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> Public markets are rational Are they? If markets were rational and efficient, you wouldn't have stocks trading below their asset value. There is nothing rati

> Public markets are rational Are they? If markets were rational and efficient, you wouldn't have stocks trading below their asset value. There is nothing rational at all about having $1B on the books that you could acquire for the company in a fire sale, and then trading as though you only have $500M. This is the basis for how value investing works and how people like Ben Graham and one of his students you may have heard of (Warren Buffett) have made billions of dollars off of this assumption. Fred's a great private/venture investor, but he's not a credible source on macroeconomic theory.

jerf 11y ago
Given how blatently obvious this "irrationality" is, either a lot of people with enough money to do something about that are being really stupid and missing the huge blinking FREE MONEY sign even though it seems their primary purpose in life is to search for free money, or you're not fully accounting for all the costs involved in extracting the putatively free money, and in fact the market is trying to tell you it's not as easy as it looks.
- idlewords 11y ago
  This is just begging the question. "If the market weren't rational, all these highly rational rich people would take advantage of it, therefore the market must be rational."
  - jerf 11y ago
    Just because the market is "irrational" does not mean that your diagnosis of the irrationality is correct. It is not a binary thing. There's an infinity of ways to be irrational, and most of them are incomprehensible... not the sort of "oh my gosh I can't believe how stupid that is" sort of incomprehensible, either, but literally incomprehensible. The manner in which the market is being irrational, distributed across millions of actors, many of them greatly more informed than you or I, is all but certainly a rapidly-shifting irrationality, a bubbling froth that changes before you stand a chance of identifying it and taking advantage of it. Market irrationality probably does not look like a sign hanging out the door saying FREE MONEY, stable for months and years at a time, that mysteriously people are just too stupid to walk up and take. If people aren't claiming their free money, there's probably a reason you don't know about. (A lot of people desperately need the market to be "irrational" so they can justify putting central authorities over it. But it's really a crazy argument... "the market consisting of millions of entities with all sorts of differing needs and information moving at the speed of electronic data transfer is sometimes "irrational", even if we can't demonstrate that we've correctly identified the "irrationality" by simply profiting from it directly. So let's fix that by putting an entity in charge of it that has a vanishing fraction of the computational power, tiny fractions of a percent of the information, moves at the speed of Congressional deliberation, and has its own independent incentives that do not necessarily align with any participant in the market." The F1 racers are moving too fast, let's send that sloth out to catch them and make them slow down. Surely that will fix racing for everybody.)
notahacker 11y ago
Whilst I'm the last person to defend the efficient market hypothesis, it's perfectly possible that the stock price is more representative of the value likely to be realised from a fire sale of a firm's assets than the asset valuations on a firms books, which are at best representative of the value of the assets sold individually under no pressure and at worst are a work of pure fiction to fit a desired amortisation schedule.
paulpauper 11y ago
Yeah, that statement is pretty loaded, the subject of dozens pf PHD dissertations alone. I do think Fred is right, but it requires looking looking at the EMF in a slightly different way than most people understand it. The market is 99% efficient. 1% is what could give some traders who have real skill an edge, such as the Warren Buffets and like. Most people would agree the markets are mostly efficient in that the market react to news quickly, and that most people who try to beat the market using a 'system' (fundamental analysis, quantitative analysis, technical analysis, or other) fail to do so. But my interpretation of the EMH doesn't preclude the possibility that markets can occasionally exhibit inefficient behavior. It's just that the inefficiencies, when they arise, aren't big enough or occur consistently enough to allow the aggregate of firms to beat some 'rate' of return. This rate could be the risk free interest rate or the S&P 500 dividend yield, or some other benchmark. The EMH is predicated upon random-walk theory, in which theoretically any 'walk' is possible, including even a perfectly strait line for a near-infinite duration of time.
jcdavis 11y ago
P/B is an extremely simplistic measurement that must be used with caution. Many financial companies trade with P/Bs <1.
davidkatz 11y ago
Actually that can be entirely rational. When shareholders believe that management will run said assets into the ground, they value a company under book (asset) value. If I have two hundred dollars in my pocket and without you knowing anything else, you might assess my value at two hundred dollars. However, if I had a thousand this morning and I'm standing at a slot machine with no sign of giving up, you'd probably think my $200 are on the way out.

