4 ms·

I don't know if he is, but I would certainly suggest that markets are not efficient. Not even close. Google had a 40 billion dollar swing in valuation in a day

I don't know if he is, but I would certainly suggest that markets are not efficient. Not even close. Google had a 40 billion dollar swing in valuation in a day last month. Were they really worth 40 billion more that day? Apple lost 300 billion in market cap in a matter of 6 months. Either they weren't worth that much at the peak, or they weren't worth that little at the bottom. There is no way you could ever convince me that Apple was efficiently priced at both ends (most likely neither end). Knowing that the market is inefficient is not equivalent to knowing which stocks to buy or sell, or when to do so. It doesn't give you a magic formula, but it does give you some idea of what to look for. FWIW, I have done pretty well picking stocks for myself, but I'm far from what I would consider "extremely wealthy". That being said, if I had a magic formula for instant huge wealth you can be damn sure I wouldn't be sharing it.

jerf 13y ago
You seem to be using a definition of "efficient" that has some sort of moral or intuitive meaning. That's not the relevant definition. It's really something more like "the market will not exhibit large-scale persistent arbitrage opportunities", which is why showing the market is inefficient pretty much by definition requires you to produce a method to consistently make substantial quantities of money by exploiting the arbitrage opportunities you found. Market efficiency is not a moral concern; it's more like a physics observation. In fact trying to understand economics with morality or some other form of normative claim is a huge and quite pervasive mistake that destroys people's ability to understand it before they even start trying. It's a machine. What we do with it may be moral or immoral, but the market itself is all but a natural force.
- clarky07 13y ago
  According to investopedia[1] - An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments. At the very least, if not me, Warren Buffett has shown that the market does in fact exhibit large-scale persistent opportunities. You just have to be patient. I don't think "arbitrage" is actually the relevant term here. It has a very specific meaning that isn't simply a stock being mispriced. Really though, the market offers deals all the time. FWIW, I don't have Buffett's track record, but I currently have 20 stocks in my portfolio most of which I've held for several years. Of those, 19 have made money and 1 has lost a small amount, and on the whole I've beaten the market nicely. I could just be written off as lucky, or as about to lose lots of money, but how do you explain Buffett? He has a track record of consistently beating the market by wide margins for 50 years. Seems like that wouldn't be possible under EMH. [1] http://www.investopedia.com/terms/e/efficientmarkethypothesis.asp http://www.investopedia.com/terms/e/efficientmarkethypothesi...
  - jerf 13y ago
    "Opportunities" is not "arbitrage". The value of an item going up over time is not disproof of a market's efficiency; efficiency is a point-in-time characteristic, not an across-time characteristic. A market is not required to be psychic to be efficient. It especially doesn't pertain to the case where someone generates value; Warren Buffet is not a passive purchaser of stocks, Warren Buffet seeks out stocks where he can generate value in some manner with better management. As for your positive returns, the easiest explanation is that you're in a green square on this graph (suitably updated): http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html?_r=0 http://www.nytimes.com/interactive/2011/01/02/business/20110... (Read what the graph is carefully, most people misinterpret it at first glance.)
  - onebaddude 13y ago
    >According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices... ...on average. Which is what makes "beating" the market, over enough time, impossible. But we know there are pricing discrepancies and information asymmetries in finite periods of time because we see them every day.
    - deleted 13y ago
      [deleted]
- nhaehnle 13y ago
  That's one of the main problems with the efficient market hypothesis, actually. The EMH is false for values of "efficient" that are interesting, and the values of "efficient" for which it might be true are boring and useless in the grander scheme of things. A lot of needless bad blood enters discussions because everybody interprets the word "efficient" as they please.
fotbr 13y ago
> That being said, if I had a magic formula for instant huge wealth you can be damn sure I wouldn't be sharing it. But I'd be selling it, and you can find out how by buying my book for the low, limited time price of three payments of $99.99. If you act now, we'll also throw in this great place-mat shaped like a $3 bill, and a ring-tone for your phone that sounds like money. Just pay separate shipping and handling. <insert three thousand word disclaimer here>

jerf 13y ago

You seem to be using a definition of "efficient" that has some sort of moral or intuitive meaning. That's not the relevant definition. It's really something more like "the market will not exhibit large-scale persistent arbitrage opportunities", which is why showing the market is inefficient pretty much by definition requires you to produce a method to consistently make substantial quantities of money by exploiting the arbitrage opportunities you found. Market efficiency is not a moral concern; it's more like a physics observation. In fact trying to understand economics with morality or some other form of normative claim is a huge and quite pervasive mistake that destroys people's ability to understand it before they even start trying. It's a machine. What we do with it may be moral or immoral, but the market itself is all but a natural force.

clarky07 13y ago
According to investopedia[1] - An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments. At the very least, if not me, Warren Buffett has shown that the market does in fact exhibit large-scale persistent opportunities. You just have to be patient. I don't think "arbitrage" is actually the relevant term here. It has a very specific meaning that isn't simply a stock being mispriced. Really though, the market offers deals all the time. FWIW, I don't have Buffett's track record, but I currently have 20 stocks in my portfolio most of which I've held for several years. Of those, 19 have made money and 1 has lost a small amount, and on the whole I've beaten the market nicely. I could just be written off as lucky, or as about to lose lots of money, but how do you explain Buffett? He has a track record of consistently beating the market by wide margins for 50 years. Seems like that wouldn't be possible under EMH. [1] http://www.investopedia.com/terms/e/efficientmarkethypothesis.asp http://www.investopedia.com/terms/e/efficientmarkethypothesi...
- jerf 13y ago
  "Opportunities" is not "arbitrage". The value of an item going up over time is not disproof of a market's efficiency; efficiency is a point-in-time characteristic, not an across-time characteristic. A market is not required to be psychic to be efficient. It especially doesn't pertain to the case where someone generates value; Warren Buffet is not a passive purchaser of stocks, Warren Buffet seeks out stocks where he can generate value in some manner with better management. As for your positive returns, the easiest explanation is that you're in a green square on this graph (suitably updated): http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html?_r=0 http://www.nytimes.com/interactive/2011/01/02/business/20110... (Read what the graph is carefully, most people misinterpret it at first glance.)
- onebaddude 13y ago
  >According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices... ...on average. Which is what makes "beating" the market, over enough time, impossible. But we know there are pricing discrepancies and information asymmetries in finite periods of time because we see them every day.
  - deleted 13y ago
    [deleted]
nhaehnle 13y ago
That's one of the main problems with the efficient market hypothesis, actually. The EMH is false for values of "efficient" that are interesting, and the values of "efficient" for which it might be true are boring and useless in the grander scheme of things. A lot of needless bad blood enters discussions because everybody interprets the word "efficient" as they please.

fotbr 13y ago

> That being said, if I had a magic formula for instant huge wealth you can be damn sure I wouldn't be sharing it. But I'd be selling it, and you can find out how by buying my book for the low, limited time price of three payments of $99.99. If you act now, we'll also throw in this great place-mat shaped like a $3 bill, and a ring-tone for your phone that sounds like money. Just pay separate shipping and handling. <insert three thousand word disclaimer here>