A Simple Test In Your Belief In Market Efficiency

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

Post by TomCat96 »

Let's do another problem.

I live in communist soviet union.
I want to purchase item A. There is a long list of legal hassles, red tape, forms to fill out, and the like. There is a list of people I have to bribe to obtain item A.

Is the market for Item A efficient?

I use EMH.

Yes it is efficient, because laws don't matter--they are after all known, therefore the information is incorporated into the price of item A. The bribery? That's known too. It all goes to reduce the price of item A.

My response:

Really? A market where I have to bribe people, and jump through a bunch of legal hoops to purchase item A is "efficient"? Is that how we are going?
TomCat96
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Re: A Simple Test In Your Belief In Market Efficiency

Post by TomCat96 »

Let's do another problem.

Price control.
US government has capped the price of oil to a dollar barrel.

Is this market efficient?

I use EMH.

Everyone knows the US government's price control is in effect. That information is incorporated into the price, hence why the price of gas is $1.
Answer: This market is efficient.

My Response:
Really? Of course the price of the supply is significantly higher than a dollar per barrel of oil. As a result, we get a shortage.
A market where I cant buy gas because of a shortage because of a price control is efficient?

Is this how we are going?
TomCat96
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Re: A Simple Test In Your Belief In Market Efficiency

Post by TomCat96 »

Let's do another problem.


The US market has equity market volume of x trillion a day.
The equity market of say Bhutan is significantly less, at y million a day.

One of these has high volume, and significantly scrutiny.
The other does not.

Thing is, all the market traders in the US and elsewhere are well aware of the lack of volume on the Bhutan stock exchange, so they price it in.

Is the Bhutan stock exchange efficient because everybody knows the low volume and has priced it in?

or is it not efficient because the volume is lower and therefore information is slower to incorporate itself into the price.
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Stef
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Stef »

VT is my target allocation, leaving international out is a bigger bet than a 50% US SCV tilt.
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JoMoney
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Re: A Simple Test In Your Belief In Market Efficiency

Post by JoMoney »

Caduceus wrote: Mon Feb 03, 2020 6:02 pm...
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.
It's tautological to say that the aggregate of investors can't beat themselves.
We can assume that there is some "average" return investments like stocks will have in aggregate.
The "efficient market" view, is that above average returns only occur through increasing exposure to risk.
The alternative, is that above average returns occur by having better information and positional advantages. Like in other forms of businesses, advantages degrade as competition in that market-space rises. The "average" return is a commodity product. Superior returns come from bringing something to the market that others can't/don't. What has an advantage changes as competition gets tougher, and it moves things towards "efficiency", but it's a very different thing.
Is a doctor's above average salary compensation for unique skills the market can't otherwise fill, or is it something anyone willing to bear the "risk" can do and the market pricing a "risk premium" ?
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fortyofforty
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Re: A Simple Test In Your Belief In Market Efficiency

Post by fortyofforty »

Can I see a picture of Tomcatart96? I'll tell you the value.
MotoTrojan
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Re: A Simple Test In Your Belief In Market Efficiency

Post by MotoTrojan »

Rosencrantz1 wrote: Mon Feb 03, 2020 5:54 pm 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?
US data goes back further on there but ex-US starts around 1985.

There are other sources for ex-US & US data that goes back further which you can upload into PF. I am not familiar with good ex-US sources but I have S&P500 data from 1955-2018 loaded in to mine.
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calmaniac
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Re: A Simple Test In Your Belief In Market Efficiency

Post by calmaniac »

Random Walker wrote: Sun Feb 02, 2020 2:31 pm 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
What is so special about market cap weighting that you think it is THE answer? Why not P/E weighted or just earnings weighted? There are a host of variables associated with companies that could use used for such weighting. Just as one can use multiple metrics to estimate central tendency (arithmetic mean, geometric mean, median), don't you think there may be other valid ways to weigh your portfolio?

