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

[trdrmac]

Katarina,

Say it isn't so, I feel so used.

Aphie = Validatior

Oh, I have to go rinse my eyes out.


Darkhorse,

I am tending to lean on the less efficient side, mainly as you say due to the volatility. Now maybe it is due to the 3 year tail spin that we have been in. Similar to the pricing of any company.com that said so in 99. So in some sense it is hard to say if it is all due to FD, which I doubt.

It also seems like it may drag out the bear or drug out, depending on where we are. For instance, I had dinner with some friends tonight, and one says I am getting a ton of RFPs. Now if he was public, and I was a hitter, that would be enough to start accumulation. But in absence of that only the true fundies get it right, which slows the momentum crowd, and the technicians.

All in all though you still have to get it right which is the hard part efficient or not.

 

[nitro]

Quote from jbtrader23:

Technical analysis is seen somewhere between tarot cards and voodoo according to the academic "theorists".

I just can't believe this stuff is still taught in schools. The fundamental flaw as I see it in their arguement is assuming that all market participants will view the same information the same way. I can't think of anything more bogus than that. All you have to do is watch bubblevision to get a sense of how people will view the same information differently. To one person, if Intel makes their numbers, it's a buy. To another, even if they make their numbers, top line growth could be slow, or margins are declining and they'll go short. The same thing with technical indicators. The VIX is one of the best and mostly widely used sentiment gauges around. But not everyone buying stocks is even aware of it. Not the novice. Most mom and pop investors can't even read a balance sheet.

I don't know how the theorists can explain the consistent success of some day traders. Or the success of Warren Buffet. Reading about him in Fortune magazine today, I was struck by the comment about,..."he must drive the efficient market theorists crazy". By consistenly beating the market for 3 decades, he must be the luckiest man on earth then.

EMH, like much of any part of a young science, is an approximation to the truth.

I take VERY seriously all that is published [and accessible to me] in academic journals. Has it made me a better trader? Honestly, YES!

Is the market efficient - NO WAY! Does that devalue EMH - not in my eyes...

nitro

 

[Sucker]

Quote from Te':

I love you braniac types with your ivy degrees!
She and I will eat you up for breakfast, lunch and dinner...

EAT, EAT, EAT, EAT

Being a confessed sucker I feel more comfortable about it.

BTW, interesting signature (Tao) Te' (Ching).

Sucker

 

[jem]

The following is part of a post by Trading4Alpha-- he was just explaining this thought not necessarily endorsing it.

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Anything Can Happen = Perverse: Some would say that the markets are worse than random, they are perverse. They try to generate maximum pain in the participants of the market. The paranoid would say that the market is "out to get" traders, and other would sagely nod in the affirmative. The curse of buying exactly at the intraday high and selling exactly at the intraday low are a good examples of this perverseness. Another example is when both sides of a hedge go the wrong way (and a "zero risk" overleveraged system becomes a "double risk" blow-up). Although standard randomness seems pretty bad, its not arbitrary. Even heavy tailed randomness follows a stable rule. But what if the roulette ball always fell on the slot with the lowest bet -- that the behavior of the market was inversely related to our actions in some way! Now that's a very nasty version of "anything at all."

Implication for System's Traders: Its hard to cope with perverseness because it Implies playing a much deeper game in the markets. It implies understand the flow of moves and countermoves of capital into and out of the markets. It implies looking a models like self-organized criticality, chaos, fractals, and all that. Traders need to be aware that their actions (and the parallel actions by others just like them) combine to move the markets. Ultimately, this type of "anything can happen" implies learning the shifting rhythms of the market -- synchronizing with or adapting to the mob-induced patterns in the price structure. This is what drives some traders, like dottom, to use Neural Networks and other traders, like rtharp, to field a portfolio of systems.



So, Which Definition of "Anything At All" Do I Believe In?

