A Simple Test In Your Belief In Market Efficiency

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JoMoney
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Re: A Simple Test In Your Belief In Market Efficiency

Post by JoMoney »

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
Whether you're a "true believer" in "efficient markets" or not, that doesn't change an individuals risk preferences. There are a multitude of diverse portfolios that one could choose to match differing "risk preferences". Your selection of international stocks (or not) can be as unique as your allocation of stocks to bonds, to the extent your belief in "efficient markets" is a factor, you might expect your returns would be commensurate with the risk you're running.
The problem for the "true believer" is how they deal with the dissonance if their preferred measure of "risk" doesn't predict returns in a way they believe is "efficient".
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: A Simple Test In Your Belief In Market Efficiency

Post by hilink73 »

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?
There are 195 countries in the world.

Also, why are there "developed" equities indices, if you think that other countries are not as regulated as the USA?

Your comment is a synonym for home country bias.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by UpperNwGuy »

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
How would you apply this line of thinking to investing in factors?
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Caduceus »

I find the EMH very interesting because I don't find the basic hypothesis compelling, but I accept the result. Take a look at the average investor - you think they are capable of setting efficient prices? When was the last time you heard some friend say they are going to buy Tesla because "they just know" it's going to go up? Think Wall Street analysts are any better? If you've ever worked on Wall Street or have friends who do, you'll know there are plenty of dumb people working at hedge funds, and that even the smart ones often trade based on considerations having nothing to do with valuation. There's a lot of stupidity in the finance industry and it just feels weird to accept that the people setting prices at the margin are good at incorporating all the given information and translating it to some given price.

I wonder if there's a way to decouple the superiority of index funds from the EMH. Maybe index funds simply do better due to its ability to capture the outliers - so it always includes the small percentage of out-performers that account for a huge proportion of the index's returns, and that is why it's so difficult for any given fund manager to beat the index. You'll lose to the index even if you are right, valuation-wise, because while people who buy the indexes are laughing all the way to the bank with their over-valued Teslas and Amazons trading at nose-bleed valuations, you're stuck with your low price-to-book value stocks that haven't done nothing in a decade. Maybe you're right, but you've waited too long to see any gains.

Maybe the EMH is the wrong reason why index funds are superior.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by fortyofforty »

MotoTrojan wrote: Sun Feb 02, 2020 8:53 pm Do any nations in a developed market index have dictatorship governments?
I don't know. Since all my international investments are in "total" international markets, they do indeed include at least one large one I can think of right off the top, I haven't kept up with developed market indexes.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by z3r0c00l »

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
They can't, many try to justify it with spurious reasoning. Unfortunately much the same reasoning would apply to not holding US stocks at market weight either. Why own Toyota when you can just hold US car-makers with international exposure? Well why not just own Ford?
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Re: A Simple Test In Your Belief In Market Efficiency

Post by rkhusky »

Random Walker wrote: Sun Feb 02, 2020 5:31 pm
Nate79 wrote: Sun Feb 02, 2020 3:53 pm Arguing for global market cap weighting is also arguing against tilting to small cap value....
I disagree. One can strongly believe in diversifying across both factors and geographies.

Dave
Depends on what you mean by market efficiency. If you believe that market efficiency means that the market can tell the future, then having anything but a cap weighted portfolio would mean that you reject that idea.

IMO, market efficiency means that the market incorporates all available information into stock prices as of that moment. It doesn't mean that the market can correctly predict future stock prices or that there is no irrationality in the market. It simply means that the current market price is the correct price for that moment.

The market provides its best guess as to the future of stock prices, but there is no guarantee that it will be correct. Which is what those who deviate from a market cap portfolio must be counting on, along with the idea that they know in which direction the market will be wrong.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by PVW »

MotoTrojan wrote: Sun Feb 02, 2020 8:53 pm Do any nations in a developed market index have dictatorship governments?
None of the countries that compose the FTSE Developed ex North America Index have authoritarian governments. The possible exception is Hong Kong, which is at least partially subject to the authoritarian rule of China.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by midareff »

Since "According to S&P DJI's annual S&P 500 Foreign Sales Report, foreign sales totaled 43.6% for 2017, up from 43.2% for 2016. The total for 2017 still trails 44.3% for 2015 and 47.8% for 2014, which is the record since S&P DJI's first foreign sales report from 2003.Aug 16, 2018" ... you get a very significant slice of the world's economy regardless of the home country domicile of the company.

For me, and knowing that, I'm fine owning the S&P (IRA) and Total US Stock (taxable) without additional international fund ownership. YMMV.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by JoMoney »

Random Walker wrote: Sun Feb 02, 2020 5:31 pm
Nate79 wrote: Sun Feb 02, 2020 3:53 pm Arguing for global market cap weighting is also arguing against tilting to small cap value....
I disagree. One can strongly believe in diversifying across both factors and geographies.

