Efficient market theory; Total junk still being taught to people?

[vladiator]

Quote from darkhorse:

Who ever said inefficient = easy?

Your assumptions highlight the point that intelligence and common sense have no more correlation than money and taste...

To sum up, you're a socialist embracing the height of capitalism, and a trader who supports a theory that concludes trading is pointless...

Maybe if it doesn't work out you can become a jewish muslim pig farmer.

Maybe you should trying thinking before typing, just for a change.
I was speaking about generalities and if you are intelligent enough, it should not be hard to understand where I was coming from. I did not say it was easy either. I was I said was that for a self educated college drop out or someone with a similar background, it is best to flip burgers rather than trying to show the world and himself how markets are inefficient. There are much more sophisticated traders barely able to keep their heads above water doing that.
I was not embracing the height of capitalism, read carefully. there is also nothing wrong in being a trader, even a successful one, and not believe in markets being very efficient. I reconcile those two seemingly conflicting ideas by saying that you have to REALLY know what you are doing inside out to try and find/trade on arb opportunities. I have invested many years and have hundreds of CDs of intraday data I tested the strategy one, across different periods etc etc - out of sample. I can't help but laugh when someone on this board finds some strategy by looking at the data. That's not TA, that's BS. You can find anything you want that way, but it will not mean anything for the future. Unless you have a sound model (or call it whatever else if model is too academic for you) that predicts something, and then go test it in the data. If it holds up, well, you MAY have an arb niche. Trading on it will take care of it. That is EXACTLY what I'm doing. I don't see how it conflicts with believing that markets are efficient.

 

[daniel_m]

Quote from vladiator:



See, that's our difference right there. To you, they fucked up means they what they did was really wrong. [re LTCM]

the point is, i don't care about being "right" or "wrong" when it comes to trading. i just care about making money or not.

so if LTCM were indeed "right" about the market on their call, hooray for them. but what determines trading performance is the bottom line - did they make money? the answer is obviously no.

why didn't they? well, from what i know of the story they simply bet too large and got blown out. why not simply admit that the LTCM brains trust are guilty of committing this cardinal trading sin? that the market might have later proved them "right" is completely inconsequential.

here's an example from my own trading. i go to buy 1000 klac at 37. price goes to 37.20 and i go to sell and realise i had only gotten filled on 50 shares. i was "right", no doubt. did i make money? not really. so why would i care that i made a "right" call? answer: i don't. i couldn't give a shit.

 

[vladiator]

Quote from aphexcoil:

Here is the flaw as I see it:

Schools teach this premise -- "The markets are efficient."

First, this is assuming that all participants of the market belond to the same set. This set includes equal acess to information, equal trading platforms and speed, equal pattern recognition, etc.

What schools teach is correct man. Can many freaking times do I have to repeat this???? Your professor probably drew a price chart for you and said, if the price becomes too low, people start buying and drive it up, the opposite happens if it's too high. the process of arbitrage insures it pretty much stays transactions costs away from the true value. The assumptions you are mentioning are NOT necessary. As long as there are enough traders with good enough access to info, the fact that others don't have it is irrelevant. Same goes for other things. And lose that "pattern recognition" stuff man That is so BS. The "price patterns out there" are a TA myth .

Quote from aphexcoil:
However, this is not the case. Therefore, the original premise is flawed and must be adjusted to, "The markets are efficient to the majority of traders."

This, in my opinion, has a fair shot of being true. There is a minority of traders that will always be able to exploit the market in some fashion and therefore make them to appear inefficient. [/B]

You are absolutely correct! Just like when someone mentioned in the post ealier that the earth is really round to which I replied that only VERY few people with see it that way (astronauts ), in this case, there are indeed very very few traders to whom the markets will be inefficient. But you better be REALLY good before you believe you are in that group enough to put your money at stake

 

[darkhorse]

Quote from vladiator:


Unless you have a sound model (or call it whatever else if model is too academic for you) that predicts something, and then go test it in the data. If it holds up, well, you MAY have an arb niche. Trading on it will take care of it. That is EXACTLY what I'm doing. I don't see how it conflicts with believing that markets are efficient.

This is the problem Vladiator: you promote efficient market theory in word but not in deed. Your weaker version of efficient market basically says "trading is hard." To which the response has to be, no duh. Trading is obviously not a cakewalk, no one ever said it was. Saying that a trader has to work hard to craft and maintain a definable edge, is also saying that markets are inefficient ENOUGH to be exploited, and thus the theory does not apply.

