4 ms·

If 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 wil

If 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 ago
  If 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 ago
    The 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 ago
    Isn't this just the saying "time in the market beats timing the market"
- aetherson 2y ago
  The very idea that the "market can remain irrational" implies a non-random price algorithm.
energy123 2y ago
You can't beat a geometric browning motion with mean return of zero using this method.
- aetherson 2y ago
  Companies never have a negative price. Also, just look at stock graphs. Companies are not priced by geometric browning methods. This is what I mean when I say that it's usually not helpful to try to make claims about the world based on, "I'm really mad about the EMH." You end up making silly claims.
  - em500 2y ago
    > Companies never have a negative price. Also, just look at stock graphs. Companies are not priced by geometric browning methods. Geometric Brownian motion can't take negative values either, so I don't know what you think this proves. While it's true that stock prices don't literally follow geometric Brownian motions (+drift), you can't tell the difference from stock graphs. (You can tell the difference with statistical tests if you know what to look for, e.g. volatility clustering, but humans can't tell by eye, and naive classification ML models will not perform well.)
    - aetherson 2y ago
      I admit that I assumed that "geometric browning motion" was just "a random walk with more extreme movements when it goes away from the starting place," and that was wrong. What geometric browning motion in fact is, with some handwaving simplicity, is exponential growth with some jitter. I will note that "stocks are priced via geometric browning motion" would satisfy the EMH. And that the underlying growth trend of GBM, in a real world, is, like, "the stock market actually values real things about the company that you can find out, but which other people have already found out."

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 ago
If 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 ago
  The 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 ago
  Isn't this just the saying "time in the market beats timing the market"
aetherson 2y ago
The very idea that the "market can remain irrational" implies a non-random price algorithm.

energy123 2y ago

You can't beat a geometric browning motion with mean return of zero using this method.

aetherson 2y ago
Companies never have a negative price. Also, just look at stock graphs. Companies are not priced by geometric browning methods. This is what I mean when I say that it's usually not helpful to try to make claims about the world based on, "I'm really mad about the EMH." You end up making silly claims.
- em500 2y ago
  > Companies never have a negative price. Also, just look at stock graphs. Companies are not priced by geometric browning methods. Geometric Brownian motion can't take negative values either, so I don't know what you think this proves. While it's true that stock prices don't literally follow geometric Brownian motions (+drift), you can't tell the difference from stock graphs. (You can tell the difference with statistical tests if you know what to look for, e.g. volatility clustering, but humans can't tell by eye, and naive classification ML models will not perform well.)
  - aetherson 2y ago
    I admit that I assumed that "geometric browning motion" was just "a random walk with more extreme movements when it goes away from the starting place," and that was wrong. What geometric browning motion in fact is, with some handwaving simplicity, is exponential growth with some jitter. I will note that "stocks are priced via geometric browning motion" would satisfy the EMH. And that the underlying growth trend of GBM, in a real world, is, like, "the stock market actually values real things about the company that you can find out, but which other people have already found out."