Dave
And if you are a "true believer" that those are efficient market "risk factors" one can choose to efficiently tilt towards or away from those risks.
Even FF use different factor regressions for U.S. and International stock markets, if they were not unique in their risk characteristics they could lump the global stock market portfolio together as one big market to perform regressions against...
You can't believe it's "efficient" to tilt towards a risk factor without believing it's also "efficient" to tilt away, it's merely a matter of "risk preference" (like stock/bond allocation).
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Forester »

Obviously the low risk option is owning one equity market, the USA at CAPE 31 + President 46 ******* :mrgreen:
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Re: A Simple Test In Your Belief In Market Efficiency

Post by willthrill81 »

rkhusky wrote: Mon Feb 03, 2020 7:54 am IMO, market efficiency means that the market incorporates all available information into stock prices as of that moment.
That's basically the definition of market efficiency.
rkhusky wrote: Mon Feb 03, 2020 7:54 amIt doesn't mean that the market can correctly predict future stock prices or that there is no irrationality in the market.
Correct.
rkhusky wrote: Mon Feb 03, 2020 7:54 amIt simply means that the current market price is the correct price for that moment.
What do you mean by 'correct'? As you note above, the EMH does not apply that the market can correctly predict future stock prices. Given this, what assurance do we have that the current price is correct or even the best estimate of its net present value?
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Re: A Simple Test In Your Belief In Market Efficiency

Post by rascott »

JonnyB wrote: Sun Feb 02, 2020 4:32 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?
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!"

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Re: A Simple Test In Your Belief In Market Efficiency

Post by protagonist »

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?

Dave
A "true believer" in anything that cannot be proven, or even reliably tested, is a set up for profound disappointment.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by afan »

There are differences in expense ratios and tax costs. I don't know whether there are differences in trading costs. If so and US were cheaper that would justify some favor to US stocks, maybe. One might hope that the higher costs were considered by the market in setting setting prices. If that happened, then the expected risk adjusted return should be the same for both markets.
Remember that the price is a net effect of the decisions by investors in all markets. Investors are not homogeneous in their constraints. Foreign investors may face constraints on their ownership of US stocks. The market price of US vs international reflects the average of all investors. But it need not be the case that there exists any investor at all whose situation and risk preferences conform to the average.

On the other hand, the high correlation between US and international markets means that the diversification benefit is limited. The expected return of a US only portfolio will be similar to that for a combined US and international portfolio. The expected return of a portfolio with, say 60% US, 40% international will be very close to that of a 50% US and 50% international. Given that it will be so close, minor effects like taxes could well tilt toward US for US investors.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by MEA »

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
Because of these two major exceptions.

The first one is that the US provides the security that the entire world operates under.
Image

The second one is that the American people are not too keen on doing that anymore. https://youtu.be/sfyrURHpUcM
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Re: A Simple Test In Your Belief In Market Efficiency

Post by tadamsmar »

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?
It easy to square because you couch it in terms of investors. Lots of investors can be biased but the rational big-money investors can still cause the market to be efficient.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Random Walker »

UpperNwGuy wrote: Mon Feb 03, 2020 4:50 am
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
How would you apply this line of thinking to investing in factors?
I suppose the common thread is diversification. If markets are efficient, there is really very little reason to prefer US over Int. So diversify internationally. With regard to factors, that falls into the diversification realm as well: diversify across as many unique and independent sources of risk and return as possible. One niche that particularly interests me is international small cap value. The small international stocks are particularly affected by their local economies, as opposed to worldwide trends. So I think they have special potential diversification benefit compared to large US and large Int. “Hyperdiversification”: geography, factors, styles, even potentially alternatives.

Dave
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Random Walker »

JoMoney wrote: Mon Feb 03, 2020 9:16 am
Random Walker wrote: Sun Feb 02, 2020 5:31 pm
Nate79 wrote: Sun Feb 02, 2020 3:53 pm Arguing for global market cap weighting is also arguing against tilting to small cap value....
I disagree. One can strongly believe in diversifying across both factors and geographies.

Dave
And if you are a "true believer" that those are efficient market "risk factors" one can choose to efficiently tilt towards or away from those risks.
Even FF use different factor regressions for U.S. and International stock markets, if they were not unique in their risk characteristics they could lump the global stock market portfolio together as one big market to perform regressions against...
You can't believe it's "efficient" to tilt towards a risk factor without believing it's also "efficient" to tilt away, it's merely a matter of "risk preference" (like stock/bond allocation).
I agree with Fama’s statement that it’s about “preferences”: one can rationally choose TSM with no tilt, tilt to value, or tilt to growth. But I think all our portfolios are dominated by market beta, so diversification calls for the tilt to size and value.

