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Doesn’t efficient market hypothesis make index investing guaranteed money long term in an expanding economy?

by ipnon 4y ago

FredPret 4y ago
Guess the hypothesis doesn’t hold up then…
- LoveMortuus 4y ago
  I would guess that you could still make some profit, since once the stock is added to S&P500 it will raise at least a bit, since many people do invest in the index, but I would guess that this change is less noticeable now that many more people are looking out for stocks that are going to be added or are close to be added to the index. I'm also guessing that many have algorithms that check for stocks that fulfill the criteria to be added to the index.
  - stouset 4y ago
    The whole point of this article is that, no, you can’t. This has already been priced in.
    - carabiner 4y ago
      Don't even ask the question. The answer is yes, it's priced in. Think Amazon will beat the next earnings? That's already been priced in. You work at the drive thru for Mickey D's and found out that the burgers are made of human meat? Priced in. You think insiders don't already know that? The market is an all powerful, all encompassing being that knows the very inner workings of your subconscious before you were even born. Your very existence was priced in decades ago when the market was valuing Standard Oil's expected future earnings based on population growth that would lead to your birth, what age you would get a car, how many times you would drive your car every week, how many times you take the bus/train, etc. Anything you can think of has already been priced in, even the things you aren't thinking of. You have no original thoughts. Your consciousness is just an illusion, a product of the omniscent market. Free will is a myth. The market sees all, knows all and will be there from the beginning of time until the end of the universe (the market has already priced in the heat death of the universe). So please, before you make a post on wsb asking whether AAPL has priced in earpods 11 sales or whatever, know that it has already been priced in and don't ask such a dumb fucking question again.
      - LoveMortuus 4y ago
        Then I guess, time in the market really does beat timing the market!
    - LoveMortuus 4y ago
      Would the gain be actually zero? What I was pointing to was that you might still get a bit, not a lot, but it would still be a positive change, even though it might be a rounding error for many.
      - stouset 4y ago
        If the expected gain was nonzero, bigger players than you would already be exploiting this opportunity up to the point where the expected gain drops to zero.
  - FredPret 4y ago
    No. The efficient market hypothesis doesn’t hold up.
reissbaker 4y ago
The article isn't referencing index investing as a strategy; it's talking about a strategy in which, for a while, you could make money by buying specific stocks when they met the criteria to be newly added to an index. That appears to no longer work, because markets have become more efficient and the value is already priced in.
- LoveMortuus 4y ago
  That sounds like "timing the market". I prefer to repeat to myself the mantra of: "Time in the market beats timing the market."
  - stouset 4y ago
    Yes, that’s the point. People thought they could beat the market by timing buys of stocks that were likely to become part of indexes. If there was any alpha in this practice, it’s been sucked out of the market at this point. The anticipation of this has already been priced in, so there’s no remaining advantage in trying this strategy.
satvikpendem 4y ago
The book Adaptive Markets has a different theory, of markets driven by behavioral economic principles based on human psychology rather than assuming everyone is a Homo Economicus, a fully rational and efficient actor in the market.
opportune 4y ago
In theory an economy could expand more in private and small businesses and not help index funds. I could see this happening if there were a lot of corporate taxes based on business size. I think but am not sure that the economy can expand by shifting more “income” from capital to wages which would be bad for stocks. Think 1950s. If the expanding economy is caused by a lot of disruption from new businesses it could also be bad to hold indices weighted towards incumbents, this seems the most likely to happen of the three cases. The disrupters don’t necessarily need to be big, just enough of a threat that investors think future growth or earnings of incumbents are threatened.

Doesn’t efficient market hypothesis make index investing guaranteed money long term in an expanding economy?

by ipnon 4y ago

Doesn’t efficient market hypothesis make index investing guaranteed money long term in an expanding economy?

FredPret 4y ago

Guess the hypothesis doesn’t hold up then…

LoveMortuus 4y ago
I would guess that you could still make some profit, since once the stock is added to S&P500 it will raise at least a bit, since many people do invest in the index, but I would guess that this change is less noticeable now that many more people are looking out for stocks that are going to be added or are close to be added to the index. I'm also guessing that many have algorithms that check for stocks that fulfill the criteria to be added to the index.
- stouset 4y ago
  The whole point of this article is that, no, you can’t. This has already been priced in.
  - carabiner 4y ago
    Don't even ask the question. The answer is yes, it's priced in. Think Amazon will beat the next earnings? That's already been priced in. You work at the drive thru for Mickey D's and found out that the burgers are made of human meat? Priced in. You think insiders don't already know that? The market is an all powerful, all encompassing being that knows the very inner workings of your subconscious before you were even born. Your very existence was priced in decades ago when the market was valuing Standard Oil's expected future earnings based on population growth that would lead to your birth, what age you would get a car, how many times you would drive your car every week, how many times you take the bus/train, etc. Anything you can think of has already been priced in, even the things you aren't thinking of. You have no original thoughts. Your consciousness is just an illusion, a product of the omniscent market. Free will is a myth. The market sees all, knows all and will be there from the beginning of time until the end of the universe (the market has already priced in the heat death of the universe). So please, before you make a post on wsb asking whether AAPL has priced in earpods 11 sales or whatever, know that it has already been priced in and don't ask such a dumb fucking question again.
    - LoveMortuus 4y ago
      Then I guess, time in the market really does beat timing the market!
  - LoveMortuus 4y ago
    Would the gain be actually zero? What I was pointing to was that you might still get a bit, not a lot, but it would still be a positive change, even though it might be a rounding error for many.
    - stouset 4y ago
      If the expected gain was nonzero, bigger players than you would already be exploiting this opportunity up to the point where the expected gain drops to zero.
- FredPret 4y ago
  No. The efficient market hypothesis doesn’t hold up.

reissbaker 4y ago

The article isn't referencing index investing as a strategy; it's talking about a strategy in which, for a while, you could make money by buying specific stocks when they met the criteria to be newly added to an index. That appears to no longer work, because markets have become more efficient and the value is already priced in.

LoveMortuus 4y ago
That sounds like "timing the market". I prefer to repeat to myself the mantra of: "Time in the market beats timing the market."
- stouset 4y ago
  Yes, that’s the point. People thought they could beat the market by timing buys of stocks that were likely to become part of indexes. If there was any alpha in this practice, it’s been sucked out of the market at this point. The anticipation of this has already been priced in, so there’s no remaining advantage in trying this strategy.

satvikpendem 4y ago

The book Adaptive Markets has a different theory, of markets driven by behavioral economic principles based on human psychology rather than assuming everyone is a Homo Economicus, a fully rational and efficient actor in the market.

opportune 4y ago

In theory an economy could expand more in private and small businesses and not help index funds. I could see this happening if there were a lot of corporate taxes based on business size. I think but am not sure that the economy can expand by shifting more “income” from capital to wages which would be bad for stocks. Think 1950s. If the expanding economy is caused by a lot of disruption from new businesses it could also be bad to hold indices weighted towards incumbents, this seems the most likely to happen of the three cases. The disrupters don’t necessarily need to be big, just enough of a threat that investors think future growth or earnings of incumbents are threatened.