Efficient Market Theory vs Tesla Stock Price

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
bb
Posts: 324
Joined: Wed Apr 25, 2007 10:04 pm

Efficient Market Theory vs Tesla Stock Price

Post by bb »

Doesn't the price of Tesla stock disprove the assertion that the market
is always efficient or rationale?
minimalistmarc
Posts: 1142
Joined: Fri Jul 24, 2015 4:38 pm

Re: Efficient Market Theory vs Tesla Stock Price

Post by minimalistmarc »

Not necessarily. Market might be pricing in high probability of certain outcomes. Market can be wrong.
Normchad
Posts: 1777
Joined: Thu Mar 03, 2011 7:20 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by Normchad »

Efficiency is a continuum. Nobody argues that the market is 100% efficient.

The question is, can you exploit or profit from the many small inefficiencies that exist at any point in time? Broad consensus is that very few people can do it, so just buy a broad market index.
Semantics
Posts: 183
Joined: Tue Mar 10, 2020 1:42 pm

Re: Efficient Market Theory vs Tesla Stock Price

Post by Semantics »

We'll know in 5-10 years. Amazon reached Tesla's valuation when they were still losing money.
langlands
Posts: 748
Joined: Wed Apr 03, 2019 10:05 pm

Re: Efficient Market Theory vs Tesla Stock Price

Post by langlands »

Tesla is a very polarizing company where no one can agree on the correct valuation. There are professional investors who right now think Tesla should have a price of $3000 and others who think it should have a price of $0 (well there are much fewer of those now). It seems difficult to disprove EMH based on this example when there is no objectively correct answer to Tesla's valuation.

I think Hertz is a better example. The price spiked literally as the company was going into bankruptcy. There was really no justifiable reason for that price action.
User avatar
JonnyDVM
Posts: 2338
Joined: Wed Feb 12, 2014 6:51 pm
Location: Atlanta, GA

Re: Efficient Market Theory vs Tesla Stock Price

Post by JonnyDVM »

bb wrote: Sun Aug 02, 2020 11:44 am Doesn't the price of Tesla stock disprove the assertion that the market
is always efficient or rationale?
I saw this same statement on Reddit and I have to agree. Tesla price is not efficient. Same with the wrong Zoom being bid up to astronomical levels. That is also not efficient.
I’d trade it all for a little more | -C Montgomery Burns
Elysium
Posts: 3282
Joined: Mon Apr 02, 2007 6:22 pm

Re: Efficient Market Theory vs Tesla Stock Price

Post by Elysium »

Markets are efficient in pricing over longer periods, not necessarily in the short run where price could be driven up/down based on sentiments. Even then one can argue the price is right for the moment since there is no reliable means to take advantage of a mispricing even if one suspects it.
whereskyle
Posts: 1293
Joined: Wed Jan 29, 2020 10:29 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by whereskyle »

bb wrote: Sun Aug 02, 2020 11:44 am Doesn't the price of Tesla stock disprove the assertion that the market
is always efficient or rationale?
Efficient and rational people change their minds about things everyday. The market is not omniscient. People think new things. People do new things. The market reflects their behavior. Using the market as a template for building a portfolio almost always yields enviable long-term returns. Thus, buyers seem to be buying at reasonable prices most of the time.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
User avatar
JonnyDVM
Posts: 2338
Joined: Wed Feb 12, 2014 6:51 pm
Location: Atlanta, GA