I'm not necessarily advocating for any of the above, but I'm surprised at the dogma that is associated with market cap weighting and would like more discussion of the reasoning and/or evidence base for the supremacy of such.
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JonnyB
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Re: A Simple Test In Your Belief In Market Efficiency

Post by JonnyB »

calmaniac wrote: Mon Feb 03, 2020 9:39 pm What is so special about market cap weighting that you think it is THE answer?
I have no idea what "THE" answer is.

However, market cap weighting is the only mathematical answer to the question of how to guarantee receiving exactly the total market return every year.
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willthrill81
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Re: A Simple Test In Your Belief In Market Efficiency

Post by willthrill81 »

rkhusky wrote: Mon Feb 03, 2020 5:00 pm
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.
Maybe I'm dumb, but I don't see how a small bid-ask spread has anything to do with 'efficient transfer of market information.'
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Re: A Simple Test In Your Belief In Market Efficiency

Post by alex_686 »

willthrill81 wrote: Mon Feb 03, 2020 10:23 pm Maybe I'm dumb, but I don't see how a small bid-ask spread has anything to do with 'efficient transfer of market information.'
EMH says that the market price incorporates all knowledge, less price discovery. i.e. Prices are not set by magic, but people trying to make a buck.

There are ways of determining if a market is efficient. Do stock prices move in a random fashion? Is there any information contained in stock prices? For example, in some emerging markets prices jump up before positive earnings announcements. A obvious leakage.

Thy looking up Shannon coding. It is used in data compression, cryptography, and stock analysis.

Anyways, a large bid-ask spread suggests that the market is thin. Thar there are few market participants, and thus few inputs into the collective wisdom. You get long periods of no action and then big jumps. Not so much a random walk but lots of standing around and then sprints. The system does not map as efficient.
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jibantik
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Re: A Simple Test In Your Belief In Market Efficiency

Post by jibantik »

I don't know if some people on this board were forced to say the pledge of allegiance one to many times in school or something, but to act like the USA has no corruption and other countries are lawless lands with no innovation is pretty laughable (or scary).
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Re: A Simple Test In Your Belief In Market Efficiency

Post by csmath »

jibantik wrote: Mon Feb 03, 2020 11:37 pm I don't know if some people on this board were forced to say the pledge of allegiance one to many times in school or something, but to act like the USA has no corruption and other countries are lawless lands with no innovation is pretty laughable (or scary).
There is no such thing as “no corruption” in large populations... of humans. Who is “some people” you refer to? Making a straw man argument like that only distracts from the real debate. No one has said any countries are all good or all bad, just that some are more or less corrupt and or more or less transparent. Surely you don’t think all countries are equal in all characteristics and cannot see that there may be issues that some people may argue interfere with Market Efficiency? You may not agree that they aren’t accounted for in the market but they are there.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Unladen_Swallow »

I am surprised that name calling "xenophobia " posts are still here.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Unladen_Swallow »

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!"
Nuff said.
"I think it's much more interesting to live not knowing than to have answers which might be wrong." - Richard Feynman
Northern Flicker
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Northern Flicker »

If the efficient market hypothesis is true it would in no way imply that you have to hold every possible asset class at cap weight. As an example, if you are choosing not to allocate to non-US equities because some publicly available information leads you to believe they will underperform, then EMH would have to fail for the strategy to be expected to succeed.

But there may be all sorts of valid reasons that have nothing to do with belief in market efficiency or lack thereof for holding a particular allocation. For instance, if your liabilities are in USD then increasing the exposure of a portfolio to non-USD currencies increases risk. While the currency exposure of a particular stock is difficult to elucidate and may extend beyond the currency of the country where the company is domiciled, it still is reasonable to try to manage currency risk of a portfolio. This has nothing to do with market efficiency.

