4 ms·

Could you explain that second sentence a bit? I don't see how EMH being wrong implies that there's a strategy that beats the market. Let's say I think the EMH

by jbooth 13y ago

Could you explain that second sentence a bit? I don't see how EMH being wrong implies that there's a strategy that beats the market. Let's say I think the EMH is false, because, I dunno, I think people are irrational and emotional a lot of the time. It doesn't necessarily follow from that that I can beat the market by betting on people being irrational -- irrationality is really hard to predict, people could be irrational in many different directions.

yummyfajitas 13y ago
The EMH does not assert that people are rational. The EMH can be true even if every single person is irrational. http://en.wikipedia.org/wiki/Efficient-market_hypothesis http://en.wikipedia.org/wiki/Efficient-market_hypothesis How it implies there is a strategy to beat the market? Simple. Suppose you have knowledge (e.g., the next iPhone causes cancer) that the market has not incorporated. You can use that knowledge to trade since the people not using that information will give you favorable prices (in this case by shorting AAPL). Ultimately the problem with the EMH is the name. It's a fairly technical result that most people don't understand. People hear "Efficient Markets Hypothesis", they think it means "markets are magic fluffy bunnies that protect puppies from twisted stomachs and cure inequality", and argue against that.
- natural219 13y ago
  I'm still confused as to what your ultimate point is. Are you saying that nobody has ever made a bet like that before? I made 4x on TSLA earlier this year. I don't claim to have refuted the Efficient Market Hypothesis, I just saw a situation where most institutional investors had a wrong idea and I thought I could beat them. You seem to think that "market is sometimes wrong" somehow implies "you can always beat the market". That's not what we're saying. We are saying the market is clearly wrong often, so there exists some space for speculation arbitrage.
  - onebaddude 13y ago
    >"I made 4x on TSLA earlier this year" This implies that you made the round trip (ie bought and sold). If not, you've made exactly zero. So what was it that you saw, that institutional investors missed, that caused you to buy? What changed with the company's prospects in the past year that caused you to sell recently, and book your profit? Otherwise, you haven't "beaten" anyone.
    - natural219 13y ago
      Yes, I bought TSLA options when the stock was at $30 and sold them for a 4x return. It grew to many more times that, so I could have gotten more. "So what was it that you saw, that institutional investors missed, that caused you to buy?" At the time, there was a large distrust in the financial community that Tesla had the production capacity to meet its Q42012 sales goals (I believe it was between 3-5k Model Ss, they ended up selling 6k). It further followed that Tesla failing to meet its sales goals would undermine investor confidence in the company and squeeze TSLA's operating capital in the coming 1-2 year period. I disagreed with both hypotheses. The funny thing is, my strategy wasn't even smart. I know nothing about Tesla's production capabilities, what the bottlenecks were, or if they were likely to succeed. I assume that information had been priced into the market. Essentially, I bet on Elon Musk. I don't know what the bottlenecks were, I saw the Model S and shit my pants and said "This is awesome" and then I bought options. I really only have one point to make, which is that if you think TSLA going from $30 to $180 / share in less than a year is a completely random, unguessable market move, well, I don't know what to tell you. It's not to me. tldr; http://ycombinator.com/munger.html http://ycombinator.com/munger.html (just kidding, that one is longer)
      - evanmoran 13y ago
        This tldr is an extremely interesting essay on wealth, business, and stocks. It is ridiculously long, but takes you amazing places. Definitely worth reading!
      - dennisgorelik 13y ago
        Can we discuss it here? https://news.ycombinator.com/item?id=6837713 https://news.ycombinator.com/item?id=6837713
- john_b 13y ago
  > "Suppose you have knowledge (e.g., the next iPhone causes cancer) that the market has not incorporated." The EMH is based on the assumption that prices perfectly reflect the available information on the underlying. This is mentioned in the second paragraph of the Wikipedia article you quoted. You can't invoke the EMH as a model of the market and then violate one of its core assumptions when defending it.
  - yummyfajitas 13y ago
    Please try to follow the logic rather than just the talking points. I'm showing jbooth how (not EMH) => exists awesome trading strategy.

by jbooth 13y ago

yummyfajitas 13y ago

The EMH does not assert that people are rational. The EMH can be true even if every single person is irrational. http://en.wikipedia.org/wiki/Efficient-market_hypothesis http://en.wikipedia.org/wiki/Efficient-market_hypothesis How it implies there is a strategy to beat the market? Simple. Suppose you have knowledge (e.g., the next iPhone causes cancer) that the market has not incorporated. You can use that knowledge to trade since the people not using that information will give you favorable prices (in this case by shorting AAPL). Ultimately the problem with the EMH is the name. It's a fairly technical result that most people don't understand. People hear "Efficient Markets Hypothesis", they think it means "markets are magic fluffy bunnies that protect puppies from twisted stomachs and cure inequality", and argue against that.

natural219 13y ago
I'm still confused as to what your ultimate point is. Are you saying that nobody has ever made a bet like that before? I made 4x on TSLA earlier this year. I don't claim to have refuted the Efficient Market Hypothesis, I just saw a situation where most institutional investors had a wrong idea and I thought I could beat them. You seem to think that "market is sometimes wrong" somehow implies "you can always beat the market". That's not what we're saying. We are saying the market is clearly wrong often, so there exists some space for speculation arbitrage.
- onebaddude 13y ago
  >"I made 4x on TSLA earlier this year" This implies that you made the round trip (ie bought and sold). If not, you've made exactly zero. So what was it that you saw, that institutional investors missed, that caused you to buy? What changed with the company's prospects in the past year that caused you to sell recently, and book your profit? Otherwise, you haven't "beaten" anyone.
  - natural219 13y ago
    Yes, I bought TSLA options when the stock was at $30 and sold them for a 4x return. It grew to many more times that, so I could have gotten more. "So what was it that you saw, that institutional investors missed, that caused you to buy?" At the time, there was a large distrust in the financial community that Tesla had the production capacity to meet its Q42012 sales goals (I believe it was between 3-5k Model Ss, they ended up selling 6k). It further followed that Tesla failing to meet its sales goals would undermine investor confidence in the company and squeeze TSLA's operating capital in the coming 1-2 year period. I disagreed with both hypotheses. The funny thing is, my strategy wasn't even smart. I know nothing about Tesla's production capabilities, what the bottlenecks were, or if they were likely to succeed. I assume that information had been priced into the market. Essentially, I bet on Elon Musk. I don't know what the bottlenecks were, I saw the Model S and shit my pants and said "This is awesome" and then I bought options. I really only have one point to make, which is that if you think TSLA going from $30 to $180 / share in less than a year is a completely random, unguessable market move, well, I don't know what to tell you. It's not to me. tldr; http://ycombinator.com/munger.html http://ycombinator.com/munger.html (just kidding, that one is longer)
    - evanmoran 13y ago
      This tldr is an extremely interesting essay on wealth, business, and stocks. It is ridiculously long, but takes you amazing places. Definitely worth reading!
    - dennisgorelik 13y ago
      Can we discuss it here? https://news.ycombinator.com/item?id=6837713 https://news.ycombinator.com/item?id=6837713
john_b 13y ago
> "Suppose you have knowledge (e.g., the next iPhone causes cancer) that the market has not incorporated." The EMH is based on the assumption that prices perfectly reflect the available information on the underlying. This is mentioned in the second paragraph of the Wikipedia article you quoted. You can't invoke the EMH as a model of the market and then violate one of its core assumptions when defending it.
- yummyfajitas 13y ago
  Please try to follow the logic rather than just the talking points. I'm showing jbooth how (not EMH) => exists awesome trading strategy.