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I'm stuck between these definitions, which seem to represent polar opposites. On the one hand, I can follow the argument and agree that by that definition, it

I'm stuck between these definitions, which seem to represent polar opposites. On the one hand, I can follow the argument and agree that by that definition, it is "trivially false". However, how do you square this with the generally correct observation that investors in the long term cannot / don't seem to be able to outperform the markets? Or do you feel this is wrong?

philosopher1234 6y ago
I think it is true that it is very hard to beat the market. That can be true without the market being perfectly efficient. The way I see it is that the market is ultra competitive and full of very competent & very rational (not perfectly rational) individuals with a very high incentive to interpret facts correctly. So its not easy to beat the market. You have to be very knowledgeable, and invest very deeply in order to generate insights your competitors dont have. As another commenter mentioned, its not clear to me how economically sensible it is to make this kind of investment. If you play chess against someone, and you discover a winning strategy, and you play it repeatedly, they'll eventually discover your strategy and be able to counter you. Your opponents in the market are adaptive in this same way, so trying to always stay ahead is very hard. Some funds find some way (which I am not privy to) to succeed at this, and people still make boat loads of money as professional traders or quants, so there is reason to believe it is possible. The fact that it is possible to have a very successful career in finance as a quant or trader also seems to me like evidence the efficient market hypothesis (taken in its strongest form, that markets are perfectly efficient) is false.
- imtringued 6y ago
  >The fact that it is possible to have a very successful career in finance as a quant or trader also seems to me like evidence the efficient market hypothesis (taken in its strongest form, that markets are perfectly efficient) is false. It's the opposite. Traders increase market efficiency up to a certain point. If traders didn't exist then markets couldn't be efficient in the first place. Liquidity problems would persist and cause large spreads between buy and sell prices.
anm89 6y ago
This just isn't true that investors don't beat the markets in the long term though. Sure many don't, but there are plenty of examples who do. And really all it takes is one who does to disprove itt.
- Judgmentality 6y ago
  They might just be statistical outliers. Given infinite time, would any investor beat the market? That's the real question (sticking to the mathematical theory here). Be careful before holding up a single example as an exception to the rule. Some basic statistical analysis show there was a 30% chance the Red Baron, the most famous WW1 fighter pilot, was just lucky. And obviously his luck eventually ran out. https://www.scientificamerican.com/article/news-bytes-red-baron-lucky/ https://www.scientificamerican.com/article/news-bytes-red-ba...
  - anm89 6y ago
    Or thee might not be. If your burden of proof is that no data is valid because new data might come in that disagrees, then sure it's easy to see why you can't acknowledge that someone has disproved the theory. It also makes the theory unfalsifiable ie meaningless. So we are right back at it not being meaningfully true.
    - Judgmentality 6y ago
      Fair. My point was if an investor really can't beat the market, you'd never know until an infinite amount of time has passed (or at least, whatever a large enough timespan is for this context - I honestly don't know as I haven't made a statistical model). If it really is random, there will be outliers by luck. But not just some - all investors would eventually gravitate towards the overall trend of the market with enough time (again, assuming you can't beat the market). So yeah, until I make a falsifiable model it's just intellectual masturbation.
- danielbarla 6y ago
  To be more clear, the statement should have been that on average, they don't. As far as I am aware, this _is_ true, although quite surprising, and not a popular idea among investors. The second part of the argument is interesting. On the one hand, a la Warren Buffet's analogy of thousands of professional coin flippers, it is obvious that a small number will do great, while the average will do average (or slightly worse, because of fees). This does not imply that there are _zero_ people who can consistently and on average outsmart the markets, only that it seems to take more than the median full time, relatively highly trained professional to do so.

philosopher1234 6y ago

I think it is true that it is very hard to beat the market. That can be true without the market being perfectly efficient. The way I see it is that the market is ultra competitive and full of very competent & very rational (not perfectly rational) individuals with a very high incentive to interpret facts correctly. So its not easy to beat the market. You have to be very knowledgeable, and invest very deeply in order to generate insights your competitors dont have. As another commenter mentioned, its not clear to me how economically sensible it is to make this kind of investment. If you play chess against someone, and you discover a winning strategy, and you play it repeatedly, they'll eventually discover your strategy and be able to counter you. Your opponents in the market are adaptive in this same way, so trying to always stay ahead is very hard. Some funds find some way (which I am not privy to) to succeed at this, and people still make boat loads of money as professional traders or quants, so there is reason to believe it is possible. The fact that it is possible to have a very successful career in finance as a quant or trader also seems to me like evidence the efficient market hypothesis (taken in its strongest form, that markets are perfectly efficient) is false.

imtringued 6y ago
>The fact that it is possible to have a very successful career in finance as a quant or trader also seems to me like evidence the efficient market hypothesis (taken in its strongest form, that markets are perfectly efficient) is false. It's the opposite. Traders increase market efficiency up to a certain point. If traders didn't exist then markets couldn't be efficient in the first place. Liquidity problems would persist and cause large spreads between buy and sell prices.

anm89 6y ago

This just isn't true that investors don't beat the markets in the long term though. Sure many don't, but there are plenty of examples who do. And really all it takes is one who does to disprove itt.

Judgmentality 6y ago
They might just be statistical outliers. Given infinite time, would any investor beat the market? That's the real question (sticking to the mathematical theory here). Be careful before holding up a single example as an exception to the rule. Some basic statistical analysis show there was a 30% chance the Red Baron, the most famous WW1 fighter pilot, was just lucky. And obviously his luck eventually ran out. https://www.scientificamerican.com/article/news-bytes-red-baron-lucky/ https://www.scientificamerican.com/article/news-bytes-red-ba...
- anm89 6y ago
  Or thee might not be. If your burden of proof is that no data is valid because new data might come in that disagrees, then sure it's easy to see why you can't acknowledge that someone has disproved the theory. It also makes the theory unfalsifiable ie meaningless. So we are right back at it not being meaningfully true.
  - Judgmentality 6y ago
    Fair. My point was if an investor really can't beat the market, you'd never know until an infinite amount of time has passed (or at least, whatever a large enough timespan is for this context - I honestly don't know as I haven't made a statistical model). If it really is random, there will be outliers by luck. But not just some - all investors would eventually gravitate towards the overall trend of the market with enough time (again, assuming you can't beat the market). So yeah, until I make a falsifiable model it's just intellectual masturbation.
danielbarla 6y ago
To be more clear, the statement should have been that on average, they don't. As far as I am aware, this _is_ true, although quite surprising, and not a popular idea among investors. The second part of the argument is interesting. On the one hand, a la Warren Buffet's analogy of thousands of professional coin flippers, it is obvious that a small number will do great, while the average will do average (or slightly worse, because of fees). This does not imply that there are _zero_ people who can consistently and on average outsmart the markets, only that it seems to take more than the median full time, relatively highly trained professional to do so.