Similarly, constructing a liability matching bond portfolio will focus on certain bond subclasses. There is no imperative of EMH to hold every possible bond in the world. But if you choose to hold a certain bond or bond subclass because public information about it leads you to conclude the market has priced in a higher yield than is fair value, then you are denying EMH.
Last edited by Northern Flicker on Tue Feb 04, 2020 6:46 pm, edited 1 time in total.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by fennewaldaj »

ScubaHogg wrote: Sun Feb 02, 2020 4:54 pm Just spitballing but I think one solid reason would be threat of asset expropriation. It doesn’t seem unreasonable to think there is a non-zero probability of a foreign government seizing the assets of non-nationals (in this case let’s say Americans) without seizing the assets of its own citizens.

I don’t think it would be “priced in” because it’s a risk citizens wouldn’t face (or would face it at a lower probability), so they could still bid up the price till the their expected return is higher than the expected return of a non-citizen.

I don’t think/know this is provable, but it is a risk one faces in international markets and is an argument for some home bias.
I think that is a risk. It makes an argument for not having too much exposure to the countries that is most likely to happen in (or really any individual country that is not your own). I don't think this is a huge issue for people from the US (because you won't end up with that much of one country) but it might be for those from other countries holding too much US stock
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Re: A Simple Test In Your Belief In Market Efficiency

Post by fennewaldaj »

willthrill81 wrote: Sun Feb 02, 2020 5:48 pm
arcticpineapplecorp. wrote: Sun Feb 02, 2020 5:41 pm
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?
that's why it's called the efficient market hypothesis and not the efficient market theory. Since it can't be proven it can't be a theory and must remain a hypothesis.
Actually, a good hypothesis is testable. Something that is untestable is often referred to as a proposition.
Philosophy of Science has sort of moved on from Popper though on the demarcation problem though right. Or at least the general view is that it is not quite that simple.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by PVW »

TomCat96 wrote: Mon Feb 03, 2020 8:40 pm I can't stand this board's conception of efficient markets.
[...]
I create a work of art. Call it Tomcat96 art. I try to sell it.

Is the market efficient for that art?

If your artwork is part of the All Art Index, then I'll buy it at market value.

For many Bogleheads, Efficient Markets are an ideology that is the foundation of the belief that active management and market timing are a loser's game. While some people here are debating the finer economic details of EMH.

A debate that mixes facts with faith won't have a conclusion, but that's what you get in an open forum.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by rkhusky »

Random Walker wrote: Mon Feb 03, 2020 7:45 pm
rkhusky wrote: Mon Feb 03, 2020 7:06 pm
Random Walker wrote: Mon Feb 03, 2020 6:20 pm 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.
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
But some proponents of small-value investing propose all small-value, which is not diversified across size and value.

If you are 50/50 TSM and small-value, then I suppose you could call yourself diversified.

In the same way, if someone is 70/30 US/Int'l, they could also say they are diversified internationally. They don't have to be at market-cap weighting.

On the other hand, if being 70/30 US/Int'l means that you don't believe in efficient markets, then being 50/50 TSM/SV also means that you don't believe in efficient markets.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by rkhusky »

willthrill81 wrote: Mon Feb 03, 2020 10:23 pm
rkhusky wrote: Mon Feb 03, 2020 5:00 pm 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.
Maybe I'm dumb, but I don't see how a small bid-ask spread has anything to do with 'efficient transfer of market information.'
What alex_686 said.

But to give an example, consider a piece of information that would cause a change in a stock's price (e.g. a company's drug passed (or did not pass) an FDA test). If a significant percentage of the market participants get the news at the same time and they can all process the implications at the same speed, then there would be a temporary dislocation in the bid-ask spread, but the transients would quickly die down, perhaps in seconds or minutes. On the other hand, if a significant percentage of the market participants get that news over an extended period, say 24 hours, then the dislocation gets spread out over a day or more.