Dave
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Re: A Simple Test In Your Belief In Market Efficiency

Post by alex_686 »

Caduceus wrote: Mon Feb 03, 2020 7:24 am I wonder if there's a way to decouple the superiority of index funds from the EMH. ... Maybe the EMH is the wrong reason why index funds are superior.
They guys who invented the idea of index funds and launched the first one explicitly link their ideas of passive investing with their undergraduate work with Farma in EMH. I haven’t seen any other theoretical work suggesting otherwise. You would have to rip up 40 years of investment theory.

As for the post that EMH can’t be proven false so it can’t be a theory- well that is true. However there has been a fair amount of work testing to see if it is true, and it holds up. What price weirdness that show up are hard to exploit and short lived. It helps frame how the market works.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Scooter57 »

I learned early in life that true believers are usually blind to important things that are very obvious to others.

"Market Efficiency" strikes me as one of those comforting oversimplifications academics in the social sciences come up with to advance their careers that in time are replaced by different, equally comforting oversimplifications.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by beehivehave »

Caduceus wrote: Mon Feb 03, 2020 7:24 am Maybe the EMH is the wrong reason why index funds are superior.
Maybe it's that index funds are superior for only the man-on-the-street investor who is going head-to-head with investors who have PHDs from MIT, investing full-time for a living using sophisticated models on supercomputers and sometimes having inside information working for companies that can move markets by floating rumors.
Maybe it's at least in part because index funds do not have high expenses.
Maybe it's just that index funds are superior in the sense they are less volatile and safer - so far at least, you can opt for an almost sure single by buying the market which has historically risen rather than swinging for a home run and risk striking out.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Dottie57 »

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?
This is my thought too. There are different level of efficiency across the globe.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by shess »

Caduceus wrote: Mon Feb 03, 2020 7:24 am I find the EMH very interesting because I don't find the basic hypothesis compelling, but I accept the result. Take a look at the average investor - you think they are capable of setting efficient prices? When was the last time you heard some friend say they are going to buy Tesla because "they just know" it's going to go up? Think Wall Street analysts are any better? If you've ever worked on Wall Street or have friends who do, you'll know there are plenty of dumb people working at hedge funds, and that even the smart ones often trade based on considerations having nothing to do with valuation. There's a lot of stupidity in the finance industry and it just feels weird to accept that the people setting prices at the margin are good at incorporating all the given information and translating it to some given price.
I'm not sure I understand the point you're getting at. The price of a stock is literally the equilibrium point where the demand balances the supply. If demand is caused by people "just knowing" that a stock is going up, that is real demand, albeit perhaps not sustainable on the part of an individual investor. We see obvious cycles from that kind of demand all the time, but what we don't know is how much of the average stock price is also from people who "just know" that stocks are going to go up, or down. We do know it's probably a non-zero amount. It could be that a speculative rally happens when sentiment's input to prices rises by 10x or 100x - but it also could be when it rises by 2x.

As I see the EMH, it basically recognizes that there are a bunch of reasons why people buy and sell things, and that it's possible that the market itself is the only reliable way to integrate all those reasons together successfully. Just because some of those inputs are stupid or uninformed doesn't mean they don't have long-term impacts on the market, since the world continually generates new investors.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Taylor Larimore »

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
Dave:

This is a very good question and the answer is not apparent. Nevertheless, John Bogle gives the answer in his book, Common Sense on Mutual Funds. It is 25 pages titled "On Global Investing" which can't be repeated here.

It is instructive to know that Mr. Bogle has been right (U.S. stocks more than doubled EAFE stocks) ever since Jack wrote his first book in 1993.

Bogleheads can read my international stock suggestion for U.S. investors HERE.

Best wishes.
Taylor
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Money Market »

MotoTrojan wrote: Sun Feb 02, 2020 8:53 pm Do any nations in a developed market index have dictatorship governments?
Singapore could be considered one since it's been ruled by a single party since independence.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by MotoTrojan »

Money Market wrote: Mon Feb 03, 2020 1:42 pm
MotoTrojan wrote: Sun Feb 02, 2020 8:53 pm Do any nations in a developed market index have dictatorship governments?
Singapore could be considered one since it's been ruled by a single party since independence.
Interesting. Well my core International holding FNDC doesn't even register Singapore as a top-ten holding, so it must be under 3%. I'll sleep A-okay.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by backofbeyond »

I may not be an expert in world economics, but having worked and lived in 6 foreign countries (other than the US) and negotiated multi-million dollar contracts with another 30 countries, I think I do have more insight than the normal Joe Sixpack. Based on my (key word) observations, the future trends seem to point to technology being (or is it staying?) the dominate sector.

