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

Quote from darkhorse:

In addition to the good points brought up, I would like to add this question to the list:

What about the fact that there are very large players in the markets who have no vested interest in price discovery whatsoever?

Efficient markets theory not only assumes that all research is of unvarying quality (impossible and undefinable in the first place), it assumes that all players have an interest in valuing issues correctly- getting the price right.

Well, it seems fairly obvious there are plenty of large players who don't give a damn about valuing stocks correctly. Mutual funds aren't interested in finding the true value of the stocks they buy, they are interested in seeing them go up, especially near the end of the quarter or the fiscal year. Investment banks aren't interested in seeing their clients' issues valued correctly, they are interested in seeing them go through the roof. And there probably isn't a CEO alive who wouldn't be happy to see their stock 30% higher and would be happy to try and justify why it should be there.

When the big players (institutionals and mutual funds) have a strong financial incentive to play games with the little people's money (the public), and the public is either too dumb to know what's going on or happily approving of the scheme in the first place, the result is that rational price discovery is hardly even a major consideration in the first place.
More...

You are right that many don't care about the true value, but as I mentioned many many times here that is NOT necessary. Arbitrage will ensure it. That's what drives price discovery, not CEOs and the others you list.
 
Quote from Madison:



That is an excellent point - and you could add 'speculators' to that list as well. Volume attributable to day and swingtraders is largely based on the actions of other participants, with the composition of the security being secondary - I don't know the percentages, but I'd guess that a significant number of intraday swings are based only remotely on the enterprise value underlying the security.
More...

As I said, those assumptions are irrelevant. If a news comes out, EMH doesn't say the price will shift to the new level and just stay there. You can have very varying opinions and there can be a lot of volatility around the new mean level. But the new mean level should be very close to the new true value.
 
Quote from aphexcoil:



I would have to say the markets are more efficient as the ratio of what you know compared to what everyone else knows approaches one.

Was the market efficient for those select few who knew THC was going to come out with bad news? Obviously, from their perspective, it could be argued that the market was in a very inefficient position to their view of the market (which was substantially more than the average Joe).

The only clue that others had were two strong red candles with increasing volume, but a lot of people were:

a) Buying the dip (Oh look, THC is down! What a bargain)
b) Selling with the thought (Hmm, something is technically wrong here, volatility just spiked, volume is up and prices are falling)

There could be countless scenerios where group A is correct and group B is correct. However, group C (the insiders) are the only ones who know the entire story behind those two red candles before news hit.

Also, the market is EXTREMELY efficient to the new trader. As a trader gets more experienced, the market becomes less efficient.

Trying to call the market efficient or inefficient is like saying, "This painting is very depressing." Yes, to some the painting is depressing, but to others it may be happy. Likewise, people with more knowledge will be in a better position to exploit the inefficiency of the market. That inefficiency comes from knowledge.

We could say that perfect efficiency is 1. Perfect inefficiency is 0. Someone who is just randomly trading will meet perfect efficiency. Someone who is experienced, has inside knowledge or is in a position located outside the masses enjoys a number less than 1.0.

Trying to determine if markets are efficient or inefficient is pointless. The real truth is that the market is both, based on the reality of the observer.
More...

Dude! Finally a post by you I can agree on. Now that's smth that doesn't happen too often :D
 
Quote from daniel_m:



can we take ANYTHING you say seriously? you were lucky enough to live BEFORE it started going haywire? since you were born in 75 or 76 i find it kinda hard to believe... as by the time you were old enough to even begin to understand what was taking place it was all over..

i was living in socialist yugoslavia at the same time... things were pretty great as far as a kid was concerned... yet for the rest of the population.. wel...
More...

For some people, you dont' have to be very old to understand things around you. It might have taken you a bit longer, but why should it take me as long???
Yes, I was born in 76, but I did understand what was going on and what wasn't. As a further proof of it, you once mentioned that you disagree with you dad on it (and I agree). Well, your dad did live in that era and knows it better than you. My opinions happens to coincide with his, which is a further indication to you that yes, I wasn't just playing with toys growing up...
 
Quote from daniel_m:

i really couldn't give two shits what the ltcm boys were TYRING to do... the point is they FUCKED UP.. and that, my friend, is by FAR the most important point..

iq10? try 140 buddy.. and believe me, when it comes to making something of your life, or doing well as a trader, it doesn't mean shit...

and don't get so worked up.. what i said was hardly an insult to YOU (unless you have some stake in LTCM's reputation)...
More...

See, that's our difference right there. To you, they fucked up means they what they did was really wrong. Just as the collapse of the USSR is proof to you it was not viable. The truth is any thing can happen to anybody/any country. Some are not necessarily someone's fault and are totally force major. A good basketball player may be a super star than jump and break his neck and be permanently disabled. Well, maybe it was a bit his fault, maybe he was not as careful as he should have been. To you he fucked up and didn't know what he was doing. To me, I pity the poor fellow and think one should learn from his mistake and use that along with the strength and good points he exibited. Just b/c something that seemed to work got scewed up doesnt' mean it can't work at all or is bad inherently. If you blindly judge things in life that way, you will miss a lot of opportunities. Dude, you remind me of my wife. To her if I break a super cool wine glass, it is my fault no matter what happened, whether it was an accident or not. She just cares about what happened and not why and how. That may be a useful rule of thumb to make quick decisions in some cases, but doing it in all cases will result in many misjudgements.
 
OK, time for me to trade. So I pass the baton of defending EMH to... Heck, I'm the only one on that side... Well, enjoy ripping it apart folks. I'm sure you'll find the process very rewarding in theory. I hope the markets are as inefficient as you think and that you do make your money trading. My guess is that it will be a very bloody battle and not many will survive. Many of those who thought the market was blatantly inefficient will perish proving what was obvious to them. Too many to think that the market is really inefficient :D
See ya.
 
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.
 
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.

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.
 
Quote from aphexcoil:



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.
More...

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?
 
You must log in or register to reply here.
Back
Top