A Simple Test In Your Belief In Market Efficiency

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
Random Walker
Posts: 4611
Joined: Fri Feb 23, 2007 8:21 pm

A Simple Test In Your Belief In Market Efficiency

Post by Random Walker »

The world equity market cap is roughly 50% US and 50% non US. Some people argue that because of expenses and because this is where US investors will spend their investment savings that there is some reason for modest overweighting of US equities in a US investor’s portfolio. Other than those fairly minor exceptions, how can a true believer in efficient markets be anywhere else than roughly world market cap weighting of their equity portfolio?

Dave
Slick8503
Posts: 284
Joined: Tue Nov 16, 2010 10:25 am

Re: A Simple Test In Your Belief In Market Efficiency

Post by Slick8503 »

Not that it matters a great deal but the possible extra tax drag of intl funds if the person is not able to benefit from the foreign tax credit could be an issue.
joeschmo
Posts: 179
Joined: Thu Mar 23, 2017 2:37 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by joeschmo »

Personally I completely agree with you and that is why I set my allocation at the actual market cap balance among US, foreign developed, and emerging. Anything else feels like active management to me. Home country bias is just bias.
Topic Author
Random Walker
Posts: 4611
Joined: Fri Feb 23, 2007 8:21 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by Random Walker »

Slick8503 wrote: Sun Feb 02, 2020 2:36 pm Not that it matters a great deal but the possible extra tax drag of intl funds if the person is not able to benefit from the foreign tax credit could be an issue.
That was implicit in my mention of costs.

Dave
User avatar
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by watchnerd »

Random Walker wrote: Sun Feb 02, 2020 2:31 pm The world equity market cap is roughly 50% US and 50% non US. Some people argue that because of expenses and because this is where US investors will spend their investment savings that there is some reason for modest overweighting of US equities in a US investor’s portfolio. Other than those fairly minor exceptions, how can a true believer in efficient markets be anywhere else than roughly world market cap weighting of their equity portfolio?

Dave
Hi.

See my signature.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP
Luckywon
Posts: 1077
Joined: Tue Mar 28, 2017 10:33 am

Re: A Simple Test In Your Belief In Market Efficiency

Post by Luckywon »

Oh no, a stealth International vs U.S. thread!! :shock:
Topic Author
Random Walker
Posts: 4611
Joined: Fri Feb 23, 2007 8:21 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by Random Walker »

livesoft wrote: Sun Feb 02, 2020 2:41 pm
Random Walker wrote: Sun Feb 02, 2020 2:31 pm... how can a true believer in efficient markets be anywhere else than roughly world market cap weighting of their equity portfolio?
Are other markets as transparent as the US market? No, they are not.
Are other markets as regulated as the US market? No, they are not.

Do you want the son, daughter, sister-in-law, brother-in-law of a corrupt dictator messing with your shares?
But shouldn’t an efficient market incorporate all these variables into the prices?

Dave
User avatar
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by watchnerd »

Luckywon wrote: Sun Feb 02, 2020 2:44 pm Oh no, a stealth International vs U.S. thread!! :shock:
I'm hoping it at least branches out to whether market cap weighting should be followed in bonds, too.

*That* is a far more interesting topic than yet another rehash of US vs International stocks....
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP
anil686
Posts: 1089
Joined: Thu May 08, 2014 12:33 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by anil686 »

Yep - I am there too. To me, a fund like total world is not an *international* fund. It is just a bigger SP or total stock market index fund. After all, the top 100 companies on the list (about 80% from the US) make up 35% of the fund. It is a giant mega cap fund of who’s who in business and behaves that way. JMO but that type of fund will likely be very productive for a long time....
User avatar
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by watchnerd »

I think the more interesting question is an ethical one.

If one believes in ESG, is market cap weighting a bad thing?
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP
Topic Author
Random Walker
Posts: 4611
Joined: Fri Feb 23, 2007 8:21 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by Random Walker »

palanzo wrote: Sun Feb 02, 2020 2:46 pm
livesoft wrote: Sun Feb 02, 2020 2:41 pm
Random Walker wrote: Sun Feb 02, 2020 2:31 pm... how can a true believer in efficient markets be anywhere else than roughly world market cap weighting of their equity portfolio?
Are other markets as transparent as the US market? No, they are not.
Are other markets as regulated as the US market? No, they are not.