Of all the countries that I dealt with over the last 30 years, only the Asian countries came within a light year of the US domination in this field. And again, in my humble opinion, it boils down to China and maybe South Korea. European, Middle East, and African countries have very few (in comparison) technical companies to choose from. I also think the US dominates in the Entertainment arena. Marvel superhero movies are just as big in Bangkok as they are in Billings Montana.

While the vast majority of my portfolio is in broad index funds, my international exposure (about 20%) is tilted towards Asian countries and particularly China.

Could I be wrong to have such a large exposure to the US and tilt towards China in my International selection? Absolutely.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Random Walker »

Taylor Larimore wrote: Mon Feb 03, 2020 1:41 pm
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
Dave:

This is a very good question and the answer is not apparent. Nevertheless, John Bogle gives the answer in his book, Common Sense on Mutual Funds. It is 25 pages titled "On Global Investing" which can't be repeated here.

It is instructive to know that Mr. Bogle has been right (U.S. stocks more than doubled EAFE stocks) ever since Jack wrote his first book in 1993.

Bogleheads can read my international stock suggestion for U.S. investors HERE.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Holdings of non-U.S. stocks should be limited to no more than 20% of equities."
Yes, I’m familiar with most all the above, but didn't realize US more than doubled Int. All this makes the question that much more interesting to me!

Dave
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Re: A Simple Test In Your Belief In Market Efficiency

Post by MotoTrojan »

backofbeyond wrote: Mon Feb 03, 2020 2:12 pm I may not be an expert in world economics, but having worked and lived in 6 foreign countries (other than the US) and negotiated multi-million dollar contracts with another 30 countries, I think I do have more insight than the normal Joe Sixpack. Based on my (key word) observations, the future trends seem to point to technology being (or is it staying?) the dominate sector.

Of all the countries that I dealt with over the last 30 years, only the Asian countries came within a light year of the US domination in this field. And again, in my humble opinion, it boils down to China and maybe South Korea. European, Middle East, and African countries have very few (in comparison) technical companies to choose from. I also think the US dominates in the Entertainment arena. Marvel superhero movies are just as big in Bangkok as they are in Billings Montana.

While the vast majority of my portfolio is in broad index funds, my international exposure (about 20%) is tilted towards Asian countries and particularly China.

Could I be wrong to have such a large exposure to the US and tilt towards China in my International selection? Absolutely.
No explicit mention of Japan; any direct experience in their economy? My International is predominantly in Japanese small-caps (FNDC).
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Re: A Simple Test In Your Belief In Market Efficiency

Post by TheTimeLord »

Is there a prize for passing the test, or a penalty for failing?
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Re: A Simple Test In Your Belief In Market Efficiency

Post by UpperNwGuy »

TheTimeLord wrote: Mon Feb 03, 2020 2:26 pm Is there a prize for passing the test, or a penalty for failing?
Testing my belief in market efficiency would have the same utility as testing my belief in quantum physics. I know nothing about quantum physics, nor do I care to know about it. Similarly, I have no beliefs about whether or not markets are efficient. In fact, I don't care if markets are efficient or not. All I care about is that my fund tracks its index and the index represents the market.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Steadfast »

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?
They can't. Which is why I run equities at exactly global market capitalization. It hurts to do so lately, but I am comforted by the studies showing that international equities have outperformed U.S. equities during many periods in the past. I retire in about 23 years and hope to see some mean reversion during that time. If not, c'est la vie.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Random Walker »

TheTimeLord wrote: Mon Feb 03, 2020 2:26 pm Is there a prize for passing the test, or a penalty for failing?
Clearly no :-) But I do think it’s a good sort of self evaluation measure of one’s belief in market efficiency. Like I said, I would consider myself almost naively / idealistically a believer in efficient markets. But the data reveals anomalies that clearly show markets are not perfectly efficient: momentum, small growth black hole, poor performance of IPOs. One’s US/Int split may sort of indirectly measure where an investor lies on the Efficient-Inefficient spectrum. I really like Larry Swedroe’s statement that “markets are not perfectly efficient, but best to act as if they are”.

Dave
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Re: A Simple Test In Your Belief In Market Efficiency

Post by rascott »

MotoTrojan wrote: Mon Feb 03, 2020 2:24 pm
backofbeyond wrote: Mon Feb 03, 2020 2:12 pm I may not be an expert in world economics, but having worked and lived in 6 foreign countries (other than the US) and negotiated multi-million dollar contracts with another 30 countries, I think I do have more insight than the normal Joe Sixpack. Based on my (key word) observations, the future trends seem to point to technology being (or is it staying?) the dominate sector.

Of all the countries that I dealt with over the last 30 years, only the Asian countries came within a light year of the US domination in this field. And again, in my humble opinion, it boils down to China and maybe South Korea. European, Middle East, and African countries have very few (in comparison) technical companies to choose from. I also think the US dominates in the Entertainment arena. Marvel superhero movies are just as big in Bangkok as they are in Billings Montana.

