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The Efficient-market Hypothesis[1] posits that someone with more resources than you has already made a similar analysis, so the prices of those shares already r

The Efficient-market Hypothesis[1] posits that someone with more resources than you has already made a similar analysis, so the prices of those shares already reflect the true value, including the value of potential future returns. Lucky for you, all those stocks are probably represented in large index funds, which are much less volatile than individual stocks. [1]: https://en.wikipedia.org/wiki/Efficient-market_hypothesis https://en.wikipedia.org/wiki/Efficient-market_hypothesis

WorkerBee28474 2y ago
The thing about hypotheses is that they can be either true or false. And seeing NVDA triple in the past year, even while there are many people devoting their working lives just to do financial analysis of the stock, tells us the hypothesis is false.
- Iulioh 2y ago
  The Nvidia situation wasn't predictable as they sell an unique item with pratical applications. There are no alternatives to Nvidia GPUs if you want to efficiently train an AI, they have an effective monopoly. Personally i would have invested in TSMC/ASML or Intel as this point. Buy the shovel maker.
  - bluecalm 2y ago
    NVidia make those things for quite some time you know? They also have done heavy investments in software side and had total dominance there for years. It's not like your needed to know 10 years ago. >>TSMC Relatively low margins, few good well negotiating customers. Can't grow fast. >>ASML What do you think market could have missed there? Good company with simple business model. Very unlikely to grow fast. >>Intel Terrible company with long track record of stupid decisions and deception. What make you think they will suddenly turn around and start innovating?
    - Iulioh 2y ago
      Good points but they have the fabs. That's why my bets are on them. Everyone is reliant on ASML and unlikely to change. Intel has fabs and is too big to fail, the us government won't let it happen. I'm making a safe bet on the long term, not a speculative one based on a technology that will or won't be worth that valuation.
- michaelt 2y ago
  I share your skepticism, but the EMH doesn't mean stocks would never move in price. After all, if it's election day, my analysis says FooCorp is worth $50 under a Biden administration and $100 under a Trump administration, and the candidates are neck-and-neck, that means the shares are worth $75. But tomorrow the shares will have either gained or lost $25.
  - WorkerBee28474 2y ago
    Yes, that is true. But as detailed recently in Going Infinite, Jane Street's losses around the 2016 election were because they didn't know outcome was worth the example $50 and which was $100.
- hiAndrewQuinn 2y ago
  It's not that kind of hypothesis. It's more like a mathematical proof, with some underlying assumptions that aren't actually true in reality. Figuring out which ones, and to what extent, is an unorthodox but effective path to wealth.
_gmax0 2y ago
Cue the classic joke: A finance professor is walking across the University of Chicago campus with a student. They come upon $20 lying on the ground, and the student leans down to pick it up. The professor said, “Don’t bother. If it was really there, somebody else would’ve already picked it up.”
- throwaway2037 2y ago
  It does make you wonder: What do economics professors buy in their stock portfolio?
55555 2y ago
You should read that entire wikipedia article because the EMH is useful but clearly extremely false.
oldpersonintx 2y ago
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underlipton 2y ago
John Harvard statue of a comment. 1) Someone with more resources than you has different aims and incentives than you; the prices of those shares likely reflect their valuation, not a "true" value. 2) Because of 1, the the future returns that are reflected in the price of the stock are not necessarily for the company alone, but also of future returns of other companies and ventures that are connected to the stock in question through this hypothetical someone. 3) Volatility is good if you're poor. I want my money with a winner before everyone else knows it's a winner. Index funds are slush for smart money's liquidity scams.
samatman 2y ago
The Efficient-market Hypothesis has been proven to be true only if P=NP. https://arxiv.org/abs/1002.2284 https://arxiv.org/abs/1002.2284 What's your bet on the latter? I'm... skeptical.
- GrantMoyer 2y ago
  I'm skeptical of that "proof". Specifically, for example, one of the first statements in the proof says: > We ask our question, call it question 1: “Does there exist a strategy that statistically significantly (after accounting for possible data mining) makes money (after accounting for transactions costs)?” An answer to that question essentially tests each of the possible 3n strategies. which is non-sequitur. It's like asserting the only way to find the shortest path between two vertices in a graph is to exhaustively check every path, because waves hand. Also note that paper doesn't appear to have undergone any form of peer review.
PaulRobinson 2y ago
If the Efficient-market Hypothesis was true, it would not be rational to buy (or sell), any stock, commodity, currency or other investment vehicle as an investment alone. Yet plenty of professionals and amateurs do, and many make a profit, which suggest the hypothesis is not provably true. One way to think of trading is you're kind of in a ponzi scheme. Not an illegal one, but you're buying stock today you're hoping somebody else will buy off you at a higher price one day in the future. If you short a position, you're hoping that somebody will sell you stock at a lower price than it is today for some reason. All of this suggests to me that markets are not the perfectly rational machines people insist they are. Sure, most people would do better to buy and hold indexes than to time trades on individual stocks (by a long margin), but the argument that all value is priced in all of the time is just daft.
- GrantMoyer 2y ago
  > If the Efficient-market Hypothesis was true, it would not be rational to buy (or sell), any stock, commodity, currency or other investment vehicle as an investment alone. This is not an implication of the efficient-market hypothesis. The efficient-market hypothesis implies no investment strategy can have expected returns greater than the total market, but says nothing about what the returns of the total market actually are.
  - PaulRobinson 2y ago
    If you don't have expcted returns greater than the total market, you should not trade. Your argument seems to be "yeah, assume there is no value or edge, and let's just hope for variance in our favour" is what the majority of professional traders, funds, quants, and so on are all doing. If that isn't what you meant, I'd be interested in how you clarify it: what do you think they're doing, and why?