Do you want the son, daughter, sister-in-law, brother-in-law of a corrupt dictator messing with your shares?
What percentage of stocks would you allocate to international? What do you do yourself?
I would say that I’m almost naively and idealistically a believer in efficient markets. When I think about the equity markets I envision chemical equilibrium and the lines intersecting in Econ 1. I’m 50% US / 50% Int and about 25% of my Int is EM. Larry Swedroe has written something to the effect that “even if markets are not perfectly efficient, it’s best to behave as if they are”.

Dave
alex_686
Posts: 6843
Joined: Mon Feb 09, 2015 2:39 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by alex_686 »

livesoft wrote: Sun Feb 02, 2020 2:41 pm Are other markets as transparent as the US market? No, they are not.
Are other markets as regulated as the US market? No, they are not.

Do you want the son, daughter, sister-in-law, brother-in-law of a corrupt dictator messing with your shares?
Can you give me a specific example? Most markets disallow the dual class shares that deprive minority shareholder rights in Facebook. And I would like to hear your theory on why GAAP are better than IASB standards. Or are you arguing that the Queen of England a corrupt dictator?

All DM markets have equivalent standards. This is a red hearing.

To extend, what percentage of your portfolio is in sponsored ADRs. After all these are foreign companies that have placed themselves under SEC purview, so same transparency, accounting standards, etc.
Last edited by alex_686 on Sun Feb 02, 2020 2:58 pm, edited 1 time in total.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Topic Author
Random Walker
Posts: 4611
Joined: Fri Feb 23, 2007 8:21 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by Random Walker »

watchnerd wrote: Sun Feb 02, 2020 2:46 pm
Luckywon wrote: Sun Feb 02, 2020 2:44 pm Oh no, a stealth International vs U.S. thread!! :shock:
I'm hoping it at least branches out to whether market cap weighting should be followed in bonds, too.

*That* is a far more interesting topic than yet another rehash of US vs International stocks....
Sorry, didn’t mean to be too stealthy :-) but it is a good measure of what one really thinks about market efficiency.

Dave
Slick8503
Posts: 284
Joined: Tue Nov 16, 2010 10:25 am

Re: A Simple Test In Your Belief In Market Efficiency

Post by Slick8503 »

Random Walker wrote: Sun Feb 02, 2020 2:39 pm
Slick8503 wrote: Sun Feb 02, 2020 2:36 pm Not that it matters a great deal but the possible extra tax drag of intl funds if the person is not able to benefit from the foreign tax credit could be an issue.
That was implicit in my mention of costs.

Dave
Understood. Just for the record, slightly higher costs are not enough for me to have a home country bias. Single country risk is much more worrisome to me than a few bps extra in cost.
Alaric
Posts: 72
Joined: Tue Feb 05, 2019 1:38 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by Alaric »

If you believe in market efficiency, how do you square that belief with the facts that a) US investors have a strong home country bias, and b) overall, non-US investors have even stronger home country biases?
bgf
Posts: 1534
Joined: Fri Nov 10, 2017 9:35 am

Re: A Simple Test In Your Belief In Market Efficiency

Post by bgf »

watchnerd wrote: Sun Feb 02, 2020 2:46 pm
Luckywon wrote: Sun Feb 02, 2020 2:44 pm Oh no, a stealth International vs U.S. thread!! :shock:
I'm hoping it at least branches out to whether market cap weighting should be followed in bonds, too.

*That* is a far more interesting topic than yet another rehash of US vs International stocks....
for me too. market cap weighting of equities makes sense. the brighter its future, the stronger its earning power, the greater its revenues, the larger its market cap.

market cap weighting of debt is different and doesnt make sense to me...

if amazon issues 100x the debt of apple, what does that mean?
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
fortyofforty
Posts: 2083
Joined: Wed Mar 31, 2010 12:33 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by fortyofforty »

Does OP expect adding global market weight of international equities to boost performance, reduce risk (what risk, exactly?), or simply to have no appreciable impact on long-term returns?
shess
Posts: 666
Joined: Wed May 17, 2017 12:02 am

Re: A Simple Test In Your Belief In Market Efficiency

Post by shess »