So, perhaps not just the size of the bid-ask spread, but also how fast increases in the spread take to dissipate.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by bck63 »

When it comes to global equities there is not one market. The burden of proof is on someone who believes there is to prove it.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by beehivehave »

PVW wrote: Tue Feb 04, 2020 8:22 am
TomCat96 wrote: Mon Feb 03, 2020 8:40 pm I can't stand this board's conception of efficient markets.
[...]
I create a work of art. Call it Tomcat96 art. I try to sell it.

Is the market efficient for that art?

If your artwork is part of the All Art Index, then I'll buy it at market value.

For many Bogleheads, Efficient Markets are an ideology that is the foundation of the belief that active management and market timing are a loser's game. While some people here are debating the finer economic details of EMH.

A debate that mixes facts with faith won't have a conclusion, but that's what you get in an open forum.
You don't have to believe in EMH to justify indexing and passive investing. You just have to believe that the crowd is probably smarter than you, since the crowd includes insiders for almost every stock (especially with buybacks) and professionals with a lot more time, resources and information. And even if don't admit that, you may be a satisficer, who believes the pain of big losses is greater than the joy of big gains.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Northern Flicker »

TomCat96 wrote: Mon Feb 03, 2020 8:48 pm Let's do another problem.

I live in communist soviet union.
I want to purchase item A. There is a long list of legal hassles, red tape, forms to fill out, and the like. There is a list of people I have to bribe to obtain item A.

Is the market for Item A efficient?

I use EMH.

Yes it is efficient, because laws don't matter--they are after all known, therefore the information is incorporated into the price of item A. The bribery? That's known too. It all goes to reduce the price of item A.

My response:

Really? A market where I have to bribe people, and jump through a bunch of legal hoops to purchase item A is "efficient"? Is that how we are going?
This is one of many postings on BH where someone uses an example completely outside the scope of EMH (and thus for which EMH says nothing about whether or not it is efficient) and claims it is a counter example for EMH.

EMH just says that all publicly known information about a publicly traded stock is already priced in.

It was extended to the strong form that all information is priced in, which has been discredited. The notion of weak, semi-strong or semi-weak forms we’re proposed much later and are less mainstream notions.

There also are abuses of EMH on BH where people are basically asserting the strong EMH masqueraded in EMH clothes. Saying whatever goes on in opaque, corrupt markets is priced in is really saying non-public information is priced in which required the strong EMH to be true. Insider trading is already a counterexample to that.

So yes, EMH is over-applied on BH. But a critique of that does not lead to the conclusion that the EMH is incorrect.
Last edited by Northern Flicker on Tue Feb 04, 2020 6:48 pm, edited 2 times in total.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Northern Flicker »

Maybe I'm dumb, but I don't see how a small bid-ask spread has anything to do with 'efficient transfer of market information.'
Market efficiency depends on liquidity and a lack of barriers to arbitrage. Low bid-ask spreads are a symptom of high liquidity.

Liquid stocks with low bid-ask spreads have low transaction barriers to arbitrage and any inefficiencies can be corrected rapidly. Low liquidity assets with high bid-ask spreads have barriers to arbitrage and inefficiencies may persist longer.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by willthrill81 »

Northern Flicker wrote: Tue Feb 04, 2020 2:55 pm
Maybe I'm dumb, but I don't see how a small bid-ask spread has anything to do with 'efficient transfer of market information.'
Market efficiency depends on liquidity and a lack of barriers to arbitrage. Low bid-ask spreads are a symptom of high liquidity.

Liquid stocks with low bid-ask spreads have low transaction barriers to arbitrage and any inefficiencies can be corrected rapidly. Low liquidity assets with high bid-ask spreads have barriers to arbitrage and inefficiencies may persist longer.
I get that a small bid-ask spread implies liquidity. I still don't believe that liquidity implies efficiency.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by dreamrrr »

I believe the US market is mostly efficient and that's good enough for me. I'm not that familiar with the other ex-US markets.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by UpsetRaptor »

Markets are efficient? I present TSLA.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Scooter57 »

calmaniac wrote: Mon Feb 03, 2020 9:39 pm
What is so special about market cap weighting that you think it is THE answer? Why not P/E weighted or just earnings weighted? There are a host of variables associated with companies that could use used for such weighting. Just as one can use multiple metrics to estimate central tendency (arithmetic mean, geometric mean, median), don't you think there may be other valid ways to weigh your portfolio?

