Free Market

[Utah]

That is absolutely correct. One of the key theories of efficient markets is that there are lots of buyers and sellers. Often, the small caps are not heavily played and they are not heavily analyzed. When this occurs there is the ability to have information that no one else has. However, these opportunities are quickly disappearing with the ability of technology to monitor these stocks.

[mosta]

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I just don't buy the efficient market theory. Everyone interprets the same information differently, and the market is nothing more than an aggregate of perceptions, some better than others.


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I have a few inconsistent impressions regarding efficiency of the stock market based on practice and experience. On the one hand, review the price history of JDSU and tell me those are efficient or meaningful prices with a straight face. It's silly, but then again in a way it makes sense if you view the spot price not as the most accurate forecast in the world, but (to restate the same claim in a different way) as an essentially random guess that is no worse than any other random guess. No one has any idea what Uni had coming twenty years down the line and there was no way to know. It's all noise.

also, I'm not sure if you can make the price efficiency argument non-tautologically. you can't ever take one price of JDSU and derive the rational price t-1. any price at t-1 is rational on some set of probabilities assigned to the scenarios, and the scenarios are limitless in their range. and if any price is consistent with any subsequent price/ outcome, calling it "efficient" is meaningless. but of course economists are fond of tautological theories.

And I'm pretty convinced by and sympathetic to Malkiel. I believe that the best personal investment is an index, and that the only rational way to invest is to diversify with broad based indices, avoid market timing, and most importantly, avoid transaction costs.

But then I know hedge fund managers that friends work for that have beaten the market consistently for years. They don't do any technical analysis BS, and they don't prognosticate about the big picture. They focus very very narrowly. One just on a certain segment of energy production companies. He knows their companies better than they do. he mostly trades pairs. the second guy I know only trades deals and special events. when there's a court case pending, he's going to have the judge's home number and whether his kid missed school.

I don't know how to reconile these viewpoints. maybe the idea is that the vast majority of what is out there is noise. and real research, by competent people is rare and can work. I don't know. or maybe those two guys just got luck, on a hot streak.

[Boris]

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We should no longer assume rational behavior when constructing the descriptive models of economic behavior -- and that goes for groups and not just individuals.

The work of various economists and psychologists, in the last decades, has shown that people have a limited understanding of utility, change their utility without realizing it, use criteria which they cannot explain nor account for, etc.

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Sigh. Rational for an economist only means that preferences are transitive. Nothing more. Furthermore, microeconomic theory has been proven to be an extremely powerful predictive as well as analytical tool.

[adios]

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[Utah]

Now you are really challenging my finance knowledge. lol. I used to do this every day but it has been 10 years.

There is a big difference is short-term versus long-term investing. The same fund managers that tie the monkeys on the short-term kick the monkey's asses in the long term.

I am getting out of my element a bit between long-term and short term because it has been a few years but I believe the reason is the discounting rate used for long-term returns by the majority of the market. For example, fund managers are under incredible short-term pressure and cant afford to wait 5 years for a stock to pan out.

This isnt inefficiency. It is just a overly strong desire for short-term gain. A clear example is illustrated in the article in the situations where a stock sells for much less than the asset value.

The investors in this article are not using any secret recipe to beat the market. They are simply willing to invest for the long haul where most investors are not. For, if an investor was willing to play in the long term they would invest in funds like Berkshire.

However, investors look at this and say, "I dont care. I want a quick home run".

I need to go read my finance books again but I believe that is how it works.

[Cyrus]

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Rational for an economist only means that preferences are transitive. Nothing more.

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Even when we discount Cancellation, Dominance, and Invariance and stick only to Transitivity, we are still in trouble!

But we see people routinely processing information differently when making choices and when setting 'prices' for these choices, which violates transitivity.

Phenomena of preference reversals are common. When something is observed routinely, its occurence ceases to be a mere glitch and demands the reconsidertion of what we call "rational" and what "irrational". Hausman famously castigated economists for their refusal to "abandon a single systematic and parsimonious theory of choice that is also a theory of rational choice."