Alaric wrote: Sun Feb 02, 2020 2:56 pm If you believe in market efficiency, how do you square that belief with the facts that a) US investors have a strong home country bias, and b) overall, non-US investors have even stronger home country biases?
Sorry, I don't see the connection between my belief in market efficiency and what other classes of investors are doing.
Topic Author
Random Walker
Posts: 4611
Joined: Fri Feb 23, 2007 8:21 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by Random Walker »

Alaric wrote: Sun Feb 02, 2020 2:56 pm If you believe in market efficiency, how do you square that belief with the facts that a) US investors have a strong home country bias, and b) overall, non-US investors have even stronger home country biases?
I think it’s simply a behavioral error, confusing familiar with safe.

Dave
User avatar
Vulcan
Posts: 1315
Joined: Sat Apr 05, 2014 11:43 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by Vulcan »

Random Walker wrote: Sun Feb 02, 2020 2:31 pm The world equity market cap is roughly 50% US and 50% non US.
Is that what it is?
Being 100% VTWAX for the stocks portion, I haven't noticed :sharebeer
Last edited by Vulcan on Sun Feb 02, 2020 3:01 pm, edited 2 times in total.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
alex_686
Posts: 6843
Joined: Mon Feb 09, 2015 2:39 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by alex_686 »

Alaric wrote: Sun Feb 02, 2020 2:56 pm If you believe in market efficiency, how do you square that belief with the facts that a) US investors have a strong home country bias, and b) overall, non-US investors have even stronger home country biases?
I will point out that home country bias was invented by behavior economist to discuss why people don’t act rationally.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Topic Author
Random Walker
Posts: 4611
Joined: Fri Feb 23, 2007 8:21 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by Random Walker »

fortyofforty wrote: Sun Feb 02, 2020 2:57 pm Does OP expect adding global market weight of international equities to boost performance, reduce risk (what risk, exactly?), or simply to have no appreciable impact on long-term returns?
In the very long run I expect all developed equities to return about the same. I believe current valuations favor Int and EM over US though. I believe the market prices risk. My naive view is that Royal Dutch Shell and Exxon are both equally risky and should have similar expected returns. Some of the stuff mentioned above like dictators, corruption, poor regulation should increase the risk in some markets and therefore increase their expected returns. In an efficient market, all risky assets should have about the same risk adjusted expected returns.

Less than perfect correlation between US, Int, EM should improve portfolio efficiency a bit. Perhaps a rebalancing bonus? US is certainly dominant, but international diversification would lessen this huge single country risk. Japanese home country biased investor of the 80’s sure wishes he had diversified internationally.

Dave
Topic Author
Random Walker
Posts: 4611
Joined: Fri Feb 23, 2007 8:21 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by Random Walker »

Vulcan wrote: Sun Feb 02, 2020 3:00 pm
Random Walker wrote: Sun Feb 02, 2020 2:31 pm The world equity market cap is roughly 50% US and 50% non US.
Is that what it is?
Being 100% VTWAX for the stocks portion, I haven't noticed :sharebeer
That pretty much says it all! :-)

Dave
User avatar
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by watchnerd »

Random Walker wrote: Sun Feb 02, 2020 2:54 pm

Sorry, didn’t mean to be too stealthy :-) but it is a good measure of what one really thinks about market efficiency.

Dave
Meh..kind of.

Advocating for cap-weighting in equities isn't really the deep end of the pool.

Advocating to hold cap-weighting for bonds -- quite a bit deeper.

Advocating to hold cap-weighting of all assets for the whole portfolio -- totally hardcore.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP
alex_686
Posts: 6843
Joined: Mon Feb 09, 2015 2:39 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by alex_686 »

Random Walker wrote: Sun Feb 02, 2020 3:06 pm I believe current valuations favor Int and EM over US though. I believe the market prices risk. My naive view is that Royal Dutch Shell and Exxon are both equally risky and should have similar expected returns.
This is sort of spot on. Stocks are currently regressing along world and sector factors, with regional factors coming in 3rd. 30 years ago this was inverted. International stocks have been preforming just like their US peers.