I'm not necessarily advocating for any of the above, but I'm surprised at the dogma that is associated with market cap weighting and would like more discussion of the reasoning and/or evidence base for the supremacy of such.
This is something that I have been thinking about a lot lately, after putting some time into looking at the large market indexes and seeing how heavily influenced by a handful of stocks they are. When a ridiculously designed 30 stock price-based index like the Dow matches the S&P 500 as closely as it has for most of my time investing it is pretty clear that what you have is a definition of "the market" which is really "a couple of very big companies' stocks."

Indeed, you have to wonder if you have a tautology here: The S&P 500 Index is Cap Weighted. The top 25-50 stocks overwhelmingly define its value. We then define "beating the market" as beating the S&P 500. So we are really defining "the market" as being that handful of small stocks. What happens to the other 3000+ companies trading every day has very little effect on the value of the market. The smallest cap stocks might quadruple one year and still make not a dent in the value of the S&P 500 index. Are they NOT "the market?" And when, as happened last year, almost all the growth in the S&P 500 index is due to five huge, bid up to crazy level tech stocks, ignoring the rest of the economy, is this not a sign that "the market" defined as S&P500 is not the actual market defined as thousands of companies, some of which are far more profitable than those overpriced fad stocks with the ridiculous market caps?
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Re: A Simple Test In Your Belief In Market Efficiency

Post by rkhusky »

Rather than just lamenting over the market seemingly dominated by a few stocks, you need to look at why that may be the case and whether there is any rationality to the situation. For example, look at P/E and P/B. Is a company's high price justified because it is selling billions of expensive products with a huge profit margin? Or perhaps it is sitting on a boatload of cash and/or massive of amounts of real estate and equipment. Would you want a piece of that or are you satisfied with a company selling a million items with a $1 profit margin (or even a thousand such companies).

Look also at how diversified the companies themselves are. Do they have 100's of product lines or 100's of subsidiaries in different industries. I have no problem with Berkshire-Hathaway being a dominate player in the US market because I know it is well diversified all by itself.

edit:
P/E and P/B for S&P 500 is 23 and 3.5, respectively.
P/E and P/B for Extended Market is 20 and 2.3, respectively.

P/E and P/B for Apple is 25 and 16, respectively.
P/E and P/B for Microsoft is 31 and 12, respectively.
P/E and P/B for Alphabet is 29 and 5, respectively.
P/E and P/B for Amazon is 89 and 16, respectively.
P/E and P/B for Facebook is 33 and 6, respectively.
P/E and P/B for Berkshire-Hathaway is 25 and 16, respectively.
P/E and P/B for JP Morgan is 13 and 2, respectively.
P/E and P/B for Johnson & Johnson is 27 and 7, respectively.
P/E and P/B for Visa is 37 and 15, respectively.
P/E and P/B for Procter & Gamble is 74 and 7, respectively.

It appears that on average small stocks aren't priced that much differently than large stocks.

In terms of the biggest stocks, only Amazon and Proctor & Gamble have P/E and P/B greater than 2x the average S&P 500.