At some level, all 4 definitions have some relevance. But type 3 and type 4 "anything can happen" are the hardest and most dangerous types of capriciousness. Type 3 creates outrageous outcomes with its heavy-tails. Worse is the underappreciated fact that "heavy tails" also means "compact center" -- that middle-of-the-road outcomes are too common in heavy-tailed distributions (relative to the average long-term volatility). This creates a false-sense of low volatility most of the time while throwing in the occasional rare, but extreme movement (some might say that heavy tails are perverse).

Those who ignore type 3 and 4 "anything can happen" do so at their own peril. For example, I'd bet that LTCM had an entire department of "risk managers" with MBAs and PhDs all using definitions 1 and 2 of "anything can happen" -- and look what it got them. Another, more recent example, that was discussed on ET is THC. THC was a strong company with a strong stock, modest P/E, great EPS growth, and a beta of 0.21 until the last week in October. I'm sure that many considered it a "safe" investment. A minor regulatory change and a extremely scary rumor lead to a landslide of sales. Even some of the savvy "cut your losses short" daytrading crowd got caught by the downdraft -- unable to exit as the bid plummeted and trading was halted. The dice definitely came up "-10" on THC. (BTW, anyone who trades futures would do well to study the rules for limit bid/limit offer conditions for their contracts -- some scary scenarios contained in that fine print).

For me, the implications of all this is:

conservative money management based on the presumption of heavy-tails

personal psychological efforts to embrace "reasonable" drawdowns

use adaptive or switched trading systems to cope with different or shifting market rhythms

create deeper theory to underpin any mechanical trading system (not just statistical pattern finding)



If "anything can happen" to you, I hope its unbounded profits,
Traden4Alpha


__________________
Just my 2 cents (actually, better make that a 2 cent profit target and 1 cent stoploss! )"

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The above statement by Traden4Alpha is what I was alluding too when I stated the markets are tougher than random. I believe this explains why so many people have worse than random outcomes. It is way to simplistic to simply explain it all away with the overused "transaction costs".

Now since I have been trading almost everyday since 1996 and have taken an average of probably 50 trades a day, I could explain why I believe the markets are tougher than random---- I will let the market explain it to you in the socratic style I most enjoy.

Vlad I enjoy your posts here and have nothing against you. I just think professors are a very mixed bunch and most are nuts. By the way while I have not gone to the best schools, I do have a J.D. and I have taught business law at the college level when my boss at the time had a heart attack and I taught his class for the semester.

 

[DT-waw]

Quote from jem:
The above statement by Treden4Alpha is what I was alluding too when I state the markets are tougher than random. I believe this explains why so many people have worse than random outcomes. It was way to simplistic to simply explain it all away with transaction costs.

Now, T4A in EEE thread explains why you can't win in a random market. How can the markets be even tougher?

Most people have worse than random outcomes due to psychological issues and poor risk management, IMO.

 

[jem]

DT - I am sure that is a large part of it. By the way I edited the post so your post of my post is slightly off.

 

[darkhorse]

Quote from DT-waw:



Now, T4A in EEE thread explains why you can't win in a random market. How can the markets be even tougher?

because you have to pay to play

like paddling upstream in the river of life- if you're not moving forward then you're probably moving backward, and it takes effort just to stay in the same place

but aside from that, the standard psychological profile puts a higher premium on avoidance of pain- there are documented tendencies to take bigger risks on the downside than on the upside because pain avoidance dominates in both scenarios. if something is going against you, pain avoidance comes in the form of hoping it will come back. if something is going in your direction, pain avoidance comes in the fear of missing out on what's in front of your face. weakness backfires in both cases.

i think it's a big picture function of the general weakness of the human spirit. the easy thing has a disproportionately higher probability of being the wrong thing, especially in areas of competitive endeavor, and most people simply don't have the conviction or the strength to do the hard thing when the rubber meets the road.

wisdom without courage of conviction is useless.
most folks don't have any real courage to speak of.

the universe was designed in such a way to ultimately reward decisions of high moral character and punish decisions of low moral character, regardless of any and all intellectual advances and structural stopgaps between here and there.