Re: Efficient Market Theory vs Tesla Stock Price

Post by JonnyDVM »

whereskyle wrote: Sun Aug 02, 2020 1:37 pm
bb wrote: Sun Aug 02, 2020 11:44 am Doesn't the price of Tesla stock disprove the assertion that the market
is always efficient or rationale?
Efficient and rational people change their minds about things everyday. The market is not omniscient. People think new things. People do new things. The market reflects their behavior. Using the market as a template for building a portfolio almost always yields enviable long-term returns. Thus, buyers seem to be buying at reasonable prices most of the time.
That implies that there are inefficiencies that can be exploited.
I’d trade it all for a little more | -C Montgomery Burns
Northern Flicker
Posts: 6854
Joined: Fri Apr 10, 2015 12:29 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by Northern Flicker »

bb wrote: Sun Aug 02, 2020 11:44 am Doesn't the price of Tesla stock disprove the assertion that the market
is always efficient or rationale?
The efficient market hypothesis says nothing about the market being right or rational. It just says that all public information is priced in by the market. It is priced in probabilistically. Future information that becomes public may change the assessment and be priced in a way where prices reflect a different future expectation.

The point of the efficient market hypothesis is that if you have an insight about investing in a company based on publicly available information, the only way you can profit on it is if you have a better determination of its value than the market in aggregate because the market has already taken its best shot to price it in. (And it is of course illegal to trade on material non-public information.)
Last edited by Northern Flicker on Sun Aug 02, 2020 4:19 pm, edited 1 time in total.
Risk is not a guarantor of return.
ralph124cf
Posts: 2635
Joined: Tue Apr 01, 2014 11:41 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by ralph124cf »

The market can stay irrational longer than you can stay solvent.

Ralph
Northern Flicker
Posts: 6854
Joined: Fri Apr 10, 2015 12:29 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by Northern Flicker »

JonnyDVM wrote: Sun Aug 02, 2020 1:41 pm
whereskyle wrote: Sun Aug 02, 2020 1:37 pm
bb wrote: Sun Aug 02, 2020 11:44 am Doesn't the price of Tesla stock disprove the assertion that the market
is always efficient or rationale?
Efficient and rational people change their minds about things everyday. The market is not omniscient. People think new things. People do new things. The market reflects their behavior. Using the market as a template for building a portfolio almost always yields enviable long-term returns. Thus, buyers seem to be buying at reasonable prices most of the time.
That implies that there are inefficiencies that can be exploited.
Omniscience is something different. Market efficiency does not mean the market is good at predicting future events (such as future sales, future expenses, future economic conditions). It means it is good at incorporating the past into its best analysis of the future.

I don't believe that the market is perfectly efficient, but I believe that the available evidence is that inefficiencies are hard to find. There are major market players ready to jump on inefficiencies to arbitrage them away. An in-your-face event like Tesla appreciating probably is not one of them. The market nonetheless may still be proven wrong.
Risk is not a guarantor of return.
scout1
Posts: 104
Joined: Thu Oct 18, 2018 3:26 pm

Re: Efficient Market Theory vs Tesla Stock Price

Post by scout1 »

If the market is wrong you should put your money where your mouth is and bet against the market, you’ll make some money. If you’re not willing to do that, how can you claim the market is inefficient? The market probably won’t do it for the same reason you won’t, e.g. short fees, asymmetric outcomes, the fed, etc.
TN_Boy
Posts: 1989
Joined: Sat Jan 17, 2009 12:51 pm

Re: Efficient Market Theory vs Tesla Stock Price

Post by TN_Boy »

Northern Flicker wrote: Sun Aug 02, 2020 1:59 pm
bb wrote: Sun Aug 02, 2020 11:44 am Doesn't the price of Tesla stock disprove the assertion that the market
is always efficient or rationale?
The efficient market hypothesis says nothing about the market being right or rational. It just says that all public information is priced in by the market. It is priced in probabilistically. Future information that becomes public may change the assessment and be priced in a way where prices reflect a different future expectation.

The point of the efficient market hypothesis is that if you have an insight about investing in a company based on publicly available information, the only way you can profit on it is if you have a better detetmination of its value than the market in aggregate because the market has already taken its best shot to price it in. (And it is of course illegal to trade on material non-public information.)
+1.