While the vast majority of my portfolio is in broad index funds, my international exposure (about 20%) is tilted towards Asian countries and particularly China.

Could I be wrong to have such a large exposure to the US and tilt towards China in my International selection? Absolutely.
No explicit mention of Japan; any direct experience in their economy? My International is predominantly in Japanese small-caps (FNDC).


Ah yes.... another dog (FNDC) in my international dog house. This one has been smelling even worse than the others, lately.
MotoTrojan
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Re: A Simple Test In Your Belief In Market Efficiency

Post by MotoTrojan »

rascott wrote: Mon Feb 03, 2020 2:49 pm
MotoTrojan wrote: Mon Feb 03, 2020 2:24 pm
backofbeyond wrote: Mon Feb 03, 2020 2:12 pm I may not be an expert in world economics, but having worked and lived in 6 foreign countries (other than the US) and negotiated multi-million dollar contracts with another 30 countries, I think I do have more insight than the normal Joe Sixpack. Based on my (key word) observations, the future trends seem to point to technology being (or is it staying?) the dominate sector.

Of all the countries that I dealt with over the last 30 years, only the Asian countries came within a light year of the US domination in this field. And again, in my humble opinion, it boils down to China and maybe South Korea. European, Middle East, and African countries have very few (in comparison) technical companies to choose from. I also think the US dominates in the Entertainment arena. Marvel superhero movies are just as big in Bangkok as they are in Billings Montana.

While the vast majority of my portfolio is in broad index funds, my international exposure (about 20%) is tilted towards Asian countries and particularly China.

Could I be wrong to have such a large exposure to the US and tilt towards China in my International selection? Absolutely.
No explicit mention of Japan; any direct experience in their economy? My International is predominantly in Japanese small-caps (FNDC).


Ah yes.... another dog (FNDC) in my international dog house. This one has been smelling even worse than the others, lately.
Zoom out a bit and it looks a lot better than the total market funds.
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backofbeyond
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Re: A Simple Test In Your Belief In Market Efficiency

Post by backofbeyond »

MotoTrojan wrote: Mon Feb 03, 2020 2:24 pm
backofbeyond wrote: Mon Feb 03, 2020 2:12 pm I may not be an expert in world economics, but having worked and lived in 6 foreign countries (other than the US) and negotiated multi-million dollar contracts with another 30 countries, I think I do have more insight than the normal Joe Sixpack. Based on my (key word) observations, the future trends seem to point to technology being (or is it staying?) the dominate sector.

Of all the countries that I dealt with over the last 30 years, only the Asian countries came within a light year of the US domination in this field. And again, in my humble opinion, it boils down to China and maybe South Korea. European, Middle East, and African countries have very few (in comparison) technical companies to choose from. I also think the US dominates in the Entertainment arena. Marvel superhero movies are just as big in Bangkok as they are in Billings Montana.

While the vast majority of my portfolio is in broad index funds, my international exposure (about 20%) is tilted towards Asian countries and particularly China.

Could I be wrong to have such a large exposure to the US and tilt towards China in my International selection? Absolutely.
No explicit mention of Japan; any direct experience in their economy? My International is predominantly in Japanese small-caps (FNDC).
To be honest, I left Japan out on purpose. I actually lived there for 2 years. They are a very resourceful and polite society, but they do not have the same "drive" that I saw in both China and South Korea. Plus they have social inefficiencies that other Asian countries don't deal with, like the ageing population. Their society and religion places the elderly in high regards, so I suspect their budget will be overwhelmed by taxes to care for the elderly. While in China and many (most?) other Asian countries, they leave that up to the family members.

So, while I do have exposure to Japan, I've titled more to China and SK.
The question isn't at what age I want to retire, it is at what income. - George Foreman
columbia
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Re: A Simple Test In Your Belief In Market Efficiency

Post by columbia »

For those interested, there are any number of Asia ex-Japan ETFs.

I have the capacity to be interested in an emerging markets Asia ex-China fund. ;)
MotoTrojan
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Re: A Simple Test In Your Belief In Market Efficiency

Post by MotoTrojan »

backofbeyond wrote: Mon Feb 03, 2020 3:03 pm
MotoTrojan wrote: Mon Feb 03, 2020 2:24 pm
backofbeyond wrote: Mon Feb 03, 2020 2:12 pm I may not be an expert in world economics, but having worked and lived in 6 foreign countries (other than the US) and negotiated multi-million dollar contracts with another 30 countries, I think I do have more insight than the normal Joe Sixpack. Based on my (key word) observations, the future trends seem to point to technology being (or is it staying?) the dominate sector.

