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I think a blend of your advice and that of the original post is correct. I agree that the Efficient Market Hypothesis is a load of rubbish repeatedly disproved

I think a blend of your advice and that of the original post is correct. I agree that the Efficient Market Hypothesis is a load of rubbish repeatedly disproved by the movements of the markets not to mention the impossibility of the assumptions on which it relies (perfect information etc.). However if you are investing from a position of ignorance or sentiment (rather than on the Intelligent Investor basis) then the EMH may as well be true. It is only worth trading when you believe that you have an advantage from such proper analysis. For most people this is pretty much never - which is where the original poster's advice comes in. So if you do have valuable industry knowledge and the time to glance at the basic company figures OR time to fully analyse the fundamentals of companies in the Intelligent Investor style go ahead you may well come out ahead but do remember that the market can know something you don't and/or remain irrational so you need fairly long time horizons. My summary is if you have an advantage use it, if not then use index funds.

yummyfajitas 13y ago
Where do you get the idea that the EMH assumes perfect information? In any case, since you are now revealing that the movements of the market disprove the EMH, I take it you've already made your billions by trading your EMH-disproving strategy?
- grey-area 13y ago
  Where do you get the idea that the EMH assumes perfect information? EMH assumes that the market perfectly translates all information about stocks into prices. In a strong form, that requires perfect information, you can dilute that to almost perfect but just claiming the market is anywhere close rational or efficient is a huge leap given our history of stock markets and bubbles. That claim has been shown to be false in just about every boom bust cycle so far, but to take one specific example - mortgage cdos in the last decade - what about that market was efficient? I take it you've already made your billions by trading your EMH-disproving strategy? Disagreeing with the efficient market hypothesis implies nothing about trading or investing competence.
  - yummyfajitas 13y ago
    but to take one specific example - mortgage cdos in the last decade - what about that market was efficient? The existence of apparent bubbles does not contradict the EMH. Scott Sumner has a great post explaining this: http://www.themoneyillusion.com/?p=25011 http://www.themoneyillusion.com/?p=25011 If you believe the boom&bust cycle shows the market to be irrational, what is the EMH-disproving trading strategy? "The market did something I don't like" is not the same thing as "the EMH is false."
    - grey-area 13y ago
      The existence of apparent bubbles does not contradict the EMH. I didn't find that link at all convincing, in particular the vague handwaving about bitcoin - because that is as-yet unproven and very uncertain I don't think it's a good example - why not use one of the many stock market busts? Booms and busts are not 'apparent bubbles' in any sense, they are all around us, and cause real movements in the markets regularly. They are a great illustration of markets behaving completely irrationally and becoming divorced from any efficient relationship between price and underlying or future value due to euphoria, panic, over-abstraction or obfuscation of assets and risk, monetary stimulus, corruption, cornering, rumour etc, etc. Sudden resets (often overreactions), and wild swings are the result, so much so that many of our markets have circuit-breakers which stop trading to attempt to discourage their natural movements. There are a whole host of reasons why our markets are not currently anywhere close to perfect or efficient, and to simply assume they are and then attempt to cut the facts to fit the procrustean bed of market theory is not at all convincing. What is dangerous about the EMH to me is that it encourages a sort of worship of markets, which are seen as efficient and all-knowing, and which can never be gainsaid. In fact markets get things wrong all the time, they are pretty irrational quite a lot of the time, they are just the least-bad system we know. If you believe the boom & bust cycle shows the market to be irrational, what is the EMH-disproving trading strategy? Again, not believing the EMH is not the same as believing you can beat the market with short term trading, the two concepts are completely unrelated. I have no idea what sort of trading strategy you think would disprove EMH, but we're not talking about trading strategies but models for markets. Personally, I wouldn't trade short-term at all in stock markets, but do invest. I happen to mostly agree with the author here, but again, that has nothing to do with efficient markets. The EMH is a postulation which makes extraordinary claims about markets in general, it does not need to be disproved, it needs to be proven in the first place by comparison with the real markets it claims to describe. Many leading economists (e.g. Greg B Davies) have pointed out flaws in it, and EMH is far from being a consensus.
- josephlord 13y ago
  Perfect information may not have been the right term. Steve Keen devotes a the second half of chapter 11 in Debunking Economics to the EMH. The core issues are that the empirical data does not support it and that the maths behind it is all based on the assumptions that everyone can borrow freely at the same risk free rate and secondly that everyone has the same expectations ("homogenity of investor expectations: investors are assumed to agree on the prospects of various instruments - the expected values, standard deviations and correlation coefficients..." - Sharpe 1964 quoted in Debunking Economics 2011.) That the EMH may be false does not mean that I believe I will necessarily win any more than the fact that Poker is significantly a game of skill means that I would necessarily win. I can be outplayed and/or have luck against me. But I wouldn't play for significant money unless I strongly believed that I had the advantage, the same is true for the market.
  - yummyfajitas 13y ago