jerf 11y ago

Given how blatently obvious this "irrationality" is, either a lot of people with enough money to do something about that are being really stupid and missing the huge blinking FREE MONEY sign even though it seems their primary purpose in life is to search for free money, or you're not fully accounting for all the costs involved in extracting the putatively free money, and in fact the market is trying to tell you it's not as easy as it looks.

idlewords 11y ago
This is just begging the question. "If the market weren't rational, all these highly rational rich people would take advantage of it, therefore the market must be rational."
- jerf 11y ago
  Just because the market is "irrational" does not mean that your diagnosis of the irrationality is correct. It is not a binary thing. There's an infinity of ways to be irrational, and most of them are incomprehensible... not the sort of "oh my gosh I can't believe how stupid that is" sort of incomprehensible, either, but literally incomprehensible. The manner in which the market is being irrational, distributed across millions of actors, many of them greatly more informed than you or I, is all but certainly a rapidly-shifting irrationality, a bubbling froth that changes before you stand a chance of identifying it and taking advantage of it. Market irrationality probably does not look like a sign hanging out the door saying FREE MONEY, stable for months and years at a time, that mysteriously people are just too stupid to walk up and take. If people aren't claiming their free money, there's probably a reason you don't know about. (A lot of people desperately need the market to be "irrational" so they can justify putting central authorities over it. But it's really a crazy argument... "the market consisting of millions of entities with all sorts of differing needs and information moving at the speed of electronic data transfer is sometimes "irrational", even if we can't demonstrate that we've correctly identified the "irrationality" by simply profiting from it directly. So let's fix that by putting an entity in charge of it that has a vanishing fraction of the computational power, tiny fractions of a percent of the information, moves at the speed of Congressional deliberation, and has its own independent incentives that do not necessarily align with any participant in the market." The F1 racers are moving too fast, let's send that sloth out to catch them and make them slow down. Surely that will fix racing for everybody.)

notahacker 11y ago

Whilst I'm the last person to defend the efficient market hypothesis, it's perfectly possible that the stock price is more representative of the value likely to be realised from a fire sale of a firm's assets than the asset valuations on a firms books, which are at best representative of the value of the assets sold individually under no pressure and at worst are a work of pure fiction to fit a desired amortisation schedule.

paulpauper 11y ago

Yeah, that statement is pretty loaded, the subject of dozens pf PHD dissertations alone. I do think Fred is right, but it requires looking looking at the EMF in a slightly different way than most people understand it. The market is 99% efficient. 1% is what could give some traders who have real skill an edge, such as the Warren Buffets and like. Most people would agree the markets are mostly efficient in that the market react to news quickly, and that most people who try to beat the market using a 'system' (fundamental analysis, quantitative analysis, technical analysis, or other) fail to do so. But my interpretation of the EMH doesn't preclude the possibility that markets can occasionally exhibit inefficient behavior. It's just that the inefficiencies, when they arise, aren't big enough or occur consistently enough to allow the aggregate of firms to beat some 'rate' of return. This rate could be the risk free interest rate or the S&P 500 dividend yield, or some other benchmark. The EMH is predicated upon random-walk theory, in which theoretically any 'walk' is possible, including even a perfectly strait line for a near-infinite duration of time.

jcdavis 11y ago

P/B is an extremely simplistic measurement that must be used with caution. Many financial companies trade with P/Bs <1.

davidkatz 11y ago

Actually that can be entirely rational. When shareholders believe that management will run said assets into the ground, they value a company under book (asset) value. If I have two hundred dollars in my pocket and without you knowing anything else, you might assess my value at two hundred dollars. However, if I had a thousand this morning and I'm standing at a slot machine with no sign of giving up, you'd probably think my $200 are on the way out.