Indexes are different. The US market is skewed towards large growth companies in favored sectors. So unless you like making factor bets, I don’t think markets favor International or EM markets- I am neutral.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
User avatar
willthrill81
Posts: 20903
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by willthrill81 »

Random Walker wrote: Sun Feb 02, 2020 2:45 pm
livesoft wrote: Sun Feb 02, 2020 2:41 pm
Random Walker wrote: Sun Feb 02, 2020 2:31 pm... how can a true believer in efficient markets be anywhere else than roughly world market cap weighting of their equity portfolio?
Are other markets as transparent as the US market? No, they are not.
Are other markets as regulated as the US market? No, they are not.

Do you want the son, daughter, sister-in-law, brother-in-law of a corrupt dictator messing with your shares?
But shouldn’t an efficient market incorporate all these variables into the prices?

Dave
This is part of the problem with the EMH: it's not falsifiable.

Efficiency (i.e. quickly incorporating all available information into the market price) means literally nothing if the the information is not incorporated in a rational way. I don't think that we need to get into all of the recent examples of market prices being impacted in completely irrational ways (e.g. two ticker symbols being confused by participants and prices getting very wonky very quickly) to see that that is certainly not always true. Further, many believe that the market is only efficient in the micro sense and not the macro.

If most investors exhibit a home country bias, then that alone may inhibit investment capital from 'flowing' from one country to another. As a simple example, if the U.S. was a better investment, but investors in nation X have a strong home country bias, they may still invest in their home country rather than the U.S.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
User avatar
willthrill81
Posts: 20903
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by willthrill81 »

watchnerd wrote: Sun Feb 02, 2020 3:11 pm
Random Walker wrote: Sun Feb 02, 2020 2:54 pm

Sorry, didn’t mean to be too stealthy :-) but it is a good measure of what one really thinks about market efficiency.

Dave
Meh..kind of.

Advocating for cap-weighting in equities isn't really the deep end of the pool.

Advocating to hold cap-weighting for bonds -- quite a bit deeper.

Advocating to hold cap-weighting of all assets for the whole portfolio -- totally hardcore.
The argument for cap-weighting bonds is very weak IMHO, even if the bond market was 'completely' efficient. The individual investor's time horizon and purpose for holding bonds in the first place should matter far more than whatever the sum total of the Bloomberg Barclay's Aggregate index is.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 6:18 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by Phineas J. Whoopee »

Informational efficiency applies to a single market, not multiple scattered ones. Developed markets are approaching being single, but aren't there yet, and developing markets are nowhere close.

Informational efficiency is not a matter of belief. It's a matter of finding out what that really means, as opposed to what the parodists claim, and evaluating how, if at all, it affects one personally.

It is not a matter of agreeing the price the most recent most eager seller and most eager buyer traded at is an appropriate one. The parodists pretend it is.

Capital markets operate on disagreements. There is no central stock pricing authority.

PJW
Luckywon
Posts: 1077
Joined: Tue Mar 28, 2017 10:33 am

Re: A Simple Test In Your Belief In Market Efficiency

Post by Luckywon »

Random Walker wrote: Sun Feb 02, 2020 2:54 pm
watchnerd wrote: Sun Feb 02, 2020 2:46 pm
Luckywon wrote: Sun Feb 02, 2020 2:44 pm Oh no, a stealth International vs U.S. thread!! :shock:
I'm hoping it at least branches out to whether market cap weighting should be followed in bonds, too.

*That* is a far more interesting topic than yet another rehash of US vs International stocks....
Sorry, didn’t mean to be too stealthy :-) but it is a good measure of what one really thinks about market efficiency.

Dave

Haha, I'm in a punchy mood this morning. Actually, I think the angle you raise here with respect to this issue is very interesting.
wootwoot
Posts: 577
Joined: Tue Jan 27, 2009 7:37 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by wootwoot »

joeschmo wrote: Sun Feb 02, 2020 2:39 pm Personally I completely agree with you and that is why I set my allocation at the actual market cap balance among US, foreign developed, and emerging. Anything else feels like active management to me. Home country bias is just bias.
Do you rebalance your funds as the market cap balance changes?
Normchad
Posts: 1303
Joined: Thu Mar 03, 2011 7:20 am

Re: A Simple Test In Your Belief In Market Efficiency

Post by Normchad »

Even Malkiel didn't say the markets were perfectly efficient....