    What empirical data disagrees with the EMH? I also have no idea why you believe the EMH requires investors to agree on the prospects of various instruments. It doesn't. If it did, the EMH would be a "no one ever trades" theorem. If the EMH were false, a trading strategy generating above-market (risk-adjusted) returns over the long haul would exist. Claiming such a strategy exists is far more plausible if you've already traded it and won.
    - mistermann 13y ago
      Would wide swings in the price of an individual stock on no material news not suggest that perhaps the market pricing is not perfectly efficient? (And if it doesn't, then I don't think anything could. I mean, that is one of the primary means you would prove it is not efficient, so if you reject that, then there's not much else I could offer you.)
      - Symmetry 13y ago
        The EMH says that the absence of news when news is expected should cause price swings, as well as the presence of news when that news is unexpected. And that the presence of expected news shouldn't cause any price swing.
- clarky07 13y ago
  You seem to say this a lot whenever something about EMH get's posted - https://news.ycombinator.com/item?id=6690838 https://news.ycombinator.com/item?id=6690838 The existence of Warren Buffett disproves EMH.[1] EMH basically says that beating the market is pure luck as everything is priced efficiently. The fact that WB exists, just one person beating the market for 50 years, disproves EMH. I don't personally have to have an EMH-disproving strategy to see that it isn't true. [1] http://www.investopedia.com/terms/e/efficientmarkethypothesis.asp http://www.investopedia.com/terms/e/efficientmarkethypothesi... "For example, investors, such as Warren Buffett have consistently beaten the market over long periods of time, which by definition is impossible according to the EMH."
  - dragonwriter 13y ago
    Investopedia is incorrect. It is not impossible under EMH for particular investors to consistently beat the market over long periods of time, it is just improbable. Given a large number of investors, however, improbable runs of good and bad luck are near certain to occur somewhere in the system. This is one of the reasons that it would be very difficult to disprove the EMH even if it were false -- there is no set of outcomes that is strictly inconsistent with the EMH.
    - clarky07 13y ago
      "Long period of time" and "50 years" aren't really the same thing in my book. You can get lucky for awhile. At some point it stops being luck. I'm not sure where that line is, but I am confident though that Buffett has crossed it. I'd be willing to bet you'd have a hard time finding anybody credible that would say what Buffett has done is just luck, which is exactly what you are claiming. Once we accept that he isn't just a lucky guy, EMH is disproven.
      - dragonwriter 13y ago
        > You can get lucky for awhile. At some point it stops being luck. No, it doesn't. There is no length of a run that cannot be luck. If you have a quantifiable expected distribution of results, you can say how improbable it is that you would see a run of a particular size in a given sized universe of data, but the fact that such a run exists in the data doesn't prove that its not luck. > I'd be willing to bet you'd have a hard time finding anybody credible that would say what Buffett has done is just luck, which is exactly what you are claiming. Er, no, its not what I'm claiming. In fact, I'm highly skeptical about EMH, to the point of having said that there is no particular reason (except for known-to-be-false assumptions) to assume that it should be true. On the other hand, I am saying that the claims that it is "disproven" by the existence of runs like Buffet's overstate the degree to which the EMH is even falsifiable.
- dragonwriter 13y ago
  > Where do you get the idea that the EMH assumes perfect information? The grounding of the EMH is a consequence of rational actor theory which assumes perfect information. It could be true without the rational actor theory more generally or perfect information in particular being true, but there is no reason to expect it to be true except the assumption of those theoretical foundations in which it is grounded. Its difficult to falsify the EMH, since it doesn't actually rule out any outcomes, it just asserts that if market-beating outcomes occur, they are because of luck rather than strategy. As such, there is no result that is strictly inconsistent with the EMH. (Further difficulties arise since, if one rejects the EMH, but still assumes that market participants do efficiently apply the information that is available to them, any market-beating strategy would need to be kept secret to avoid being adopted generally in the market, and thus no longer be market-beating, so any test of EMH has to be able to distinguish between result of luck and results of covert strategy.)
reinhardt 13y ago
Most professional investors and fund managers do have an advantage using it over naive/amateur investors and yet they rarely beat the market, and when they do it almost never lasts more than a few years. "Use index funds unless your name is Warren Buffet" would be a better summary.
- squirejons 13y ago
  but is right now a good time to buy into an index fund? Or to buy any stock? Most things revert to the mean, and right now the market is substantially above mean, and that market level is based on other aspects of the world that are currently also out of mean.
  - ZeroGravitas 13y ago
    Isn't the standard advice to not invest unless you can wait 10 years for the ups and down to average out?
    - john_b 13y ago
      That is common Buffett-style advice. But he also advises that price matters. Matters a lot, in fact.
      - judk 13y ago
        There are two sides to buffet style advice: 1. Buy bargains when assets are underpriced. 2. Hold those assets for many years. Also, Buffet buys substantial or controlling fractions of a company, so the other owners can't scrwwo him. If you can't do that, you can't replicate his large scale success.
        infinite8s 13y ago
        Not only that - he's able to affect those long-term returns.
  - 13y ago

yummyfajitas 13y ago

Where do you get the idea that the EMH assumes perfect information? In any case, since you are now revealing that the movements of the market disprove the EMH, I take it you've already made your billions by trading your EMH-disproving strategy?