I'm not seeing outrageous over-pricing of the larger stocks with this simple comparison. There are many other factors that investors use to value stocks, which take into account future expectations, as well as current numbers.
Last edited by rkhusky on Tue Feb 04, 2020 6:55 pm, edited 1 time in total.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Northern Flicker »

I get that a small bid-ask spread implies liquidity. I still don't believe that liquidity implies efficiency.
Liquidity is a necessary condition for market efficiency. The statement that it is a sufficient condition is a more precise way of expressing the EMH.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by columbia »

Has the market for Tesla this week been efficient per EMH?
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Re: A Simple Test In Your Belief In Market Efficiency

Post by alex_686 »

columbia wrote: Tue Feb 04, 2020 7:55 pm Has the market for Tesla this week been efficient per EMH?
Yeah, it has. Why would you think it wasn’t? i.e. can you point to a specific piece of information from last that would indicate today’s price?

Flip a coin. Heads is worth $1, tails $0. Before the flip the efficient price is $.50. After the flip...
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Re: A Simple Test In Your Belief In Market Efficiency

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

Post by Seasonal »

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
At this point, the tax cost be too high for me to move to a market portfolio.
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JoMoney
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Re: A Simple Test In Your Belief In Market Efficiency

Post by JoMoney »

alex_686 wrote: Tue Feb 04, 2020 8:19 pm
columbia wrote: Tue Feb 04, 2020 7:55 pm Has the market for Tesla this week been efficient per EMH?
Yeah, it has. Why would you think it wasn’t? i.e. can you point to a specific piece of information from last that would indicate today’s price?

Flip a coin. Heads is worth $1, tails $0. Before the flip the efficient price is $.50. After the flip...
It looked like a question to me.
It's easy for me to say I had no advantage over a coin flip, but it's another concern to say that nobody did. Can you prove that nobody trading in Tesla had an advantage?
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rockstar
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Re: A Simple Test In Your Belief In Market Efficiency

Post by rockstar »

UpsetRaptor wrote: Tue Feb 04, 2020 4:36 pm Markets are efficient? I present TSLA.
Krugman would argue that speculative bubbles are ignored by this theory.

Here's his 2008 rant:

https://www.nytimes.com/2009/09/06/maga ... mic-t.html
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UpsetRaptor
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Re: A Simple Test In Your Belief In Market Efficiency

Post by UpsetRaptor »

rockstar wrote: Tue Feb 04, 2020 10:42 pm
UpsetRaptor wrote: Tue Feb 04, 2020 4:36 pm Markets are efficient? I present TSLA.
Krugman would argue that speculative bubbles are ignored by this theory.

Here's his 2008 rant:

https://www.nytimes.com/2009/09/06/maga ... mic-t.html
That's the point. I agree with Mr. Krugman in that I do not believe markets are 100% efficient.
Seasonal
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Seasonal »

I think it's useful to separate two strands of market efficiency. One strand is whether the government can or should take action to improve the economy, which involves fiscal and monetary policy. Another stand involves how an individual should invest.

The first strand is beyond the scope of this board and beyond the scope of individuals unless they are in policy roles. The second is very important for our purposes, making investment decisions. For this second strand it really doesn't matter if the market is "correct" or "completely efficient". What matters is whether you are better than the market at valuing assets and constructing portfolios. If you are not, then you should think long and hard about deviating too far from the market portfolio and should have articulable reasons for doing so.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by columbia »

Seasonal wrote: Wed Feb 05, 2020 6:10 am I think it's useful to separate two strands of market efficiency. One strand is whether the government can or should take action to improve the economy, which involves fiscal and monetary policy. Another stand involves how an individual should invest.

The first strand is beyond the scope of this board and beyond the scope of individuals unless they are in policy roles. The second is very important for our purposes, making investment decisions. For this second strand it really doesn't matter if the market is "correct" or "completely efficient". What matters is whether you are better than the market at valuing assets and constructing portfolios. If you are not, then you should think long and hard about deviating too far from the market portfolio and should have articulable reasons for doing so.