Of all the countries that I dealt with over the last 30 years, only the Asian countries came within a light year of the US domination in this field. And again, in my humble opinion, it boils down to China and maybe South Korea. European, Middle East, and African countries have very few (in comparison) technical companies to choose from. I also think the US dominates in the Entertainment arena. Marvel superhero movies are just as big in Bangkok as they are in Billings Montana.

While the vast majority of my portfolio is in broad index funds, my international exposure (about 20%) is tilted towards Asian countries and particularly China.

Could I be wrong to have such a large exposure to the US and tilt towards China in my International selection? Absolutely.
No explicit mention of Japan; any direct experience in their economy? My International is predominantly in Japanese small-caps (FNDC).
To be honest, I left Japan out on purpose. I actually lived there for 2 years. They are a very resourceful and polite society, but they do not have the same "drive" that I saw in both China and South Korea. Plus they have social inefficiencies that other Asian countries don't deal with, like the ageing population. Their society and religion places the elderly in high regards, so I suspect their budget will be overwhelmed by taxes to care for the elderly. While in China and many (most?) other Asian countries, they leave that up to the family members.

So, while I do have exposure to Japan, I've titled more to China and SK.
Good stuff. I have decided on a small-value tilt (via a Fundamental index) for all of my ex-US, so until Japan's smaller companies start dropping off in economic output (as measured by dividends, cash-flow, and sales) I will have a bit of an overweight there. Let's hope the small-cap companies have more to prove and keep that drive up :twisted: .
rascott
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Re: A Simple Test In Your Belief In Market Efficiency

Post by rascott »

MotoTrojan wrote: Mon Feb 03, 2020 2:53 pm
rascott wrote: Mon Feb 03, 2020 2:49 pm
MotoTrojan wrote: Mon Feb 03, 2020 2:24 pm
backofbeyond wrote: Mon Feb 03, 2020 2:12 pm I may not be an expert in world economics, but having worked and lived in 6 foreign countries (other than the US) and negotiated multi-million dollar contracts with another 30 countries, I think I do have more insight than the normal Joe Sixpack. Based on my (key word) observations, the future trends seem to point to technology being (or is it staying?) the dominate sector.

Of all the countries that I dealt with over the last 30 years, only the Asian countries came within a light year of the US domination in this field. And again, in my humble opinion, it boils down to China and maybe South Korea. European, Middle East, and African countries have very few (in comparison) technical companies to choose from. I also think the US dominates in the Entertainment arena. Marvel superhero movies are just as big in Bangkok as they are in Billings Montana.

While the vast majority of my portfolio is in broad index funds, my international exposure (about 20%) is tilted towards Asian countries and particularly China.

Could I be wrong to have such a large exposure to the US and tilt towards China in my International selection? Absolutely.
No explicit mention of Japan; any direct experience in their economy? My International is predominantly in Japanese small-caps (FNDC).


Ah yes.... another dog (FNDC) in my international dog house. This one has been smelling even worse than the others, lately.
Zoom out a bit and it looks a lot better than the total market funds.
Than the total international index? Yeah... another terribly smelly dog....I long ago quit feeding. Very volatile with putrid returns.
MotoTrojan
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Re: A Simple Test In Your Belief In Market Efficiency

Post by MotoTrojan »

rascott wrote: Mon Feb 03, 2020 4:16 pm
MotoTrojan wrote: Mon Feb 03, 2020 2:53 pm
rascott wrote: Mon Feb 03, 2020 2:49 pm
MotoTrojan wrote: Mon Feb 03, 2020 2:24 pm
backofbeyond wrote: Mon Feb 03, 2020 2:12 pm I may not be an expert in world economics, but having worked and lived in 6 foreign countries (other than the US) and negotiated multi-million dollar contracts with another 30 countries, I think I do have more insight than the normal Joe Sixpack. Based on my (key word) observations, the future trends seem to point to technology being (or is it staying?) the dominate sector.

Of all the countries that I dealt with over the last 30 years, only the Asian countries came within a light year of the US domination in this field. And again, in my humble opinion, it boils down to China and maybe South Korea. European, Middle East, and African countries have very few (in comparison) technical companies to choose from. I also think the US dominates in the Entertainment arena. Marvel superhero movies are just as big in Bangkok as they are in Billings Montana.

While the vast majority of my portfolio is in broad index funds, my international exposure (about 20%) is tilted towards Asian countries and particularly China.

Could I be wrong to have such a large exposure to the US and tilt towards China in my International selection? Absolutely.
No explicit mention of Japan; any direct experience in their economy? My International is predominantly in Japanese small-caps (FNDC).


