Another book question

[rockrock]

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Read anything by Swedroe or Ferri on why actively picking stocks for long term investing is a losers game.

You can't and won't win. (winning as defined by beating index).

See academic papers by Fama and French.

Basically, the sell-side of Wall Street is a scam.

"Lets take your money and my experience and turn it into my money and your experience" is their mission statement.

Most diehard indexers recommend value and small cap tilt and a big chunk of (half of equities) split in NON-US - i.e. equal weightings of VPL,VGK,EEM/VWO,EFV and VINEX.

Good luck

These opinions are from the 90s. According to my old empirical finance prof very few academics believe in the Efficient Market Hypothesis by now.

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Actually several of those books are recent, as is some of the research cited.

Your professor is right about one thing - its worse now than ever before for the individual investor.

The big brokerage houses have "black boxes" generating amazing trading profits (see Goldman blowout quarter for example).

Hedge funds generating huge commissions get analyst downgrades/upgrades and other info FIRST from the trading desks of the big brokerage houses.

The individual investor has zero shot. EMH may not be a reality for the black boxes, proprietery trading desks, inside traders (see rebock insider trading scandal) or active investors like Icahn and Buffett but it is for the average man on the street.

To say otherwise flies in the face of mountains of evidence.

Even the great Warren Buffet said "our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the passive"

[Sniper]

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The big brokerage houses have "black boxes" generating amazing trading profits (see Goldman blowout quarter for example).

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I thought your arguing about long term investment methodologies... now you refer to GS Quarterly trading results generated by short term trading???

[rockrock]

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The big brokerage houses have "black boxes" generating amazing trading profits (see Goldman blowout quarter for example).

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I thought your arguing about long term investment methodologies... now you refer to GS Quarterly trading results generated by short term trading???

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I am arguing against long term ACTIVE management (i.e. buying a selling individual stocks in an investment portfolio).

The active style will lose because the individual investor doesn't have enough information to win.

[midas]

Rock-

You point about individual investors not having enough information is completely wrong.

At this point in time, individuals can access all the information that a research analyst, hedge fund or other brokerage house trader has at their fingertips. Most individuals choose not to access this info or don't do their homework. That's why 99% of individual investors are dead money and can never beat the indexes over the long term.

Your claims are bold, your thoughts are interesting. If you care to share your background, I'd appreciate it. You seem well-read in finance and investing.

You accept the reality that one can, with skill, daytrade(well, intraday or short term I assume) profitably. But you go on to state that long term investing for the individual is a sham and cite an inability to overcome EMH.

This is confusing because you state that Goldman's black boxes, hedge funds, insider info, etc. can overcome the EMH - it appears that you made this argument to support the idea that while powerhouses can profit in the long run, individuals who don't have the info, can't. But these activities you mention are short term in nature. Stevie Cohen is making quick short term moves once he gets word from his friendly insiders what's up. Black boxes can do a variety of things, but the most powerful and active are short term - you know, those spoofs on the ECNs that headfake you, or the market making algorithms, and all the crap going on with boxes in the ES(S&P futures). Look to Jim Simmons and RenTech, I know they love automated short term strategies on futures markets.

I must ask though, what exactly is the time frame you are referring to for an individual that is actively buying and selling stocks in an investment portfolio? The SEC states that pattern daytrading is 4 or more roundtrips in one consecutive 5 day period, or something like that. I don't daytrade stocks, but I believe it's close to that. Are you saying that an individual who has a multi-week or multi-month strategy is just fooling himself?

Once you explain this, I will be able to better understand where you are coming from and give a more thorough response.

[rockrock]

[ QUOTE ]

You accept the reality that one can, with skill, daytrade(well, intraday or short term I assume) profitably. But you go on to state that long term investing for the individual is a sham and cite an inability to overcome EMH.

This is confusing because you state that Goldman's black boxes, hedge funds, insider info, etc. can overcome the EMH - it appears that you made this argument to support the idea that while powerhouses can profit in the long run, individuals who don't have the info, can't. But these activities you mention are short term in nature. Stevie Cohen is making quick short term moves once he gets word from his friendly insiders what's up. Black boxes can do a variety of things, but the most powerful and active are short term - you know, those spoofs on the ECNs that headfake you, or the market making algorithms, and all the crap going on with boxes in the ES(S&P futures). Look to Jim Simmons and RenTech, I know they love automated short term strategies on futures markets.

I must ask though, what exactly is the time frame you are referring to for an individual that is actively buying and selling stocks in an investment portfolio? The SEC states that pattern daytrading is 4 or more roundtrips in one consecutive 5 day period, or something like that. I don't daytrade stocks, but I believe it's close to that. Are you saying that an individual who has a multi-week or multi-month strategy is just fooling himself?

Once you explain this, I will be able to better understand where you are coming from and give a more thorough response.

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My statements are not bold. First, I think its important to refute the claim that EMH is dead. It is alive and well. Fama and French are 2 of the most famous names in finance.

Here is a great article from the WSJ (free this week) As Two Economists Debate Markets, The Tide Shifts

Of interest is Richard Thaler's quote at the bottom (a behaviorist who refutes EMH) "Defending efficient markets has gotten harder, but it's probably too soon for Mr. Thaler to declare victory. He concedes that most of his retirement assets are held in index funds, the very industry that Mr. Fama's research helped to launch. And despite his research on market inefficiencies, he also concedes that "it is not easy to beat the market, and most people don't.""

Also - I don't think the markets are perfectly efficient - there are anomalies and the exploitation of these anamolies makes the market more effecient. EMH is theory, not a law. It helps us understand how markets work and also the most prudent approach. I think it was French that said "The markets may not be effecient but its best to act like they are".

Considering taxes, trading costs and behavioral deficiencies in an investors character (i.e. selling at bottom, buying at top, chasing hot sectors) and most aren't gonna win. Hey - I find Cramer as entertaining as the next guy and I think actively managing a small part of one's portfolio can be entertaining and may even be profitable but it will have nothing to do with superior stock picking skills.

My argument is that beating the benchmark is possible but not probable (and the longer the term the harder it becomes).