triceratop wrote: ↑
Sun Nov 26, 2017 12:08 am
nedsaid wrote: ↑
Fri Nov 24, 2017 12:21 am
packer16 wrote: ↑
Thu Nov 23, 2017 10:29 pm
I have the same understanding as Taylor. If the market efficiently prices all risk including the factor risks, then would not the market weight represent the markets best estimate of the optimal risk/reward ratio? If not, then why not?
Nedsaid: Except that markets do exhibit periods of irrationality, where markets are too optimistic or too pessimistic. Euphoria and panic. Does anyone really believe that the high flying internet and high tech stocks were efficiently priced during the late 1990's mania? Companies with no earnings and in a few cases, no sales were priced pretty much to infinity. This is efficient pricing? Really?
Eugene Fama is on record as saying precisely this(though he wasn't speaking about specific equities but the phenomenon of the tech 'bubble' in general); go see his joint interview with Andrew Lo and Thaler.
This is why I don't live in the land of "always" or "never." Some pretty weird things happen in markets, because, well, because people are pretty weird sometimes. It is easy to get caught in a groundswell of groupthink. It gets to be sort of like a cult, that our beliefs get to be so strong in a particular area that it takes a catastrophic event to get us back to reality.
I post about the "Four Horsemen of Underperformance" which originally were AIG, GE, Microsoft, and Pfizer. These stocks each had fanatical followings and it was like cults developed around the CEO's of many of the market favorites of the 1990's. So you had the cult of AIG, the cult of GE, the cult of Microsoft, the cult of Pfizer, and so on. The worst examples were Tyco, Worldcomm, and Enron. In the case of the "Four Horsemen", the underlying businesses were great, it was just that expectations were too high. When I bought at "bargain" prices, in retrospect, they still were too expensive. In the case of Worldcomm and Enron, it was outright fraud. Tyco was somewhere in the middle.
Microsoft has returned to being a growth company and I have kicked it out of my "anti-index" and replaced it with Comtech Communications. So the "Four Horsemen" now ride three horses and a pony.
So yes, I do believe markets are pretty efficient. But certainly there are exceptions, depending upon investor mood.
A fool and his money are good for business.