I’d expand that by why adding where you reside, your country’s currency and *what* market you’re referring to. The Chilean, Belgian, Chinese, US, etc are not the same and none of them are like the “global” market.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by alex_686 »

JoMoney wrote: Tue Feb 04, 2020 10:08 pm
alex_686 wrote: Tue Feb 04, 2020 8:19 pm
columbia wrote: Tue Feb 04, 2020 7:55 pm Has the market for Tesla this week been efficient per EMH?
Yeah, it has. Why would you think it wasn’t? i.e. can you point to a specific piece of information from last that would indicate today’s price?

Flip a coin. Heads is worth $1, tails $0. Before the flip the efficient price is $.50. After the flip...
It looked like a question to me.
It's easy for me to say I had no advantage over a coin flip, but it's another concern to say that nobody did. Can you prove that nobody trading in Tesla had an advantage?
Yes. The stock price moved after the announcement. It is one if the ways you test if the market is efficient. If it had moved before you could tell it wasn’t.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
rascott
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Re: A Simple Test In Your Belief In Market Efficiency

Post by rascott »

columbia wrote: Tue Feb 04, 2020 7:55 pm Has the market for Tesla this week been efficient per EMH?
Only truly blind believers would say so. Either that or asset bubbles should be ignored. Or something.
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JoMoney
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Re: A Simple Test In Your Belief In Market Efficiency

Post by JoMoney »

Seasonal wrote: Wed Feb 05, 2020 6:10 am I think it's useful to separate two strands of market efficiency. One strand is whether the government can or should take action to improve the economy, which involves fiscal and monetary policy. Another stand involves how an individual should invest.

The first strand is beyond the scope of this board and beyond the scope of individuals unless they are in policy roles. The second is very important for our purposes, making investment decisions. For this second strand it really doesn't matter if the market is "correct" or "completely efficient". What matters is whether you are better than the market at valuing assets and constructing portfolios. If you are not, then you should think long and hard about deviating too far from the market portfolio and should have articulable reasons for doing so.
If the market is efficient, one can confidently stock pick, slice-n-dice, tilt, market time, etc.. even if their trading scheme doesn't turn out to have a "risk premium", at worst they should be getting fair odds for the risk they are taking with upside potential commensurate with the down.

If markets are not efficient, people are potentially vulnerable to behavioral issues, marketing, and to participants with better information/positions. The market's aggregate return doesn't change, but there would be some participants who consistently garner higher returns while avoiding risks, at the relative expense of those carrying portfolios with extra uncompensated risk.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by acegolfer »

JoMoney wrote: Wed Feb 05, 2020 9:28 am If the market is efficient, one can confidently stock pick, slice-n-dice, tilt, market time, etc.. even if their trading scheme doesn't turn out to have a "risk premium", at worst they should be getting fair odds for the risk they are taking with upside potential commensurate with the down.
One will not get fair odds for taking idiosyncratic risks. Market compensates only for systematic risks. I'm sure you understand this.
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JoMoney
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Re: A Simple Test In Your Belief In Market Efficiency

Post by JoMoney »

acegolfer wrote: Wed Feb 05, 2020 9:39 am
JoMoney wrote: Wed Feb 05, 2020 9:28 am If the market is efficient, one can confidently stock pick, slice-n-dice, tilt, market time, etc.. even if their trading scheme doesn't turn out to have a "risk premium", at worst they should be getting fair odds for the risk they are taking with upside potential commensurate with the down.
One will not get fair odds for taking idiosyncratic risks. Market compensates only for systematic risks. I'm sure you understand this.
I'm not suggesting that there is a "risk premium" for taking idiosyncratic risks, I'm only saying that if the market is efficient the price of a stock going up or down are at least fairly valued relative to the odds.
Last edited by JoMoney on Wed Feb 05, 2020 9:59 am, edited 1 time in total.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by UpsetRaptor »

Seasonal wrote: Wed Feb 05, 2020 6:10 am I think it's useful to separate two strands of market efficiency. One strand is whether the government can or should take action to improve the economy, which involves fiscal and monetary policy. Another stand involves how an individual should invest.

