Efficient market theory; Total junk still being taught to people?
- Thread starter jbtrader23
- Start date
I wonder how much reg fd has to do with cutting down any efficiency that the market had? And I am coming at it from a point of outperformance of the indexes themselves.
For instance, Jim Cramer had a great run in the 90s running a hedge fund. Per his book, his firm would call analysis and companies to "confirm expectations." Which implies to me buy a boatload of merchandise, and unload when the news hits. REPEAT
Now to be sure, he is out of the loop, but still does some stock picking on his site. His calls have been terrible. All on the long side and just terrible. Still like his writing, but the calls are bad.
In the past the fundamentalist would crunch the numbers and buy, the insider buys with prior knowledge, the chartist notes the accumulation, the news hits, the stock moves. Now that the big dollar guys don't have the same level of information, have the markets become even less efficient?
I suspect over the next X years the markets will continue to be very erratic, and professional funds will do far worse compared to the indexes than in the past.
For instance, Jim Cramer had a great run in the 90s running a hedge fund. Per his book, his firm would call analysis and companies to "confirm expectations." Which implies to me buy a boatload of merchandise, and unload when the news hits. REPEAT
Now to be sure, he is out of the loop, but still does some stock picking on his site. His calls have been terrible. All on the long side and just terrible. Still like his writing, but the calls are bad.
In the past the fundamentalist would crunch the numbers and buy, the insider buys with prior knowledge, the chartist notes the accumulation, the news hits, the stock moves. Now that the big dollar guys don't have the same level of information, have the markets become even less efficient?
I suspect over the next X years the markets will continue to be very erratic, and professional funds will do far worse compared to the indexes than in the past.
Actually there are some people trading the FAILURE of well known trading patterns e.g. head and shoulders. This contradicts the self-fulfilling prophecy theory. But it's important to see what the crowd is doing. The crowd is right except at turning points. No self-fulfilling prophecy at turning points.
Well, I just finished TEACHING an investments course to finance majors like you and while I did not cram the Efficient Markets Hypothesis down their throat (heck, I even showed them the actual tools from TradeStation that TA guys use and covered a lot more of TA than is in the book), I don't think giving the average Joe and Jane an idea that markets on average are efficent is a bad thing. The idea of efficiency is NOT that everyone interprets the information in the same way, as erroneously suggested in the first post. The idea is that YOU CAN'T MAKE MONEY USING THE INFO THAT OTHERS HAVE, b/c chances are, there are much smarter people using it and if you could, they already did. Now, you can disagree with me on this one as much as you want, but having taught hundreds of Joes and Janes here, I would claim that hardly one of them falls into the category of those who might hypothetically use old info to make money.
EMH is crap? Oh give me a break. Look at all the whining on this board about how freaking hard it is to make money using TA. I would claim that most of those who ARE making money out of the members of this board either are extemely lucky (most likely) or indeed do have the IQ's that are needed. For the average student about to get his BS in finance, it's best to think that markets are efficient and keep his tail where it belongs as opposed to venturing out with the sharks and seeing his funds vanish.
You can call me biased if you want. I trade, thank God, quite successfully using a mixure of fundamental/technical analysis. But having said that, I still believe that markets are darn efficient. Had they not been, you'd be driving a Lumborginni
PS As one of my professors used to say "I worship at the church of market efficiency, but I sit at the very back..."
I think you either unwittingly or not are making a mistake in your statements. Reg.FD enhances efficiency by making sure there's less informed trading and people have a more fair access to info. The fact that professional funds do worse is only a testament to improved efficiency - b/c if markets are perfectly efficient, they could only beat the index by chance and would not do so on average, even before all the costs.
I think you didn't mean what you said
HAHAHA, LOL. Arrogance is not such a good thing, my friend. Those professors might not be up to date on all the developments in the fields of microstructure and TA (that is more a function of how good your school was), but trust me, they did invest a lot more time in studying the financial markets than you, and probably now what they are saying. I think you are implying that things like the constant growth model and the CAPM and the like are not useful. Maybe. But I don't think the alternatives you can offer make as much sense or can do a better job of consistently explaning the time-series and cross-sectional variation in stock returns.
As a final point, the ultimate "School of Market Efficiency" in this country is the University of Chicago. The ultimate proponent of it is Eugene Fama. Read some of his articles and see if you can offer a counter argument as strong.
PS as for the ignorant profs, come on dude, ask your class mates to how they would solve 100=234^X for the exponent using the log function and see how many would know the answer.
Some students (SENIORS!!!) think that square root of a+b is same as square root A plus square root B. Ignorant? Give me a break.
Validator,
Maybe both are right if that is possible. Loosely, I interpret EMH as (All available information((public and non-public)) being factored in to the price) and (the fact about most people can't use the information to beat the market).
For an example, QCOM just came out with earnings, better than expected. Last week there was the information about China trying to circumvent the liscencing arrangements for CDMA, or some such.
Now in the past, lets say Peter Lynch could have called the CFO and said "What's the deal?" Run his numbers, decided to buy the sell-off. But now in theory at least he can't do that.
So now the earnings come out and everyone has to decide at once (in theory) of what the correct value is.
Hence, more volatility, and less efficiency? Or are we talking apples and raisins?
Maybe both are right if that is possible. Loosely, I interpret EMH as (All available information((public and non-public)) being factored in to the price) and (the fact about most people can't use the information to beat the market).
For an example, QCOM just came out with earnings, better than expected. Last week there was the information about China trying to circumvent the liscencing arrangements for CDMA, or some such.
Now in the past, lets say Peter Lynch could have called the CFO and said "What's the deal?" Run his numbers, decided to buy the sell-off. But now in theory at least he can't do that.
So now the earnings come out and everyone has to decide at once (in theory) of what the correct value is.
Hence, more volatility, and less efficiency? Or are we talking apples and raisins?