Efficient Market Hypothesis

Re: Efficient Market Hypothesis

Postby winston » Sat Dec 04, 2010 5:30 am

Warren Buffett on the Efficient Market Hypothesis

NEW YORK (TheStreet) -- According to the proponents of the Efficient Market Hypothesis, stock prices reflect all available information about companies, and investors can't beat the market indices by stock picking.

They say investors trying to find a secret formula are wasting their time because stock prices follow a random walk. Interestingly, this theory also implies that a monkey selecting stocks by throwing darts at a newspaper's financial pages should perform as well as any star hedge fund manager who may or may not use inside information.

You could guess how this was such a huge relief for millions of stock market investors. Suddenly, one need not worry about timing or stock picking skills. Since all the information is incorporated into stock prices, there's no need to do any research about the companies, or the macro economic developments, or the regulatory environment.

Nothing, nada. Do you want to invest in an internet start-up that sells toys, with $30 million in revenue, $50 million in losses and $6 billion in market cap? Don't worry. Markets are efficient. Just buy it, as simple as that.

In 1984, Warren Buffett gave a speech at the Columbia Business School, arguing that the superinvestors of Graham-and-Doddsville can beat the market by a huge margin. The "look for values with a significant margin of safety relative to prices" approach has been deemed out of date by college professors such as Eugene Fama. Yet Warren Buffett and several investors who took Ben Graham's course managed to beat index funds by following the value approach.


Warren Buffett
Twenty six years ago, Warren Buffett said that nine investors independently investing in different companies achieved far superior returns than did index funds. He said:

"So these are nine records of "coin-flippers" from Graham-and-Doddsville. I haven't selected them with hindsight from among thousands. It's not like I am reciting to you the names of a bunch of lottery winners -- people I had never heard of before they won the lottery.

I selected these men years ago based upon their framework for investment decision-making. I knew what they had been taught and additionally I had some personal knowledge of their intellect, character, and temperament.

It's very important to understand that this group has assumed far less risk than average; note their record in years when the general market was weak.

While they differ greatly in style, these investors are, mentally, always buying the business, not buying the stock. A few of them sometimes buy whole businesses. Far more often they simply buy small pieces of businesses. Their attitude, whether buying all or a tiny piece of a business, is the same.

Some of them hold portfolios with dozens of stocks; others concentrate on a handful. But all exploit the difference between the market price of a business and its intrinsic value."

I'm convinced that there is much inefficiency in the market. These Graham-and-Doddsville investors have successfully exploited gaps between price and value.

When the price of a stock can be influenced by a "herd" on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally.

In fact, market prices are frequently nonsensical."

Finally, here's the quote of the month from Warren Buffett:

"Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper."

http://www.thestreet.com/story/10937290 ... L_btb_html
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
User avatar
winston
Billionaire Boss
 
Posts: 118528
Joined: Wed May 07, 2008 9:28 am

Re: Efficient Market Hypothesis

Postby winston » Wed Apr 06, 2011 1:10 pm

TOL:-

There has been many discussions, that the stock market may not be really that efficient.

But what about Commodities & Currencies then ? Are they also not that efficient ?

If they are that efficient, how come you always have parrots, telling you where a certain Currency or Commodity is supposedly heading ? And some of the time, these parrots are also very wrong :P

Not to mention that the Retail investors also have the habit of telling you, where a certain Commodity or Currency is supposedly heading :lol: :roll:
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
User avatar
winston
Billionaire Boss
 
Posts: 118528
Joined: Wed May 07, 2008 9:28 am

Re: Efficient Market Hypothesis

Postby b0rderc0llie » Wed Apr 06, 2011 1:56 pm

If the parrots can be wrong all the time, then how to trade should be pretty clear. Since they are only wrong some of the time, that information is not particularly useful.
User avatar
b0rderc0llie
Foreman
 
Posts: 454
Joined: Thu May 08, 2008 12:02 pm

Re: Efficient Market Hypothesis

Postby winston » Mon Jul 18, 2011 8:24 am

TOL:-

Are the markets really that inefficient, that you can consistently make some serious money off it ?

For Bonds, Currencies & Commodities, the reaction to any major news is almost instantaneous. Even for Equities, the reaction is also almost instantaneous.

Isnt this quite different from what the "experts" have been telling you ?