WorkerBee28474 2y ago

The thing about hypotheses is that they can be either true or false. And seeing NVDA triple in the past year, even while there are many people devoting their working lives just to do financial analysis of the stock, tells us the hypothesis is false.

Iulioh 2y ago
The Nvidia situation wasn't predictable as they sell an unique item with pratical applications. There are no alternatives to Nvidia GPUs if you want to efficiently train an AI, they have an effective monopoly. Personally i would have invested in TSMC/ASML or Intel as this point. Buy the shovel maker.
- bluecalm 2y ago
  NVidia make those things for quite some time you know? They also have done heavy investments in software side and had total dominance there for years. It's not like your needed to know 10 years ago. >>TSMC Relatively low margins, few good well negotiating customers. Can't grow fast. >>ASML What do you think market could have missed there? Good company with simple business model. Very unlikely to grow fast. >>Intel Terrible company with long track record of stupid decisions and deception. What make you think they will suddenly turn around and start innovating?
  - Iulioh 2y ago
    Good points but they have the fabs. That's why my bets are on them. Everyone is reliant on ASML and unlikely to change. Intel has fabs and is too big to fail, the us government won't let it happen. I'm making a safe bet on the long term, not a speculative one based on a technology that will or won't be worth that valuation.
michaelt 2y ago
I share your skepticism, but the EMH doesn't mean stocks would never move in price. After all, if it's election day, my analysis says FooCorp is worth $50 under a Biden administration and $100 under a Trump administration, and the candidates are neck-and-neck, that means the shares are worth $75. But tomorrow the shares will have either gained or lost $25.
- WorkerBee28474 2y ago
  Yes, that is true. But as detailed recently in Going Infinite, Jane Street's losses around the 2016 election were because they didn't know outcome was worth the example $50 and which was $100.
hiAndrewQuinn 2y ago
It's not that kind of hypothesis. It's more like a mathematical proof, with some underlying assumptions that aren't actually true in reality. Figuring out which ones, and to what extent, is an unorthodox but effective path to wealth.

_gmax0 2y ago

Cue the classic joke: A finance professor is walking across the University of Chicago campus with a student. They come upon $20 lying on the ground, and the student leans down to pick it up. The professor said, “Don’t bother. If it was really there, somebody else would’ve already picked it up.”

throwaway2037 2y ago
It does make you wonder: What do economics professors buy in their stock portfolio?

55555 2y ago

You should read that entire wikipedia article because the EMH is useful but clearly extremely false.

oldpersonintx 2y ago

[dead]

underlipton 2y ago

John Harvard statue of a comment. 1) Someone with more resources than you has different aims and incentives than you; the prices of those shares likely reflect their valuation, not a "true" value. 2) Because of 1, the the future returns that are reflected in the price of the stock are not necessarily for the company alone, but also of future returns of other companies and ventures that are connected to the stock in question through this hypothetical someone. 3) Volatility is good if you're poor. I want my money with a winner before everyone else knows it's a winner. Index funds are slush for smart money's liquidity scams.

samatman 2y ago

The Efficient-market Hypothesis has been proven to be true only if P=NP. https://arxiv.org/abs/1002.2284 https://arxiv.org/abs/1002.2284 What's your bet on the latter? I'm... skeptical.

GrantMoyer 2y ago
I'm skeptical of that "proof". Specifically, for example, one of the first statements in the proof says: > We ask our question, call it question 1: “Does there exist a strategy that statistically significantly (after accounting for possible data mining) makes money (after accounting for transactions costs)?” An answer to that question essentially tests each of the possible 3n strategies. which is non-sequitur. It's like asserting the only way to find the shortest path between two vertices in a graph is to exhaustively check every path, because waves hand. Also note that paper doesn't appear to have undergone any form of peer review.

PaulRobinson 2y ago

If the Efficient-market Hypothesis was true, it would not be rational to buy (or sell), any stock, commodity, currency or other investment vehicle as an investment alone. Yet plenty of professionals and amateurs do, and many make a profit, which suggest the hypothesis is not provably true. One way to think of trading is you're kind of in a ponzi scheme. Not an illegal one, but you're buying stock today you're hoping somebody else will buy off you at a higher price one day in the future. If you short a position, you're hoping that somebody will sell you stock at a lower price than it is today for some reason. All of this suggests to me that markets are not the perfectly rational machines people insist they are. Sure, most people would do better to buy and hold indexes than to time trades on individual stocks (by a long margin), but the argument that all value is priced in all of the time is just daft.

GrantMoyer 2y ago
> If the Efficient-market Hypothesis was true, it would not be rational to buy (or sell), any stock, commodity, currency or other investment vehicle as an investment alone. This is not an implication of the efficient-market hypothesis. The efficient-market hypothesis implies no investment strategy can have expected returns greater than the total market, but says nothing about what the returns of the total market actually are.
- PaulRobinson 2y ago
  If you don't have expcted returns greater than the total market, you should not trade. Your argument seems to be "yeah, assume there is no value or edge, and let's just hope for variance in our favour" is what the majority of professional traders, funds, quants, and so on are all doing. If that isn't what you meant, I'd be interested in how you clarify it: what do you think they're doing, and why?