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Nobody sensible believes that financial markets are perfectly efficient. On the other hand, nobody sensible believes they are completely inefficient, or trivia
by aetherson 2y ago
Nobody sensible believes that financial markets are perfectly efficient.
On the other hand, nobody sensible believes they are completely inefficient, or trivially beatable. If you want evidence of this, feel free to go out and beat the market with long plays on the alpha you imagine you have.
I think it's usually helpful, when trying to understand the world, to think, "markets are pretty efficient, do they agree with me? If they don't, can I think of a real reason why this may be a case where they're wrong, or am I just engaging in wishful thinking?"
I think it is not usually helpful, when trying to understand the world, to be really mad about the EMH.
- onlyrealcuzzo 2y agoWhy does the market need to be beatable if it's inefficient? If the market is chaotic, you can't beat it just because you're smart.
- RandomLensman 2y agoChaotic doesn't necessarily imply there is no way to make pretty accurate forecasts for some horizons (weather would be an example of that).
- immibis 2y agoSome people, like Warren Buffett, do exactly that. But the forecasting is very difficult. It's a full time job for them, and they have the industry connections to obtain information that you or I can't.
- tim333 2y agoBuffett says he doesn't generally believe in market forecasting, he sticks to figuring the prospects of individual businesses, which simplifies things a bit.
- bell-cot 2y agoYep. Plus, any investment strategy which involves "if I'm as good at this as Warren Buffett" is 99.999% likely to fail.
- aetherson 2y agoIf markets just randomly assign values to companies, you can beat them in two straightforward ways: 1. Just buy when the price is low and random variation will move the price higher eventually (or short when the price is high). 2. Ignore the market except to buy when a company is underpriced, then just have the company declare dividends or whatever and directly eat the profit that the market is stipulated to have underpriced. A very small investor in a random market might have difficulty with either of these strategies, but a reasonably well-capitalized investor would not. If you want to think up some kind of complicated model of difficult-to-take-advantage-of company pricing that is hard to exploit, really ask yourself whether that model is grounded in anything other than, "I'm mad about the EMH."
- onlyrealcuzzo 2y ago> 1. Just buy when the price is low and random variation will move the price higher eventually (or short when the price is high). 1. How do you know when the price is high or low? The market can remain irrational for a very long time (longer than you can stay solvent). 2. You can easily lose money shorting when you're right. People do it all the time.
- corimaith 2y agoIf the market is assigning random values you could easily just use the uniform distribution to model what is high or low; Intuitively the median would the demarcating line.
- onlyrealcuzzo 2y agoThe market is a fractal, and if you get blown up at any point, it doesn't matter if in the long-run you'll win. You can't blow up. You're not the House at the casino.
- pixl97 2y agoIsn't this just the saying "time in the market beats timing the market"
- 2y ago
- energy123 2y agoIf it's random (I assume that's what you mean by "chaotic") then it's efficient by definition because future price changes aren't a function of historical prices or publicly available information.
- deleted 2y ago[deleted]
- mypastself 2y agoThat’s exactly it. I view it almost like Newtonian physics. Sure, it’s inaccurate at some level, but until we find a superior model, it’s safer to make your investment decisions based on it.
- deleted 2y ago[deleted]