The first strand is beyond the scope of this board and beyond the scope of individuals unless they are in policy roles. The second is very important for our purposes, making investment decisions. For this second strand it really doesn't matter if the market is "correct" or "completely efficient". What matters is whether you are better than the market at valuing assets and constructing portfolios. If you are not, then you should think long and hard about deviating too far from the market portfolio and should have articulable reasons for doing so.
I also don't believe it should be automatically assumed that every country - from the well-regulated open fair markets to the much less so, in various government structures - operates with the same level of proximity to complete efficiency.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by columbia »

Someone can tell me over and over that today is Tuesday, but their only evidence for that would be that they are claiming it to be Tuesday.

I sometimes think something similar about the diehard EMH advocates; doubly so, for those who want to apply it a global scale.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Seasonal »

JoMoney wrote: Wed Feb 05, 2020 9:50 am
acegolfer wrote: Wed Feb 05, 2020 9:39 am
JoMoney wrote: Wed Feb 05, 2020 9:28 am If the market is efficient, one can confidently stock pick, slice-n-dice, tilt, market time, etc.. even if their trading scheme doesn't turn out to have a "risk premium", at worst they should be getting fair odds for the risk they are taking with upside potential commensurate with the down.
One will not get fair odds for taking idiosyncratic risks. Market compensates only for systematic risks. I'm sure you understand this.
I'm not suggesting that there is a "risk premium" for taking idiosyncratic risks, I'm only saying that if the market is efficient the price of a stock going up or down are at least fairly valued relative to the odds.
The problem is that you are taking additional risk by not being sufficiently diversified, i.e., you're taking idiosyncratic risk. That the asset is priced fairly helps, except to the extent part of its pricing is due to its contribution to a well diversified portfolio.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Seasonal »

UpsetRaptor wrote: Wed Feb 05, 2020 9:54 am
Seasonal wrote: Wed Feb 05, 2020 6:10 am I think it's useful to separate two strands of market efficiency. One strand is whether the government can or should take action to improve the economy, which involves fiscal and monetary policy. Another stand involves how an individual should invest.

The first strand is beyond the scope of this board and beyond the scope of individuals unless they are in policy roles. The second is very important for our purposes, making investment decisions. For this second strand it really doesn't matter if the market is "correct" or "completely efficient". What matters is whether you are better than the market at valuing assets and constructing portfolios. If you are not, then you should think long and hard about deviating too far from the market portfolio and should have articulable reasons for doing so.
I also don't believe it should be automatically assumed that every country - from the well-regulated open fair markets to the much less so, in various government structures - operates with the same level of proximity to complete efficiency.
Sure. The issue is then whether the market is aware of this and adjust prices to compensate, just as it adjusts prices of domestic securities to take into account its view of future prospects, risk, etc. Which brings me back to asking what you know that the market does not know about the prospects and risks of non-domestic stocks or why the market's risks are not your risks and vice versa.
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Re: A Simple Test In Your Belief In Market Efficiency

Post by Northern Flicker »

JoMoney wrote: Wed Feb 05, 2020 9:50 am
acegolfer wrote: Wed Feb 05, 2020 9:39 am
JoMoney wrote: Wed Feb 05, 2020 9:28 am If the market is efficient, one can confidently stock pick, slice-n-dice, tilt, market time, etc.. even if their trading scheme doesn't turn out to have a "risk premium", at worst they should be getting fair odds for the risk they are taking with upside potential commensurate with the down.
One will not get fair odds for taking idiosyncratic risks. Market compensates only for systematic risks. I'm sure you understand this.
I'm not suggesting that there is a "risk premium" for taking idiosyncratic risks, I'm only saying that if the market is efficient the price of a stock going up or down are at least fairly valued relative to the odds.
The point of uncompensated idiosyncratic risk is that an individual stock price is not fairly valued for that. The value the market prices in assumes that idiosyncratic risk is diversified away.
Risk is not a guarantor of return.
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