Didnt the "experts" tell you that the markets are quite inefficient and you can just go in and scoop the money ?
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
User avatar
winston
Billionaire Boss
 
Posts: 118528
Joined: Wed May 07, 2008 9:28 am

Re: Efficient Market Hypothesis

Postby kennynah » Mon Jul 18, 2011 9:04 am

to begin with, what is the Efficient Market Theory?
Options Strategies & Discussions .(Trading Discipline : The Science of Constantly Acting on Knowledge Consistently - kennynah).Investment Strategies & Ideas

Image..................................................................<A fool gives full vent to his anger, but a wise man keeps himself under control-Proverbs 29:11>.................................................................Image
User avatar
kennynah
Lord of the Lew Lian
 
Posts: 16005
Joined: Wed May 07, 2008 2:00 am
Location: everywhere.. and nowhere..

Re: Efficient Market Hypothesis

Postby winston » Sat Sep 03, 2011 7:12 pm

Efficient Market Hypothesis

Very few people are neutral on efficient market hypothesis (EMH). You either believe in it and adhere to passive, broad market investing strategies, or you detest it and focus on picking stocks based on growth potential, undervalued assets and so on.

The EMH states that the market price for shares incorporates all the known information about that stock. This means that the stock is accurately valued until a future event changes that valuation.

Because the future is uncertain, an adherent to EMH is far better off owning a wide swath of stocks and profiting from the general rise of the market.

Opponents of EMH point to Warren Buffett and other investors who have consistently beat the market by finding irrational prices within the overall market.

Source: Investopedia
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
User avatar
winston
Billionaire Boss
 
Posts: 118528
Joined: Wed May 07, 2008 9:28 am

Re: Efficient Market Hypothesis

Postby winston » Tue Nov 01, 2011 6:42 am

Markets are efficient?

You know the line: Stock and bond prices reflect all available information. Attempts to outperform are fruitless.

Not long ago, this myth dominated Wall Street and financial theory. The Supreme Court even relied on it in rulings.

But this is nonsense. Three months ago Greek government bonds were already trading as if a default were nearly inevitable.

The yield on the one-year Greek bond was 35%. At the same time, the Russell 2000 index of small company stocks was at 850, nearly an all-time high – and a record compared to the price of large company stocks.

So back then, the "efficient" market was simultaneously betting that Greece would default, small companies would keep booming, and investors would continue to want more risk in their portfolios. On which planet?

Source: WSJ
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
User avatar
winston
Billionaire Boss
 
Posts: 118528
Joined: Wed May 07, 2008 9:28 am

Re: Efficient Market Hypothesis

Postby winston » Fri Jan 06, 2017 9:17 pm

Why I Don't Focus on the Overall Market

Starting with the assumption that the market is largely efficient – and therefore hard to beat – is not bad.

It will make you careful as an investor. You can't just look at a stock and say, "Oh! This stock looks cheap."

Maybe the market knows some things you don't… and what you think is cheap is actually fairly priced.

Conversely, you might say a stock looks ridiculously expensive. But again, there may be something you don't know or don't understand. I try to approach every stock like that – very carefully.

I'm always asking:
1. What expectations are built into this stock price?
2. Does it make sense?
3. What's the risk?
4. What is the market seeing and what is it not seeing?


Source: Daily Wealth
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
User avatar
winston
Billionaire Boss
 
Posts: 118528
Joined: Wed May 07, 2008 9:28 am

Re: Efficient Market Hypothesis

Postby winston » Thu Jun 01, 2017 6:44 pm

Is efficient-market theory becoming more efficient?

Theory is changing traders’ behaviour. And vice versa

The average Joe has no hope of beating the market. But if you devote enough capital and computer power to the effort, you can succeed.


Quirks that cannot be explained by the efficient-market hypothesis.

One example is the momentum effect: shares that have outperformed the market in the recent past continue to do so.

Another is the “low-volatility” effect: shares that move less violently than the market, produce better risk-adjusted returns than theory predicts.


Source: The Economist

http://www.economist.com/news/finance-a ... aretheview
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
User avatar
winston
Billionaire Boss
 
Posts: 118528
Joined: Wed May 07, 2008 9:28 am

Previous

Return to Other Investment Instruments & Ideas

Who is online

Users browsing this forum: No registered users and 5 guests

cron