grey-area 13y ago
Where do you get the idea that the EMH assumes perfect information? EMH assumes that the market perfectly translates all information about stocks into prices. In a strong form, that requires perfect information, you can dilute that to almost perfect but just claiming the market is anywhere close rational or efficient is a huge leap given our history of stock markets and bubbles. That claim has been shown to be false in just about every boom bust cycle so far, but to take one specific example - mortgage cdos in the last decade - what about that market was efficient? I take it you've already made your billions by trading your EMH-disproving strategy? Disagreeing with the efficient market hypothesis implies nothing about trading or investing competence.
- yummyfajitas 13y ago
  but to take one specific example - mortgage cdos in the last decade - what about that market was efficient? The existence of apparent bubbles does not contradict the EMH. Scott Sumner has a great post explaining this: http://www.themoneyillusion.com/?p=25011 http://www.themoneyillusion.com/?p=25011 If you believe the boom&bust cycle shows the market to be irrational, what is the EMH-disproving trading strategy? "The market did something I don't like" is not the same thing as "the EMH is false."
  - grey-area 13y ago
    The existence of apparent bubbles does not contradict the EMH. I didn't find that link at all convincing, in particular the vague handwaving about bitcoin - because that is as-yet unproven and very uncertain I don't think it's a good example - why not use one of the many stock market busts? Booms and busts are not 'apparent bubbles' in any sense, they are all around us, and cause real movements in the markets regularly. They are a great illustration of markets behaving completely irrationally and becoming divorced from any efficient relationship between price and underlying or future value due to euphoria, panic, over-abstraction or obfuscation of assets and risk, monetary stimulus, corruption, cornering, rumour etc, etc. Sudden resets (often overreactions), and wild swings are the result, so much so that many of our markets have circuit-breakers which stop trading to attempt to discourage their natural movements. There are a whole host of reasons why our markets are not currently anywhere close to perfect or efficient, and to simply assume they are and then attempt to cut the facts to fit the procrustean bed of market theory is not at all convincing. What is dangerous about the EMH to me is that it encourages a sort of worship of markets, which are seen as efficient and all-knowing, and which can never be gainsaid. In fact markets get things wrong all the time, they are pretty irrational quite a lot of the time, they are just the least-bad system we know. If you believe the boom & bust cycle shows the market to be irrational, what is the EMH-disproving trading strategy? Again, not believing the EMH is not the same as believing you can beat the market with short term trading, the two concepts are completely unrelated. I have no idea what sort of trading strategy you think would disprove EMH, but we're not talking about trading strategies but models for markets. Personally, I wouldn't trade short-term at all in stock markets, but do invest. I happen to mostly agree with the author here, but again, that has nothing to do with efficient markets. The EMH is a postulation which makes extraordinary claims about markets in general, it does not need to be disproved, it needs to be proven in the first place by comparison with the real markets it claims to describe. Many leading economists (e.g. Greg B Davies) have pointed out flaws in it, and EMH is far from being a consensus.
josephlord 13y ago
Perfect information may not have been the right term. Steve Keen devotes a the second half of chapter 11 in Debunking Economics to the EMH. The core issues are that the empirical data does not support it and that the maths behind it is all based on the assumptions that everyone can borrow freely at the same risk free rate and secondly that everyone has the same expectations ("homogenity of investor expectations: investors are assumed to agree on the prospects of various instruments - the expected values, standard deviations and correlation coefficients..." - Sharpe 1964 quoted in Debunking Economics 2011.) That the EMH may be false does not mean that I believe I will necessarily win any more than the fact that Poker is significantly a game of skill means that I would necessarily win. I can be outplayed and/or have luck against me. But I wouldn't play for significant money unless I strongly believed that I had the advantage, the same is true for the market.
- yummyfajitas 13y ago
  What empirical data disagrees with the EMH? I also have no idea why you believe the EMH requires investors to agree on the prospects of various instruments. It doesn't. If it did, the EMH would be a "no one ever trades" theorem. If the EMH were false, a trading strategy generating above-market (risk-adjusted) returns over the long haul would exist. Claiming such a strategy exists is far more plausible if you've already traded it and won.
  - mistermann 13y ago
    Would wide swings in the price of an individual stock on no material news not suggest that perhaps the market pricing is not perfectly efficient? (And if it doesn't, then I don't think anything could. I mean, that is one of the primary means you would prove it is not efficient, so if you reject that, then there's not much else I could offer you.)