Whether markets are totally efficient or not is basically a binary proposition because the theory as popularly held places dogmatic emphasis on the word 'totally'. Either markets are 100% efficient, or they are not. If a market is 99% efficient and only 1% inefficient, it still does not fit the conclusion that the academic theory espouses. See the clipping below and note the reference in bold. If it is possible for a trader to have an edge, then efficient market theory is wrong. What you promote is not efficient market theory. What you promote is that trading is hard, something pretty much everyone already knew.

Obviously markets are efficient to a certain degree, just as they are rational to a certain degree, which varies over time. But being rational and efficient 99% of the time is not the same as being rational and efficient 100% of the time. That 1% window is enough for skillful traders to exploit for profit.



=====================
EFFICIENT MARKET THEORY

Overview

The Efficient Market Theory says that security prices correctly and almost immediately reflect all information and expectations. It says that you cannot consistently outperform the stock market due to the random nature in which information arrives and the fact that prices react and adjust almost immediately to reflect the latest information. Therefore, it assumes that at any given time, the market correctly prices all securities. The result, or so the Theory advocates, is that securities cannot be overpriced or underpriced for a long enough period of time to profit therefrom.

The Theory holds that since prices reflect all available information, and since information arrives in a random fashion, there is little to be gained by any type of analysis, whether fundamental or technical. It assumes that every piece of information has been collected and processed by thousands of investors and this information (both old and new) is correctly reflected in the price. Returns cannot be increased by studying historical data, either fundamental or technical, since past data will have no effect on future prices.

The problem with both of these theories is that many investors base their expectations on past prices (whether using technical indicators, a strong track record, an oversold condition, industry trends, etc). And since investors expectations control prices, it seems obvious that past prices do have a significant influence on future prices.
=====================

 

[vladiator]

Quote from daniel_m:



does it?

i guess by "exploit the market" you mean "making money" right? the thing is, the market doesn't appear "inefficient" to me at all. i have no idea what it means for the market to be inefficient. i wouldn't know the difference between what an "efficient" market looks like and what an "inefficient" market looks like if it slapped me in the head...

do u mean that i see some stock priced at X and think "oh no no no, that sucker should be priced at X+2, that one's definitely a buy"? cos i definitely don't do that..

also, i'm still waiting for someone to explain to me what it means to "beat the market". does it mean taking any money at all from the market? what is the benchmark i must compare my performance to, in order to know if i've beaten the market?

Dude, you have been making some strong judgements here and now admit and show that you have no idea what market efficiency even is. That's the problem with this board, too many people putting in their say when they don't have much to say but some insult or arrogant remark. To beat the market means to earn "excess returns" on a risk adjusted basis. That mean you have not just make more than you would if you just invested in an index fund and stuck with it, but you have to make more by a sufficient amount to justify the probably much higher risk you took. Just b/c someone puts 100% in one stock and is correct in his prediction and the stock doubles, doens't necessarily mean he beat the market b/c he got 100% and the market earned 10% during the same time. Given how much risk that trader took by being so exposed/underdiversified etc that was probably not enough to provide an excess risk adjusted return. Are you familiar with the Sharp Ratio? It's one of the measures of your risk adjusted return.

 

[daniel_m]

Quote from vladiator:



I was I said was that for a self educated college drop out or someone with a similar background, it is best to flip burgers rather than trying to show the world and himself how markets are inefficient. There are much more sophisticated traders barely able to keep their heads above water doing that.

LOL.

your somewhat admirable, but definitely misguided, superiority complex becomes clearer with every post.

i am that college drop out. do u really think i'm out to "show the world" ANYTHING, let alone that markets are "inefficient"? lol. i really couldn't care less.

it's a common pattern i've noticed that the more highly educated someone is the less he is willing to accept anything not taught to him by his esteemed professors as constituting "knowledge" or "skill" (and thus deride its value). vlad, i'd say you are a prime example of this unfortunate tendency.

 

[daniel_m]

slow down vlad, because it is most certainly YOU who is continually jumping the gun with unfounded assumptions..

an index fund huh? ok, just making sure no one's changed the rules since the last time i read Malkiel.

are you sure that such and index fund is truly representative of the "market"? i wouldn't be so quick to think so. and just why earning a return in excess of an arbitrarily constructe index is considered such an accomplishment is beyond me...

you nonchalantly dismiss the "small trader" not only beating, but completely and utterly trouncing these bullshit index returns as being of no consequance. yet, i would say, that totally destroys the idea that it is "impossible" to do it, shit, it's not even "very hard"...

sharpe ratio. pffft. if that's the level of "sophistication" you bring to the table, forget it, it's not worth talking about.