My biggest concern for international is that they do have different government structures, regulations, and reporting requirements. In short, I do not trust them completely.

In Greenspans book, he offered the opinion, that one of the things that set America apart from most of the rest of the world, were the strong government and regulatory mechanisms in place, and specifically the way that "individual property rights" were protected. For example, if the Chinese government seized the new Tesla factory in the future, would anybody be surprised? That probably won't happen, but it might.

In that way, I do expect America (and other similar first world countries) to do better economically, then say a lot of the emerging markets. I suppose all of this should be priced in, but I don't think it is.

And, part of the efficient market hypothesis, I think, is that all information that is knowable, that affects price, is available to everybody. I certainly do not believe that to be true in a lot of foreign countries. I don't think it's 100% true here, either. But I suspect it is much worse elsewhere.
s
But I am honestly torn. Nothing lasts forever, not even the Roman Empire. So I do have a pretty big portion in VSMGX, which is 40% international....
User avatar
Teriyaki
Posts: 68
Joined: Sat Feb 23, 2019 9:08 am
Location: Finland

Re: A Simple Test In Your Belief In Market Efficiency

Post by Teriyaki »

Oh it's international vs U.S. time again? Okay, I can fan the flames.

When it comes to picking individual stocks, most people here seem to agree that it's a fool's errand to try to beat the market.

However, when it comes to picking countries to invest in, many of the same people seem to think it's fine to try to beat the (global) market.

Go figure...

(Disclaimer: I'm personally underweight U.S. equities and overweight EM and European equities :wink:)
joeschmo
Posts: 179
Joined: Thu Mar 23, 2017 2:37 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by joeschmo »

wootwoot wrote: Sun Feb 02, 2020 3:33 pm
joeschmo wrote: Sun Feb 02, 2020 2:39 pm Personally I completely agree with you and that is why I set my allocation at the actual market cap balance among US, foreign developed, and emerging. Anything else feels like active management to me. Home country bias is just bias.
Do you rebalance your funds as the market cap balance changes?
Yes, as long as the difference is above my ±5% rebalancing threshold - otherwise the taxes and time hurt too much.
User avatar
Nate79
Posts: 6419
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: A Simple Test In Your Belief In Market Efficiency

Post by Nate79 »

Arguing for global market cap weighting is also arguing against tilting to small cap value....
User avatar
willthrill81
Posts: 20903
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by willthrill81 »

Teriyaki wrote: Sun Feb 02, 2020 3:43 pm Oh it's international vs U.S. time again? Okay, I can fan the flames.

When it comes to picking individual stocks, most people here seem to agree that it's a fool's errand to try to beat the market.

However, when it comes to picking countries to invest in, many of the same people seem to think it's fine to try to beat the (global) market.

Go figure...

(Disclaimer: I'm personally underweight U.S. equities and overweight EM and European equities :wink:)
A lot of it comes down to whether you think that there are lots of 'haystacks' (e.g. various nations) or only one big 'haystack' (e.g. global stocks).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
TomCat96
Posts: 1040
Joined: Sun Oct 18, 2015 12:18 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by TomCat96 »

Random Walker wrote: Sun Feb 02, 2020 2:31 pm The world equity market cap is roughly 50% US and 50% non US. Some people argue that because of expenses and because this is where US investors will spend their investment savings that there is some reason for modest overweighting of US equities in a US investor’s portfolio. Other than those fairly minor exceptions, how can a true believer in efficient markets be anywhere else than roughly world market cap weighting of their equity portfolio?

Dave
Markets are NOT efficient.
It's time we stopped pushing this complete gibberish.

I have posted about this time and time again. I have gotten bogleheads to try to define what they believe an efficient market is, only to arrive at the conclusion that their conception is completely unworkable. If anyone wishes to challenge me on this issue I will happily debate and push such questions forward again.

People here have this EMH based idea that markets are efficient, I am guessing because it's something they learned in a classroom.