    - Symmetry 13y ago
      The EMH says that the absence of news when news is expected should cause price swings, as well as the presence of news when that news is unexpected. And that the presence of expected news shouldn't cause any price swing.
clarky07 13y ago
You seem to say this a lot whenever something about EMH get's posted - https://news.ycombinator.com/item?id=6690838 https://news.ycombinator.com/item?id=6690838 The existence of Warren Buffett disproves EMH.[1] EMH basically says that beating the market is pure luck as everything is priced efficiently. The fact that WB exists, just one person beating the market for 50 years, disproves EMH. I don't personally have to have an EMH-disproving strategy to see that it isn't true. [1] http://www.investopedia.com/terms/e/efficientmarkethypothesis.asp http://www.investopedia.com/terms/e/efficientmarkethypothesi... "For example, investors, such as Warren Buffett have consistently beaten the market over long periods of time, which by definition is impossible according to the EMH."
- dragonwriter 13y ago
  Investopedia is incorrect. It is not impossible under EMH for particular investors to consistently beat the market over long periods of time, it is just improbable. Given a large number of investors, however, improbable runs of good and bad luck are near certain to occur somewhere in the system. This is one of the reasons that it would be very difficult to disprove the EMH even if it were false -- there is no set of outcomes that is strictly inconsistent with the EMH.
  - clarky07 13y ago
    "Long period of time" and "50 years" aren't really the same thing in my book. You can get lucky for awhile. At some point it stops being luck. I'm not sure where that line is, but I am confident though that Buffett has crossed it. I'd be willing to bet you'd have a hard time finding anybody credible that would say what Buffett has done is just luck, which is exactly what you are claiming. Once we accept that he isn't just a lucky guy, EMH is disproven.
    - dragonwriter 13y ago
      > You can get lucky for awhile. At some point it stops being luck. No, it doesn't. There is no length of a run that cannot be luck. If you have a quantifiable expected distribution of results, you can say how improbable it is that you would see a run of a particular size in a given sized universe of data, but the fact that such a run exists in the data doesn't prove that its not luck. > I'd be willing to bet you'd have a hard time finding anybody credible that would say what Buffett has done is just luck, which is exactly what you are claiming. Er, no, its not what I'm claiming. In fact, I'm highly skeptical about EMH, to the point of having said that there is no particular reason (except for known-to-be-false assumptions) to assume that it should be true. On the other hand, I am saying that the claims that it is "disproven" by the existence of runs like Buffet's overstate the degree to which the EMH is even falsifiable.
dragonwriter 13y ago
> Where do you get the idea that the EMH assumes perfect information? The grounding of the EMH is a consequence of rational actor theory which assumes perfect information. It could be true without the rational actor theory more generally or perfect information in particular being true, but there is no reason to expect it to be true except the assumption of those theoretical foundations in which it is grounded. Its difficult to falsify the EMH, since it doesn't actually rule out any outcomes, it just asserts that if market-beating outcomes occur, they are because of luck rather than strategy. As such, there is no result that is strictly inconsistent with the EMH. (Further difficulties arise since, if one rejects the EMH, but still assumes that market participants do efficiently apply the information that is available to them, any market-beating strategy would need to be kept secret to avoid being adopted generally in the market, and thus no longer be market-beating, so any test of EMH has to be able to distinguish between result of luck and results of covert strategy.)

reinhardt 13y ago

Most professional investors and fund managers do have an advantage using it over naive/amateur investors and yet they rarely beat the market, and when they do it almost never lasts more than a few years. "Use index funds unless your name is Warren Buffet" would be a better summary.

squirejons 13y ago
but is right now a good time to buy into an index fund? Or to buy any stock? Most things revert to the mean, and right now the market is substantially above mean, and that market level is based on other aspects of the world that are currently also out of mean.
- ZeroGravitas 13y ago
  Isn't the standard advice to not invest unless you can wait 10 years for the ups and down to average out?
  - john_b 13y ago
    That is common Buffett-style advice. But he also advises that price matters. Matters a lot, in fact.
    - judk 13y ago
      There are two sides to buffet style advice: 1. Buy bargains when assets are underpriced. 2. Hold those assets for many years. Also, Buffet buys substantial or controlling fractions of a company, so the other owners can't scrwwo him. If you can't do that, you can't replicate his large scale success.
      - infinite8s 13y ago
        Not only that - he's able to affect those long-term returns.
- 13y ago