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I think the efficient markers hypothesis kinda accounts for that. Like, if Mongo is mispriced relative to Amazon, and you confidently see it, you will trade ac

I think the efficient markers hypothesis kinda accounts for that. Like, if Mongo is mispriced relative to Amazon, and you confidently see it, you will trade accordingly and erase the price difference. In what I recall from my CFA studies, research shows that only genuine insider information can consistent outperform the assumption that all information is already priced in. And for example, let's say you perceive Amazon and Mongo as mispriced, but what if that's because some even bigger expert than you saw something you didn't and traded accordingly? (For what it's worth, I used to work for one of the world's most significant hedge funds. Our win/loss rate on trades was something like 52/48. So even as literally the worlds top investors who spent more effort, brainpower and money to gain insight, we were right just a bit over half the time. It really drew the point home that a random non-insider individual who thinks can do that over decades is likely delusional)

monero-xmr 4y ago
It has to do with amount of capital, time horizon on the investment, how early you are, and all manner of things. It’s much easier for the individual investor to deploy capital than a hedge fund that has huge bags and therefore needs to make huge trades. There are benefits to being small as well as negatives to being huge. Writing off any ability to beat the market is defeatist because it happens all the time. Someone has to buy the mis-priced stock and it isn’t high frequency firms who exit positions every night.
- xyzelement 4y ago
  I agree that someone has to buy the mispriced stock. I disagree (because of evidence to the contrary) that someone can consistently identify the genuine mispricings in a way that pays off on risk adjusted basis.
  - greenyouse 4y ago
    There are some market inefficiencies that have been documented but they seem rare. The post earnings announcement drift (PEAD)[0] is a thing that exists but shouldn't if markets were totally efficient. That gets used for gains pretty consistently but not 100% of the time. Euan Sinclair had a book where he mentioned a return of 9-27% when traded on annually.[1] Some of the big players have moves like that which work well given the right market conditions. My guess is that they have many, many patterns like that to trade on or models which are right more often than not. I don't know anything though since I'm a 101 retail investor... Positional options trading and volatility stuff makes my brain hurt :( Have you seen strategies like that before? It's really interesting to dig into but seems to require a lot of knowledge to know how to trade on. [0] https://en.wikipedia.org/wiki/Post%E2%80%93earnings-announcement_drift https://en.wikipedia.org/wiki/Post%E2%80%93earnings-announce... [1] Positional Options Trading: An Advanced Guide, pg. 90
jongjong 4y ago
The main problem with efficient market hypothesis is that it pretends that the only way to get money out of the economy is by providing economic value for others who also provide economic value. It ignores the fact that participants within the system are only efficient with respect to the basic incentive structure created by the monetary system which itself is highly inefficient and wasteful. The government could essentially just print money to incentivize people to push a boulder up and down a mountain for no reason... You can be sure that those who will get paid the most will the the fittest ones who can push the boulders up faster than anyone else; the most efficient boulder pushers if you like... But can it be said that these people are efficient at all in the grand scheme of things? Is it an efficient market if the monetary environment within which those markets exists is itself artificial and inefficient?
- lupire 4y ago
  You are describing an unfree market. By definition, the EMH applies to a free market where people choose where to put their money. The EMH says nothing about efficiency of producing value, only about price discovery.
  - dragonwriter 4y ago
    > By definition, the EMH applies to a free market where people choose where to put their money. “The EMH only applies to an idealized analytical fiction and is not applicable to the real world” would also be a problem with the EMH.
    - jongjong 4y ago
      Totally. It is a valid critique. Suggesting that it's valuable in a hypothetical environment is similar to the "not true communism" defense used by communists to explain past failures.
- scottLobster 4y ago
  Uh, yes. Have you not been paying attention to the weekly "what potential fed action is the market pricing in this week?" articles? Efficient markets take into account everything from politics to corruption to the odds of natural disasters. I'm not sure where you read otherwise. You think investors don't price in the political risk of dealing with, say the Chinese government? You think bond investors aren't paying attention to the fed?
skippyboxedhero 4y ago
> In what I recall from my CFA studies, research shows that only genuine insider information can consistent outperform the assumption that all information is already priced in. Even if you assume there are no information inequalities outside of inside information (there are), markets are myopic. Expectations focus around one scenario which is why you see slow adjustments to trends. Btw, it is actually worse than people think: I have countless anecdotes from execs who run companies, who were "experts", who had substantial inside information and were still unable to predict industry trends better than me. There is a social, cultural, institutional context...you see vastly different investor behaviour even between countries that are very similar (i.e. US/UK). This focus on information above all is a conceit to assist the construction of economic theories, not a distinction that is useful in practice. Also, you may or may not have worked for a very impressive hedge fund but win rate tells you nothing about profitability. I know a fund that made one decision in 1992, made poor decisions constantly after, almost everyone who works there is worth $100m+, and they manage $100bn. You can go 10 years with only one good idea and outperform everyone else. Win rate means nothing.
rofo1 4y ago
> It really drew the point home that a random non-insider individual who thinks can do that over decades is likely delusional) You are, of course, correct, and it has been proven time and time again. People think that just because we had a few years of 0% rates that they are somehow geniuses who can do 15% CAGR for 50 years without a problem. In reality, almost nobody can beat the S&P500 low-cost index fund, after all expenses. People still dream, though.