Take that EMH and use, really try to use it as your analytical framework in any real world context and see what happens.
Normchad
Posts: 1303
Joined: Thu Mar 03, 2011 7:20 am

Re: A Simple Test In Your Belief In Market Efficiency

Post by Normchad »

I am personally a strong believer in the EMH; and I really think it underpins the basic Jack Bogle tenet. I.e. The next move in market prices can not be predicted, therefore stop trying, and the only thing to do to improve your personal returns is keep costs as low as possible. i.e. it is a random walk, and all knowable information is known by all market participants, and has been priced in.

This board is chock full of very smart, very successful, very well informed investors. Most have a demonstrated commitment to understanding and reasoning about these things. The majority of folks here seem to understand and embraces the EMH and the Jack Bogel philosophy to some extent.

So given all that, why do *you* suppose very few here are 100% in on VT (Vanguard total world Stock Index)? Is it purely a cognitive/behavioral bias, or is there some other reason for it?

I tend to think it's not just a cognitive bias, as the majority here seem to avoid these same cognitive biases in the rest of their investing lives.
User avatar
willthrill81
Posts: 20903
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by willthrill81 »

Normchad wrote: Sun Feb 02, 2020 4:01 pm I am personally a strong believer in the EMH; and I really think it underpins the basic Jack Bogle tenet.
I believe that Bogle's costs-matter hypothesis is both much more accurate and actionable than the EMH.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
livesoft
Posts: 73338
Joined: Thu Mar 01, 2007 8:00 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by livesoft »

palanzo wrote: Sun Feb 02, 2020 2:46 pmWhat percentage of stocks would you allocate to international? What do you do yourself?
I checked my portfolio's current asset allocation yesterday. It has about 45% of stocks allocated to international with an insignificant underweight in emerging markets which I think is a result of the recent drop in EM stocks.
Wiki This signature message sponsored by sscritic: Learn to fish.
User avatar
andromeda2k12
Posts: 45
Joined: Sun Oct 13, 2019 10:22 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by andromeda2k12 »

willthrill81 wrote: Sun Feb 02, 2020 4:06 pm
Normchad wrote: Sun Feb 02, 2020 4:01 pm I am personally a strong believer in the EMH; and I really think it underpins the basic Jack Bogle tenet.
I believe that Bogle's costs-matter hypothesis is both much more accurate and actionable than the EMH.
They’re mutually exclusive though no? You can apply Bogle’s hypothesis to an EMH portfolio, as seen with VT
theorist
Posts: 686
Joined: Sat Sep 28, 2019 11:39 am

Re: A Simple Test In Your Belief In Market Efficiency

Post by theorist »

Normchad wrote: Sun Feb 02, 2020 4:01 pm I am personally a strong believer in the EMH; and I really think it underpins the basic Jack Bogle tenet. I.e. The next move in market prices can not be predicted, therefore stop trying, and the only thing to do to improve your personal returns is keep costs as low as possible. i.e. it is a random walk, and all knowable information is known by all market participants, and has been priced in.

This board is chock full of very smart, very successful, very well informed investors. Most have a demonstrated commitment to understanding and reasoning about these things. The majority of folks here seem to understand and embraces the EMH and the Jack Bogel philosophy to some extent.

So given all that, why do *you* suppose very few here are 100% in on VT (Vanguard total world Stock Index)? Is it purely a cognitive/behavioral bias, or is there some other reason for it?

I tend to think it's not just a cognitive bias, as the majority here seem to avoid these same cognitive biases in the rest of their investing lives.
The strongest argument for indexing (which I learned from Bogle’s writings) does not rely on the EMH in any way. The sum total of investors will get average returns, before expenses. The expenses of index funds are considerably lower than those of active funds. But the market - index funds is still market cap weighted and so active and index managers are working with statistically identical pools of equities. Therefore, index funds will beat active funds, on average.

Nowhere in this logic did one need to make any hypothesis about how the market decided to weight things, which is what EMH is...
bgf
Posts: 1534
Joined: Fri Nov 10, 2017 9:35 am

Re: A Simple Test In Your Belief In Market Efficiency

Post by bgf »

willthrill81 wrote: Sun Feb 02, 2020 4:06 pm
Normchad wrote: Sun Feb 02, 2020 4:01 pm I am personally a strong believer in the EMH; and I really think it underpins the basic Jack Bogle tenet.
I believe that Bogle's costs-matter hypothesis is both much more accurate and actionable than the EMH.
costs mattered, but at this point, in 2020, the market has substantially weakened the importance of it. we dont deal with $100 trade fees, 6% load fees, and 1.75% expense ratios... fighting over 0.03 and 0.12 doesn't really mean much.