Ah yes.... another dog (FNDC) in my international dog house. This one has been smelling even worse than the others, lately.
Zoom out a bit and it looks a lot better than the total market funds.
Than the total international index? Yeah... another terribly smelly dog....I long ago quit feeding. Very volatile with putrid returns.
Sometimes feeding the hungry dog is better than the spoiled one.
rkhusky
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Re: A Simple Test In Your Belief In Market Efficiency

Post by rkhusky »

willthrill81 wrote: Mon Feb 03, 2020 9:48 am
rkhusky wrote: Mon Feb 03, 2020 7:54 amIt simply means that the current market price is the correct price for that moment.
What do you mean by 'correct'? As you note above, the EMH does not apply that the market can correctly predict future stock prices. Given this, what assurance do we have that the current price is correct or even the best estimate of its net present value?
The correct price is the one where there is equilibrium, buyers and sellers both reach a price point where their desires are satisfied. A low value for (bid-ask)/(bid+ask) is a sign of an efficient market. There is efficient transfer of market information and high liquidity in the market.
rkhusky
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Re: A Simple Test In Your Belief In Market Efficiency

Post by rkhusky »

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?
Random Walker wrote: Mon Feb 03, 2020 11:12 am If markets are efficient, there is really very little reason to prefer US over Int.
These statements seem contrary. If markets are efficient, should one be market-cap weighted between US and Int'l or does it not matter and 100/0, 0/100, and 50/50 are all equally fine?

If the US market is efficient, should one be fully cap-weighted and use Total Stock Market or should one use Small Value or a 50/50 mix of SV and TSM (notwithstanding that SV is a part of TSM)?

If you argue for cap-weighting due to market efficiency, you should be fully cap-weighted and not tilt.

The thread appears to have some confusion between market efficiency and the efficient frontier. One can be on the efficient frontier, without having an efficient market. One can have an efficient market and not be on the efficient frontier.
Rosencrantz1
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Rosencrantz1 »

I'm an admitted noob regarding the use of Portfolio Visualizer.... and, it appears that one can only back to 1985? I did a couple of quick looks at Total International vs Total US type scenarios. I realize there has been out-performance occasionally by both US and exUS equity holdings at various times in PV history.

Here's my question... is there a way to see the CAGR for US and exUS, say, from 1960 (or 1970 or 1980) forward? Not sure that I think of markets being completely efficient on a global basis.... I don't think one has to look any further than the latest health crisis and China's initial reaction to realize that not all 'information' is instantly shared equally and globally.

I've been trying to convince myself to buy international... but, I keep running up against my concerns of (some) authoritarian style governments. Therefore, for me, I rely on old faithful - Have long term (decades long) returns in exUS outperformed US?
Caduceus
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Caduceus »

alex_686 wrote: Mon Feb 03, 2020 11:37 am
As for the post that EMH can’t be proven false so it can’t be a theory- well that is true. However there has been a fair amount of work testing to see if it is true, and it holds up. What price weirdness that show up are hard to exploit and short lived. It helps frame how the market works.
I think the EMH can be proven false in particular instances.

One instance is in terms of particular valuations of stocks. Charlie Munger spoke about buying oil royalties that returned a hundred-fold in a fairly short time; people like Warren Buffett - when they were dealing with small sums of money and not restricted to buying large companies - regularly identified mispriced securities like Sanborn Maps. Sanborn maps was a map-making business for casualty insurance purposes that also owned a portfolio of stocks; the market valued the entire company at less than the constituent portfolios. So that meant that you could actually just buy those stocks cheaper indirectly by owning Sanborn Maps, and get the map business for free - how much more proof that markets can be wildly inept at valuing securities can you get than that? Yifei Lu has written on this - I can't remember the title of the book but it should be on Amazon. The financial statements of Sanborn Maps are included - take a read. It's fascinating.

Another instance would be market dislocations during periods of mass hysteria. Shiller has written from the perspective of behavioral finance about why the market suffers from animal spirits and then great depressions. I find his explanations more compelling as a matter of psychology.

Warren Buffett thinks the EMH is stupid but also believes index funds are great investments. It's possible to hold to one without believing the other.
Topic Author
Random Walker
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Random Walker »

rkhusky wrote: Mon Feb 03, 2020 5:18 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?
Random Walker wrote: Mon Feb 03, 2020 11:12 am If markets are efficient, there is really very little reason to prefer US over Int.
These statements seem contrary. If markets are efficient, should one be market-cap weighted between US and Int'l or does it not matter and 100/0, 0/100, and 50/50 are all equally fine?

If the US market is efficient, should one be fully cap-weighted and use Total Stock Market or should one use Small Value or a 50/50 mix of SV and TSM (notwithstanding that SV is a part of TSM)?

If you argue for cap-weighting due to market efficiency, you should be fully cap-weighted and not tilt.

The thread appears to have some confusion between market efficiency and the efficient frontier. One can be on the efficient frontier, without having an efficient market. One can have an efficient market and not be on the efficient frontier.
I don’t think tilting necessarily indicates a lack of belief in market efficiency. And I don’t think advocating geographical diversification based on market efficiency is contradictory to tilting. The common unifying theme is diversification: across geographies and unique potential sources of risk/return.