 

[vladiator]

Quote from aphexcoil:

"Beat the Market"

Whoever takes the time to learn every aspect of the market is going to be superior than the next guy. Whoever finds a way to "logically connect" all opportunities as they present themselves is going to do better than the average guy.

Efficiency is BS. Name one thing that you know of that is efficient? Nothing is perfectly efficient -- and if the market isn't perfectly efficient (and I mean PERFECTLY), then you can exploit some aspect of it.

If you don't want to bother finding out how, then get a job as a professor or teacher and teach some BS theory about the market and go to bed at night happy that you convinced yourself that a ton of money isn't available for the taking.

However, if you are SURE that the market is not totally efficient, then go out and figure out where it is rigged and break the damn code and suck the money out. How many trillions of dollars flows through the "market" each day? Learn how to dip your hand in it. I am, and it will pay off.

Markets aren't efficient. If you think they are, then you haven't bothered to learn how to become better than the next average Joe.

It is like chess. The best chess players are great because they have played the game so many times, that they see patterns and have excellent pattern recognition. They know precisely how certain patterns develop, how to respond to them and how to defend their position when threatened. Nobody, save for Kasparov or Fisher, ever played great chess out of the gate. Likewise, most (not all) traders will get their asses handed to them at first.

Is that going to stop me? Hell no. I am determined and anyone can do it. If you fail, then you didn't want it bad enough.

Folks, how can you all read so selectively, pick out something out of context and try to rip it apart???
Aphie, no markets are not like chess, they are more like Formula One. And to me, all the unprofessional daytraders are like little kids riding their trycicles on the racetrack during a race. What the @W#$ are they doing their in the first place kidding themselves they can compete with the pros??? Some really can, but those are the few that have similar equipment and very similar skills/training. Reading your TA books will probably raise you to a level of a yellow pickup truck instead of a trycicle. Is that good enough??? You know where I stand.

 

[vladiator]

Quote from Katrina Johns:

wonderful debate all.

vladiator, do i understand you correctly? you're saying that if i was as smart as you are i would be making money by exploiting market inefficiencies (as you claim to do) that don't exist in the first place because the market is efficient??

but i am not and cannot make any money because i am not smart or sophisticated enuf to identify and exploit these market inefficiencies (that don't exist anyway because the market is efficient)?

does this mean i have to give back my profits for the last five years?

is this close? or am i way off the mark here?

No, I think you do understand me correctly by choose to try to make fun of what I say by convoluting the logic. I'm saying that you have to be really smart and have the appropriate training to find any niches of inefficiency, and those will evaporate very soon either b/c of your own trading or that of someone else. I stated that many times before. Just b/c they are there, DOES NOT MEAN THE MARKET IS NOT EFFICIENT. The modern definition of efficiency states that the amounts of time/resources you will spend trying to find those inefficiencies and capitalize on them and the risks you will take in the process will be commensurate with what you will earn. NO FREE LUNCH.
No, it does not imply you have to give anything back. It means that if you spent the same effort/time etc on something else and took similar risks, you should have earned just as much.
It means you can not earn superior RISK ADJUSTED returns.

 

[vladiator]

Quote from trdrmac:

Ok, just one quick question


Do people in general feel the market is now more or less efficient than before Reg FD?

I feel less efficient.

Thanks

MORE efficient for the reasons I'm already mentioned. The whole idea of FD was to make access to info for equitable. Just b/c it lead to more spikes when info is finally released (with less informed trading prior to it) or to less accurate analyst estimates b/c they don't get any "tips" does NOT mean the market is less efficient. Info becomes available to mkt participants in a more fair way, less informed trading prior earnings surprises etc (I can point those interested to a paper that shows it) - I don't see how anyone could call the result as less efficiency.