 

[buzzy2]

Quote from vladiator:


The prof at the community college you attended my have been the way you described. You get what you pay for.
The professors at my school are cheif witnesses at major US wide litigations, have REAL consulting jobs etc etc and I know of a few that drive very nice jaguars
My head also hurts when I listen to BS, that's why I will not dignify your crappy anti-academic/anti-econ/finance remarks with any further response.

vladi: for your enlightment i have a PhD from a top ten university, and i have sat in classes taught by nobel prizes. as far as i know the only finance professor driving a jaguar was robert merton, but i guess he had to sell it after ltcm.
so you're giving the "Myron Scholes" treatment to the wrong person. I have several friends, PhDs too saw through all the bullshit, they also are working in "industry". We all think academics are just a bunch of pathetic self-important losers scamming, using and abusing naive starry-eyed young people. If you think your professors are rich, well you must be really poor, because you haven't seen real wealth. My condolences.

 

[vladiator]

Quote from darkhorse:






This is the problem Vladiator: you promote efficient market theory in word but not in deed. Your weaker version of efficient market basically says "trading is hard." To which the response has to be, no duh. Trading is obviously not a cakewalk, no one ever said it was. Saying that a trader has to work hard to craft and maintain a definable edge, is also saying that markets are inefficient ENOUGH to be exploited, and thus the theory does not apply.

Whether markets are totally efficient or not is basically a binary proposition because the theory as popularly held places dogmatic emphasis on the word 'totally'. Either markets are 100% efficient, or they are not. If a market is 99% efficient and only 1% inefficient, it still does not fit the conclusion that the academic theory espouses. See the clipping below and note the reference in bold. If it is possible for a trader to have an edge, then efficient market theory is wrong. What you promote is not efficient market theory. What you promote is that trading is hard, something pretty much everyone already knew.

Obviously markets are efficient to a certain degree, just as they are rational to a certain degree, which varies over time. But being rational and efficient 99% of the time is not the same as being rational and efficient 100% of the time. That 1% window is enough for skillful traders to exploit for profit.



=====================
EFFICIENT MARKET THEORY

Overview

The Efficient Market Theory says that security prices correctly and almost immediately reflect all information and expectations. It says that you cannot consistently outperform the stock market due to the random nature in which information arrives and the fact that prices react and adjust almost immediately to reflect the latest information. Therefore, it assumes that at any given time, the market correctly prices all securities. The result, or so the Theory advocates, is that securities cannot be overpriced or underpriced for a long enough period of time to profit therefrom.

The Theory holds that since prices reflect all available information, and since information arrives in a random fashion, there is little to be gained by any type of analysis, whether fundamental or technical. It assumes that every piece of information has been collected and processed by thousands of investors and this information (both old and new) is correctly reflected in the price. Returns cannot be increased by studying historical data, either fundamental or technical, since past data will have no effect on future prices.

The problem with both of these theories is that many investors base their expectations on past prices (whether using technical indicators, a strong track record, an oversold condition, industry trends, etc). And since investors expectations control prices, it seems obvious that past prices do have a significant influence on future prices.
=====================

Everything in that clip makes perfect sense expect for the added thoughts of someone in the last paragraph So fW@#$ what that some moron investors base their expectations on past prices? Trading of such investors will indeed make the price deviate from the true value (which should only be based on the future predicted info, not on the past), but it won't be for long b/c the smarter ones will arb the deviation away.
I'm not plugging a "milder version" of efficiency, the version I'm talking about is that in Grossman and Stiglitz and if you attend a moderately decent school, that's what you will be taught after the pure theory approach is discussed. That theory addresses the fact that if there was no point in analyzing stock prices to predict anything, noone would be doing it and prices would be all over the place. Thus, some do do it and earn a return commensurate with the information/transactions costs etc and the risks involved.
I'm not just saying "trading is hard", I've been tempted to say this for a while but refrained from it not to cause and avalanche of frustrated hopefuls. It's not just that trading is hard, it's that unless you are a major player with the best tools available (or have the same training as one), it's not smth you should be doing (unless you are just indulging your gambling spirit with a game of slightly better odds). I know it's not such a popular concept on this board, but hey, pluralism of opinions, right? I pity the people who start trading with no adequate experience/tools and expect to make any money when even the best of the best of the professionals tend to suck most of the time.

 

[daniel_m]

Quote from vladiator:



Everything in that clip makes perfect sense expect for the added thoughts of someone in the last paragraph So fW@#$ what that some moron investors base their expectations on past prices? Trading of such investors will indeed make the price deviate from the true value (which should only be based on the future predicted info, not on the past), but it won't be for long b/c the smarter ones will arb the deviation away.

in fact, why don't we just completely ignore the expectations of the market participants altogether, regardless of what such expecations are based on?