monero-xmr 4y ago

It has to do with amount of capital, time horizon on the investment, how early you are, and all manner of things. It’s much easier for the individual investor to deploy capital than a hedge fund that has huge bags and therefore needs to make huge trades. There are benefits to being small as well as negatives to being huge. Writing off any ability to beat the market is defeatist because it happens all the time. Someone has to buy the mis-priced stock and it isn’t high frequency firms who exit positions every night.

xyzelement 4y ago
I agree that someone has to buy the mispriced stock. I disagree (because of evidence to the contrary) that someone can consistently identify the genuine mispricings in a way that pays off on risk adjusted basis.
- greenyouse 4y ago
  There are some market inefficiencies that have been documented but they seem rare. The post earnings announcement drift (PEAD)[0] is a thing that exists but shouldn't if markets were totally efficient. That gets used for gains pretty consistently but not 100% of the time. Euan Sinclair had a book where he mentioned a return of 9-27% when traded on annually.[1] Some of the big players have moves like that which work well given the right market conditions. My guess is that they have many, many patterns like that to trade on or models which are right more often than not. I don't know anything though since I'm a 101 retail investor... Positional options trading and volatility stuff makes my brain hurt :( Have you seen strategies like that before? It's really interesting to dig into but seems to require a lot of knowledge to know how to trade on. [0] https://en.wikipedia.org/wiki/Post%E2%80%93earnings-announcement_drift https://en.wikipedia.org/wiki/Post%E2%80%93earnings-announce... [1] Positional Options Trading: An Advanced Guide, pg. 90

jongjong 4y ago

The main problem with efficient market hypothesis is that it pretends that the only way to get money out of the economy is by providing economic value for others who also provide economic value. It ignores the fact that participants within the system are only efficient with respect to the basic incentive structure created by the monetary system which itself is highly inefficient and wasteful. The government could essentially just print money to incentivize people to push a boulder up and down a mountain for no reason... You can be sure that those who will get paid the most will the the fittest ones who can push the boulders up faster than anyone else; the most efficient boulder pushers if you like... But can it be said that these people are efficient at all in the grand scheme of things? Is it an efficient market if the monetary environment within which those markets exists is itself artificial and inefficient?

lupire 4y ago
You are describing an unfree market. By definition, the EMH applies to a free market where people choose where to put their money. The EMH says nothing about efficiency of producing value, only about price discovery.
- dragonwriter 4y ago
  > By definition, the EMH applies to a free market where people choose where to put their money. “The EMH only applies to an idealized analytical fiction and is not applicable to the real world” would also be a problem with the EMH.
  - jongjong 4y ago
    Totally. It is a valid critique. Suggesting that it's valuable in a hypothetical environment is similar to the "not true communism" defense used by communists to explain past failures.
scottLobster 4y ago
Uh, yes. Have you not been paying attention to the weekly "what potential fed action is the market pricing in this week?" articles? Efficient markets take into account everything from politics to corruption to the odds of natural disasters. I'm not sure where you read otherwise. You think investors don't price in the political risk of dealing with, say the Chinese government? You think bond investors aren't paying attention to the fed?

skippyboxedhero 4y ago

> In what I recall from my CFA studies, research shows that only genuine insider information can consistent outperform the assumption that all information is already priced in. Even if you assume there are no information inequalities outside of inside information (there are), markets are myopic. Expectations focus around one scenario which is why you see slow adjustments to trends. Btw, it is actually worse than people think: I have countless anecdotes from execs who run companies, who were "experts", who had substantial inside information and were still unable to predict industry trends better than me. There is a social, cultural, institutional context...you see vastly different investor behaviour even between countries that are very similar (i.e. US/UK). This focus on information above all is a conceit to assist the construction of economic theories, not a distinction that is useful in practice. Also, you may or may not have worked for a very impressive hedge fund but win rate tells you nothing about profitability. I know a fund that made one decision in 1992, made poor decisions constantly after, almost everyone who works there is worth $100m+, and they manage $100bn. You can go 10 years with only one good idea and outperform everyone else. Win rate means nothing.

rofo1 4y ago

> It really drew the point home that a random non-insider individual who thinks can do that over decades is likely delusional) You are, of course, correct, and it has been proven time and time again. People think that just because we had a few years of 0% rates that they are somehow geniuses who can do 15% CAGR for 50 years without a problem. In reality, almost nobody can beat the S&P500 low-cost index fund, after all expenses. People still dream, though.