bogle made two great points - 1) invest in passive index funds, 2) dont pay too much.

nobody pays too much anymore.

people still dont do the first one though, at least not 100%.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
beehivehave
Posts: 466
Joined: Thu Aug 08, 2019 1:21 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by beehivehave »

EMH is either unproveable or a tautology, depending on how you interpret it. Nor is it synonymous with our individual inability to predict the future of markets, as some seem to think - unpredictable doesn't mean rational, for what is more unpredictable than irrationality?
User avatar
willthrill81
Posts: 20903
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by willthrill81 »

andromeda2k12 wrote: Sun Feb 02, 2020 4:16 pm
willthrill81 wrote: Sun Feb 02, 2020 4:06 pm
Normchad wrote: Sun Feb 02, 2020 4:01 pm I am personally a strong believer in the EMH; and I really think it underpins the basic Jack Bogle tenet.
I believe that Bogle's costs-matter hypothesis is both much more accurate and actionable than the EMH.
They’re mutually exclusive though no?
No, they are independent (i.e. one being accurate does not impact the accuracy of the other).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
MotoTrojan
Posts: 10659
Joined: Wed Feb 01, 2017 8:39 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by MotoTrojan »

Isn't currency risk an uncompensated risk?

I don't have a concrete rationale for going only 30% International but it seems reasonable overall; I also tilt it heavily to small/value for further correlation reduction, I guess I am a bad Boglehead.
User avatar
willthrill81
Posts: 20903
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by willthrill81 »

bgf wrote: Sun Feb 02, 2020 4:18 pm
willthrill81 wrote: Sun Feb 02, 2020 4:06 pm
Normchad wrote: Sun Feb 02, 2020 4:01 pm I am personally a strong believer in the EMH; and I really think it underpins the basic Jack Bogle tenet.
I believe that Bogle's costs-matter hypothesis is both much more accurate and actionable than the EMH.
costs mattered, but at this point, in 2020, the market has substantially weakened the importance of it. we dont deal with $100 trade fees, 6% load fees, and 1.75% expense ratios... fighting over 0.03 and 0.12 doesn't really mean much.

bogle made two great points - 1) invest in passive index funds, 2) dont pay too much.

nobody pays too much anymore.

people still dont do the first one though, at least not 100%.
It's surprising to many here, but Bogle was not adamantly opposed to active investing as long as the costs were low. A significant portion of his portfolio was in Wellington, an actively managed fund with low costs.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
User avatar
willthrill81
Posts: 20903
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by willthrill81 »

beehivehave wrote: Sun Feb 02, 2020 4:19 pm EMH is either unproveable or a tautology, depending on how you interpret it. Nor is it synonymous with our individual inability to predict the future of markets, as some seem to think - unpredictable doesn't mean rational, for what is more unpredictable than irrationality?
Correct. By itself, the EMH has no direct implications at all, as Fama himself readily admitted back in 1970.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
Unladen_Swallow
Posts: 784
Joined: Tue Dec 10, 2019 6:12 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by Unladen_Swallow »

Luckywon wrote: Sun Feb 02, 2020 2:44 pm Oh no, a stealth International vs U.S. thread!! :shock:
:D :D :D
"I think it's much more interesting to live not knowing than to have answers which might be wrong." - Richard Feynman
YearTrader
Posts: 80
Joined: Thu Jan 02, 2020 6:46 am

Re: A Simple Test In Your Belief In Market Efficiency

Post by YearTrader »

Another question is should you rebalance between VTI/VXUS (or VTI/VEA/VWO) if you don't hold VT.

The market cap weight between VTI and VXUS is different 10 years ago.
JonnyB
Posts: 688
Joined: Sun Jan 19, 2020 5:28 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by JonnyB »

Random Walker wrote: Sun Feb 02, 2020 2:31 pm how can a true believer in efficient markets be anywhere else than roughly world market cap weighting of their equity portfolio?
That's an easy one. I'm not a true believer in efficient markets.

As economist Larry Summers famously said "There are idiots. Look around!"
Post Reply