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Old 05-17-2011, 02:23 PM
 
Location: Los Angeles, Ca
2,813 posts, read 3,116,723 times
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Quote:
Originally Posted by mathjak107 View Post
i guess you can say the markets reacted to information about lehman that wasnt known yet . those black swan events are events not on anyones radar that pop up and give a brand new perception to something .
i would think one could argue that the efficiant market system is re-leveling itself to new perceptions.
You could argue that it was knowable. People saw problems at Citi, Lehman back in 2003 or 2004. The market isn't "rational" if these companies are using 40x leverage. Eventually, the small level of assets they held were going to be wiped out.

You could argue that people saw problems when glass steagall was repealed. It allowed the banking sector to engage in riskier activities. It seems like EMH doesn't look at safeguards. Or the sustainability of trends.

It'd be like betting on a surfer, but not looking at the 65 foot wave that's he on. Market participants are "efficient" looking at the surfer, judging him against others, giving him 3/2 odds. But they don't look at the wave.

It seems like EMH assumes the accounting is always legit and "knowable". How can the markets be efficient, if you can't even read the balance sheet? Could anyone read and understand Fannie Mae's balance sheet?
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Old 05-17-2011, 08:11 PM
 
1,998 posts, read 2,096,162 times
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The Efficient Market Hypothesis (EMH) was useful as a framework for discussion and thinking about the markets, but as most people understand and point out, it cannot take into account the irrationality of human behaviour both as individuals and in crowds. Bill Buford's book Among the Thugs is a fascinating look at crowd behaviour and serves about as much usefulness these days at the EMH.

http://www.amazon.com/Among-Thugs-Bi.../dp/0679745351

I like John23's analogy to that of a surfer on a large wave. We have to look at the wave, not just the surfer. I also agree that parts of Glass-Steagall need to be brought back. The large banks can complain about G-S making them less competitive than foreign banks, but if the competition is to see who can go bankrupt the fastest, then maybe our banks shouldn't be in that competition.
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Old 05-17-2011, 09:50 PM
 
Location: Los Angeles, Ca
2,813 posts, read 3,116,723 times
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With the surfer analogy, EMH sizes various aspects of the surfer. Where he was born, how long he's been surfing, what kind of board he likes. His past performance. This gets "efficient".

The 6'2 185 lb surfer who can handle different size waves, who's been surfing for 20 years is going to be valued "higher" or thought of in higher terms than a 5'6 135 lb surfer who just started 6 months (i.e. a higher likelihood of wiping out). The 6'2 surfer would be like IBM. The 5'6 surfer would be like a $8 Nasdaq stock that's barely listed.

But what creates the wave? The wave got irrationally high in the banking bubble. About 80 feet, when the wave use to be 20 feet or something. If a dot com is valued at $10 billion with no sales, that's like a 300 foot wave.

The classes I took in finance lumped everything together. Huge difference between Fannie Mae at $60 being "efficient" and a utility company or MMM at $60, or a well run corporation. I would say they're almost two completely different assets, like a stock and a bond. There's a difference between a house of cards and a house with brick or concrete interior walls. Or a house with an elevator going up paying a dividend. A lot of these companies had hollow elevators (i.e., you could look through the accounting, there was nothing there).

Have you read Against the Gods, the story of risk? I haven't, but its suppose to be pretty good.
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Old 05-18-2011, 06:42 AM
 
273 posts, read 311,865 times
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Quote:
Originally Posted by John23 View Post
I majored in finance in '04.

-EMH, and most of academic finance is too clean for the real world. How does EMH explain Lehman Brothers or Bear Sterns at $60 or $70. Then in a few weeks, they go to $10!!
For more than a decade, Wall St investment banks have been operating under the premise of too big to fail. . Let's put this in perspective. In the S&L crisis in the 80's, banks that had net assets equivalent 1-3% of US GDP were considered "too big to fail." As of today, JPMorgan has nets assets representing ~15% of US GDP. Goldman has 8%. Think about that.

Not sure what Bear or Lehman was, but it was more than 2%. Everyone thought the banks would get bailouts. And when they didn't, Wall St was shocked. After all, who could have possibly seen this thing coming?

You heard a lot about financial deregulation in the 2000's. That meant a lot of things, but one thing it meant was a much cushier relationship between regulators and banks. For example, when Lehman called the Whitehouse for a bailout in 2008, who made the phonecall? George Bush's cousin, who was a Lehman MD.

If Obama credibly said today there will be no more government intervention, the Wall St investment banks (which are actually hedge funds with implicit govt backing) would see share prices similarly tumble. The problem is that if he said it, it wouldn't be believable. The banks are called "too big to fail" for a reason, and continue to have govt backing factored into their stock prices.

Last edited by mcredux; 05-18-2011 at 06:55 AM..
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Old 05-18-2011, 10:11 AM
 
Location: 3rd Rock fts
690 posts, read 467,480 times
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^ What he/she said.

The prolonged low interest rates; ongoing mega-Bailouts; medium/large business tax evasion/incentives, etc. definitely smoothed out those 20 year Stock Market performance charts!

The stock market is easy when youíre plotting charts based on Govít/taxpayer-backed, FED enhanced welfare! Hopefully, the hoodwinked mature bulls (early 20s) will wake up & put a stop to this nonsense!?
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Old 05-20-2011, 05:43 PM
 
1,998 posts, read 2,096,162 times
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Quote:
Originally Posted by John23 View Post
Have you read Against the Gods, the story of risk? I haven't, but its suppose to be pretty good.
Yes, read. It is one of the better books out there regarding the history of finance. I also read that author's book The Power of Gold (Peter Bernstein), but it dragged down mid-way through. It could have used a bit more editting.
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Old 05-24-2011, 07:54 PM
 
10,963 posts, read 3,835,517 times
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Quote:
Originally Posted by Oildog View Post
Fuel Fix Ľ Scooby, Scrappy, Velma, and Efficient Market Hypothesis

Saw this article and thought I'd pass it on.

