Comments on: Why I Believe the Efficient Market Theory Is Bunk

By: Millionaire Mommy Next Door

Millionaire Mommy Next Door — Thu, 17 Apr 2008 06:32:05 +0000

Count me in the behavioral finance camp, too. I was an index investor for awhile – until I learned how to exploit the herd mentality with momentum investing. Great post.

By: AJC @ 7million7years

AJC @ 7million7years — Wed, 16 Apr 2008 03:14:35 +0000

… so does Warren Buffet, Ben Graham, Pete Town, and little ol’ me.

It’s only BECAUSE businesses and markets are inefficient that I am financially where I am today.

Well said! AJC.

By: Ron

Ron — Wed, 16 Apr 2008 02:41:15 +0000

Thanks Daniel,

Oh well. I’m enjoying the banter back and forth! It’s good to have a civil discussion with someone that sees things differently.

Where did you find information on behavioral markets?

By: Daniel@youngandfrugal.com

Daniel@youngandfrugal.com — Wed, 16 Apr 2008 01:11:58 +0000

Not as much as I would have liked. My investment fund isn’t fully built yet. I’m still saving for my down payment on the house and didn’t want to risk anything. High yield savings account is my best bet for that chuck of money!

By: Ron

Ron — Wed, 16 Apr 2008 00:39:48 +0000

Thanks Mike,
You’re exactly, precisely on target right! (in my opinion)
Graham says that in the short run, the market is a voting machine and in the long run a weighing machine. In the long run IT IS efficient, but that’s why you can outperform the market. Buy when it’s irrational and sell when it becomes rational again, doing what Buffet called “dancing in and out of the markets.”

Wow. Just when I think you’ll disagree with me, I turn around and agree with YOU. LOL!

For the record, ANW was mispriced in January…..I just dumped it for a 40 percent gain.

By: Ron

Ron — Tue, 15 Apr 2008 23:43:42 +0000

Thanks Daniel,

I hope you had a ton of it!
(EMT says there is no such thing as bargains)

By: Daniel@youngandfrugal

Daniel@youngandfrugal — Tue, 15 Apr 2008 22:10:03 +0000

After some further research, I’ve found that I’m more of a subscriber to behavioral markets. However, I agree with the premisis of EMT…the line blurs when you consider when and whether or not a feeling or an emotion becomes news. Technically we are NOT in a recession (by definition, 2 quarters of negative growth), but many people FEEL that we are going into one…and it is in the news left and right. Does that mean the feeling of recession is market information?…

Yes, there have been many bargains out there, and there will continue to be more. ZLC was mispriced in late Jan early Feb, it’s had over a 60% gain since then.

-Daniel @ Young And Frugal

By: Four Pillars

Four Pillars — Tue, 15 Apr 2008 19:01:22 +0000

I love this kind of post.

I do believe in the EMH, but I’d like to clarify that the EMH is not an all-or-nothing proposition. There are three forms of it (weak, semi-strong and strong) – only the most hardcore passive investors believe in the strong version of EMH which is what you describe.

What Malkiel, Bernstein and probably others have said, is that the market is not perfectly efficient, but it’s efficient enough that it’s not possible for an individual investor (or mutual fund) to take advantage of any mispricings over the long term in a profitable fashion. For example if there is a mis-pricing today, it won’t be there in the future. Other investors will figure out the mis-pricing and it will disappear. They also mention transaction costs as a big impediment to profitable trading strategies.

My challenge to anyone who thinks they can beat an index fund is to go ahead and do it. Make your buys and sells, track your performance and compare to a relevant index fund and see how well you do.

Mike

By: Ron

Ron — Tue, 15 Apr 2008 18:35:58 +0000

Thanks John,
I didn’t refute it. The markets and Professor Malkiel did, as have others who laugh at the folly that the markets are 100% rational 100% of the time.

Any 10 year old could refute this “cornerstone.”

By: Ron

Ron — Tue, 15 Apr 2008 18:23:32 +0000

Thanks Daniel,
Efficient market theory says that all of Buffet’s successes are dumb luck. I had this same discussion in my MBA finance class but thankfully my professor didn’t subscribe to EMT. He made a fortune investing in markets where supposedly “all information was reflected in the current prices.”

I just don’t buy it. All information IS NOT reflected in prices, all emotion IS.

What you’re proposing is not classical EMT, but a variation. Classical EMT opposes any idea that the markets are ever less than rational. It says that all available information is instantly available and reflected in the current price structure. I, and many others, disagree.