Dave
rkhusky
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Re: A Simple Test In Your Belief In Market Efficiency

Post by rkhusky »

Random Walker wrote: Mon Feb 03, 2020 6:20 pm
rkhusky wrote: Mon Feb 03, 2020 5:18 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?
Random Walker wrote: Mon Feb 03, 2020 11:12 am If markets are efficient, there is really very little reason to prefer US over Int.
These statements seem contrary. If markets are efficient, should one be market-cap weighted between US and Int'l or does it not matter and 100/0, 0/100, and 50/50 are all equally fine?

If the US market is efficient, should one be fully cap-weighted and use Total Stock Market or should one use Small Value or a 50/50 mix of SV and TSM (notwithstanding that SV is a part of TSM)?

If you argue for cap-weighting due to market efficiency, you should be fully cap-weighted and not tilt.

The thread appears to have some confusion between market efficiency and the efficient frontier. One can be on the efficient frontier, without having an efficient market. One can have an efficient market and not be on the efficient frontier.
I don’t think tilting necessarily indicates a lack of belief in market efficiency. And I don’t think advocating geographical diversification based on market efficiency is contradictory to tilting. The common unifying theme is diversification: across geographies and unique potential sources of risk/return.

Dave
Diversifying internationally is important, but diversifying across size and P/B is not? Seems contradictory.
acegolfer
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Re: A Simple Test In Your Belief In Market Efficiency

Post by acegolfer »

rkhusky wrote: Mon Feb 03, 2020 5:18 pm The thread appears to have some confusion between market efficiency and the efficient frontier. One can be on the efficient frontier, without having an efficient market. One can have an efficient market and not be on the efficient frontier.
True. Unfortunately, "market is efficient" can mean 2 different things. It may be hard for an average reader to tell which context it is referring to.
Topic Author
Random Walker
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Random Walker »

rkhusky wrote: Mon Feb 03, 2020 7:06 pm
Random Walker wrote: Mon Feb 03, 2020 6:20 pm
rkhusky wrote: Mon Feb 03, 2020 5:18 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?
Random Walker wrote: Mon Feb 03, 2020 11:12 am If markets are efficient, there is really very little reason to prefer US over Int.
These statements seem contrary. If markets are efficient, should one be market-cap weighted between US and Int'l or does it not matter and 100/0, 0/100, and 50/50 are all equally fine?

If the US market is efficient, should one be fully cap-weighted and use Total Stock Market or should one use Small Value or a 50/50 mix of SV and TSM (notwithstanding that SV is a part of TSM)?

If you argue for cap-weighting due to market efficiency, you should be fully cap-weighted and not tilt.

The thread appears to have some confusion between market efficiency and the efficient frontier. One can be on the efficient frontier, without having an efficient market. One can have an efficient market and not be on the efficient frontier.
I don’t think tilting necessarily indicates a lack of belief in market efficiency. And I don’t think advocating geographical diversification based on market efficiency is contradictory to tilting. The common unifying theme is diversification: across geographies and unique potential sources of risk/return.

Dave
Diversifying internationally is important, but diversifying across size and P/B is not? Seems contradictory.
I believe in diversifying across size, value, and geographies on the equity side

Dave
TomCat96
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Re: A Simple Test In Your Belief In Market Efficiency

Post by TomCat96 »

I can't stand this board's conception of efficient markets.

They think the ground Fama walks on is ivory because they have no other authority to appeal to on the matter.

If your analytical tool for thinking of what an efficient market is is EMH, you're telling the me world is 7 colors, and I'm asking you what color is the number pi.

You have at your disposal three buckets (strong, semi-strong and weak). You have a single axis: information.
And I'm telling you the idea of an efficient market transcends mere incorporation of information into prices. It has to, or the framework becomes unworkable at the slightest efforts to work it into practical answers.

Let's get real world because that is where I claim, consistently, incessantly, that the idea of market efficiency breaks down.

I create a work of art. Call it Tomcat96 art. I try to sell it.

Is the market efficient for that art?


Go. Have at it.

Use your so called analytical tool to answer that question.

I'll bet you all get stuck.
I'll bet you come up with conflicting answers.
I'll bet you come up with completely different rationales from one another.

This basic problem. Something that a five year old will come up with has already lent itself in a direction that is not amenable to the "information incorporation" paradigm. There the EMH has already failed.

I assert that the efficient markets hypothesis is nothing but a tautological tool which can be used to rationalize any position with respect to the market. It does no work by itself. It's nothing more than a magic eye. You see what you want to see.

By the way the color of pi is magenta. Someone prove me wrong.
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