Do you think the market hypothesis has changed a whole bunch in the last 30 years with more 'computers' doing the trading?
It has nothing to with more computers used to execute trades.

I've always felt the Efficient Market Theory NEVER takes into account human greed, and fear and those are huge factors that control market sentiment and price movement. Also different participants in the markets are in it for different reasons with different trading or investing strategies with different time franmes. The Efficient Market Theory also doesn't take that into account.

I'm a much bigger fan of Benoit Mandebrots market theories as discussed in his book "The Misbehavior of Financial Markets" or Talebs books regarding "Black Swans".
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Old 05-26-2011, 08:21 AM
 
273 posts, read 311,865 times
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As the original article states, there are various forms of the EMH.

The weak form does a good job in actually describing what you see in widely-traded markets:

Day traders and technical analysts rarely outperform the index consistently. If they do in the short-term, they are oblivious to the risks, trading costs compounded over years, and most importantly, the opportunity cost of their time. Even hedge funds rarely outperform the markets for years on end. Once you factor in the fees, it's not much better than the S&P. Moreover, most 5 to 10 year studies of HF performance only sample the funds that last 5 to 10 years. Once you include the HFs that implode after a few years, the picture looks very different. Huge amount of survivor bias and conflict of interest in supposed "objective studies." Most HF "research firms" are in reality marketing firms.

The investors who do, on rare occasion, outperform the market over time are institutional value investors - either holding companies or private equity. Even then, they are buying highly illiquid investments--namely, businesses--and there will be inherent risk premium. Even then, they're not trying outsmart the market. They're operating in a world of asymmetric information.

The idea that markets are motivated by greed and fear is increasingly outdated. In 2006, roughly 30% of all trades were being made by computers. Currently, it is at 50%. In a few years, a vast majority of all trades will be done by super computers, which are motivated by statistical optmization, not fear.

Much of Wall St exists on two foundations: gullible baby boomer clients and fees.

Last edited by mcredux; 05-26-2011 at 09:25 AM..
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Old 05-26-2011, 08:33 PM
 
10,963 posts, read 3,835,517 times
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Quote:
Originally Posted by mcredux View Post
As the original article states, there are various forms of the EMH.

The weak form does a good job in actually describing what you see in widely-traded markets:

Day traders and technical analysts rarely outperform the index consistently. If they do in the short-term, they are oblivious to the risks, trading costs compounded over years, and most importantly, the opportunity cost of their time. Even hedge funds rarely outperform the markets for years on end. Once you factor in the fees, it's not much better than the S&P. Moreover, most 5 to 10 year studies of HF performance only sample the funds that last 5 to 10 years. Once you include the HFs that implode after a few years, the picture looks very different. Huge amount of survivor bias and conflict of interest in supposed "objective studies." Most HF "research firms" are in reality marketing firms.

The investors who do, on rare occasion, outperform the market over time are institutional value investors - either holding companies or private equity. Even then, they are buying highly illiquid investments--namely, businesses--and there will be inherent risk premium. Even then, they're not trying outsmart the market. They're operating in a world of asymmetric information.

The idea that markets are motivated by greed and fear is increasingly outdated. In 2006, roughly 30% of all trades were being made by computers. Currently, it is at 50%. In a few years, a vast majority of all trades will be done by super computers, which are motivated by statistical optmization, not fear.

Much of Wall St exists on two foundations: gullible baby boomer clients and fees.
A good trader or money manager will consistently outperform the market. You post takes the collective sum of ALL traders and says they won't outperform the market. It's kind of like saying an average major league hitter won't have a batting average much higher than the overall major league average. A good major league hitter will consistently outperform his peers it's the same for hedge fund managers and traders, which is why they are rewarded so well.

The inherent advantage with hedging strategies is they offer an individual the opportunity to make money in a variety of market conditions. An index trader would have taken a beating in 2008 when that was actually the time for a money manager or trader with a good hedging strategy to make a killing.

I also disagree with your premise that computer trading takes the fear and greed out of trading. Most computerized trading strategies are based on the potential opportunity to make money that in part is based on greed. Exit strategies are based on either risk management or profit taking. The underlying reason is for an exit is the fear you will lose a profit or the fear based on cutting loses. As the flash trade meltdown showed about year ago when these processes are automated their effects are actually EXAGGERATED.

Also computerized trading did not stop the huge 500 and 600 point losses on the Dow that we saw at the height of the financial crises in late 2008 when the primary drivers of much of traded was a global financial meltdown.
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Old 05-27-2011, 08:48 AM
 
273 posts, read 311,865 times
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Hedge fund managers don’t outperform the market once you factor in fees and the various risks. From 2003-2011, HFRX Global Hedge Fund Index underperformed every major equity market index by at least 3%. Unreal.



This is before HF managers take their standard 20+2 cut. So to compare these managers to major league baseball players isn’t quite right.

As a group they, they are among the worst performing. When you adjust for reporting biases and risk, they perform somewhere between t-bills and the S&P. See studies here and here.

As the Financial Times reported, 1 in 5 HFs overstates their performance.

A major league baseball player can consistently excel at an elite level. HF’s can’t. As a group, they underperform for their investors. Individually, some managers may outperform over the short-run. They may have plausible trading strategies. But the returns to these strategies are overwhelmingly random and exhibit little pattern.

To quote:

"A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds."- Warren Buffet
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