caramels.
- DennisP 7y ago
  Published academic studies on the size factor go back decades. I'm not ready to consider them refuted because someone on reddit says he google searched papers from the last eight years and found them lacking, especially since he doesn't specifically claim to debunk any of the major factors, and the momentum factor he even confirms.
- ddxxdd 7y ago
  >Profiting off of other people's tendency to trade too much and too confidently is some of the surest money in the market This proves my point; this statement is counter to the efficient market hypothesis, and it shouldn't be too difficult to algorithmically find trigger events that cause people to trade too much and too confidently.
jefftk 7y ago
> the S&P500 outperforms leaving money under your mattress This doesn't conflict with the efficient market hypothesis. The S&P500 also outperforms 'investing' in blackjack. No one is claiming that holding your money as cash is on the efficient frontier.
- ddxxdd 7y ago
  >No one is claiming that holding your money as cash is on the efficient frontier. But it would be in an efficient market. As more investors invest in more profitable assets, the price of those assets rise, which makes the return on those assets fall relative to the initial cost. The Efficient Market Hypothesis, in it's strongest form, implies that every asset is on the efficient frontier.
  - JanSt 7y ago
    No, it won‘t. 1) You‘d still get a risk premium, because only known information can be priced into the stock. Unkown information is risk. 2) Capital is rare. There is no unlimited supply, so it‘s distributed between assets as well as available information allows. But there is still unsatisfied capital needs where the money can be employed more efficient than holding it cash.
    - ddxxdd 7y ago
      So an investor that can anticipate an increase in, decrease in, or general level of a) market risk, b) a market's risk premium, or c) available market capital, can predict market movements. Just because CFAs use fancy names for market imperfections doesn't mean that they're not exceptions to the EMH.
thekyle 7y ago
> Small cap stocks outperform large cap stock Yes, and value stocks outperform growth stocks over long enough periods of time too. But what does that have to do with the market not being efficient? The academic explanation for why small cap and value outperform large cap and growth is that small cap and value companies are riskier investments. The factor risk premiums exist because investors need a higher return to reward them taking on more risk. Risk premiums actually support the existence of an efficient market. Additional reading: - https://faculty.chicagobooth.edu/john.cochrane/research/papers/Fama_panel_nov_2013.pdf https://faculty.chicagobooth.edu/john.cochrane/research/pape... - https://www.investopedia.com/ask/answers/022715/are-small-cap-companies-more-risky-investments-large-cap-companies.asp https://www.investopedia.com/ask/answers/022715/are-small-ca... - https://www.investopedia.com/terms/v/valuestock.asp https://www.investopedia.com/terms/v/valuestock.asp

by ddxxdd 7y ago

roguecoder 7y ago

You can put your money on that, but you would pretty consistently, it turns out, be wrong. Which you would know if you had read the OP. Profiting off of other people's tendency to trade too much and too confidently is some of the surest money in the market, because regardless of evidence people want to believe that they can positively effect the outcome. Nest eggs are more like soufflés than caramels.

DennisP 7y ago
Published academic studies on the size factor go back decades. I'm not ready to consider them refuted because someone on reddit says he google searched papers from the last eight years and found them lacking, especially since he doesn't specifically claim to debunk any of the major factors, and the momentum factor he even confirms.
ddxxdd 7y ago
>Profiting off of other people's tendency to trade too much and too confidently is some of the surest money in the market This proves my point; this statement is counter to the efficient market hypothesis, and it shouldn't be too difficult to algorithmically find trigger events that cause people to trade too much and too confidently.

jefftk 7y ago

> the S&P500 outperforms leaving money under your mattress This doesn't conflict with the efficient market hypothesis. The S&P500 also outperforms 'investing' in blackjack. No one is claiming that holding your money as cash is on the efficient frontier.

ddxxdd 7y ago
>No one is claiming that holding your money as cash is on the efficient frontier. But it would be in an efficient market. As more investors invest in more profitable assets, the price of those assets rise, which makes the return on those assets fall relative to the initial cost. The Efficient Market Hypothesis, in it's strongest form, implies that every asset is on the efficient frontier.
- JanSt 7y ago
  No, it won‘t. 1) You‘d still get a risk premium, because only known information can be priced into the stock. Unkown information is risk. 2) Capital is rare. There is no unlimited supply, so it‘s distributed between assets as well as available information allows. But there is still unsatisfied capital needs where the money can be employed more efficient than holding it cash.
  - ddxxdd 7y ago
    So an investor that can anticipate an increase in, decrease in, or general level of a) market risk, b) a market's risk premium, or c) available market capital, can predict market movements. Just because CFAs use fancy names for market imperfections doesn't mean that they're not exceptions to the EMH.

thekyle 7y ago

> Small cap stocks outperform large cap stock Yes, and value stocks outperform growth stocks over long enough periods of time too. But what does that have to do with the market not being efficient? The academic explanation for why small cap and value outperform large cap and growth is that small cap and value companies are riskier investments. The factor risk premiums exist because investors need a higher return to reward them taking on more risk. Risk premiums actually support the existence of an efficient market. Additional reading: - https://faculty.chicagobooth.edu/john.cochrane/research/papers/Fama_panel_nov_2013.pdf https://faculty.chicagobooth.edu/john.cochrane/research/pape... - https://www.investopedia.com/ask/answers/022715/are-small-cap-companies-more-risky-investments-large-cap-companies.asp https://www.investopedia.com/ask/answers/022715/are-small-ca... - https://www.investopedia.com/terms/v/valuestock.asp https://www.investopedia.com/terms/v/valuestock.asp