"Efficient" in the context of the Efficient market hypothesis doesn't mean what a lot of people think it means.
Impatience
Posts: 269
Joined: Thu Jul 23, 2020 3:15 pm

Re: Efficient Market Theory vs Tesla Stock Price

Post by Impatience »

Northern Flicker wrote: Sun Aug 02, 2020 1:59 pm
bb wrote: Sun Aug 02, 2020 11:44 am Doesn't the price of Tesla stock disprove the assertion that the market
is always efficient or rationale?
The efficient market hypothesis says nothing about the market being right or rational. It just says that all public information is priced in by the market. It is priced in probabilistically. Future information that becomes public may change the assessment and be priced in a way where prices reflect a different future expectation.

The point of the efficient market hypothesis is that if you have an insight about investing in a company based on publicly available information, the only way you can profit on it is if you have a better detetmination of its value than the market in aggregate because the market has already taken its best shot to price it in. (And it is of course illegal to trade on material non-public information.)
+1000

The efficient markets hypothesis has nothing to do with prices being “right”, only with the extent to which prices reflect information.
whereskyle
Posts: 1293
Joined: Wed Jan 29, 2020 10:29 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by whereskyle »

JonnyDVM wrote: Sun Aug 02, 2020 1:41 pm
whereskyle wrote: Sun Aug 02, 2020 1:37 pm
bb wrote: Sun Aug 02, 2020 11:44 am Doesn't the price of Tesla stock disprove the assertion that the market
is always efficient or rationale?
Efficient and rational people change their minds about things everyday. The market is not omniscient. People think new things. People do new things. The market reflects their behavior. Using the market as a template for building a portfolio almost always yields enviable long-term returns. Thus, buyers seem to be buying at reasonable prices most of the time.
That implies that there are inefficiencies that can be exploited.
No, it doesn't. The market can be efficient up until people change their minds, at which point it can still be efficient. The EMH does not suggest that prices should be fixed for any duration of time. It simply maintains that prices are based on various factors and these factors in effect create the current price.

Whether or not a speculator can extract value from trading has nothing to do with pricing inefficiencies in my view. It has everything to do with the fact that prices change all the time (which again does not refute the EMH). We can call a positive return the result of an inefficiency or we can call it luck. I'm more comfortable calling it luck. How could you prove that the result was caused by something else? All you can say was the price was lower before it was higher. That means the lower price was "inefficient"? That makes no sense to me in a world where time goes forward and people learn and do new things everyday. Efficiency does not require premonition. If it did, why have a market at all? If efficiency meant absolute perfection, we would have no need for efficiency.

The real danger here is believing that there are things called inefficiencies when in reality there are unpredictable occurrences, usually the result of new information, that make it rational to buy and sell things at different prices. The EMH importantly cautions against calling prices immediately before these occurrences "inefficiencies." Because if you think you can identify inefficiencies going forward, you are probably going to lose some money.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
JBTX
Posts: 7321
Joined: Wed Jul 26, 2017 12:46 pm

Re: Efficient Market Theory vs Tesla Stock Price

Post by JBTX »

I was reading a plan where Musk has a plan to put 12000 satellites in low orbit to create a 5G worldwide network. They guy has electric cars, may control space travel and maybe will control future worldwide communications. He may be the next Rockefeller. Or Dr Evil. Or delusional.

The point is putting a valuation on all that is hard to do.

People keep betting against him and losing.
bck63
Posts: 1435
Joined: Fri Sep 28, 2018 4:59 pm

Re: Efficient Market Theory vs Tesla Stock Price

Post by bck63 »

.....
Danzangdc
Posts: 77
Joined: Sun Oct 13, 2013 7:59 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by Danzangdc »

Northern Flicker wrote: Sun Aug 02, 2020 1:59 pm
bb wrote: Sun Aug 02, 2020 11:44 am Doesn't the price of Tesla stock disprove the assertion that the market
is always efficient or rationale?
The efficient market hypothesis says nothing about the market being right or rational. It just says that all public information is priced in by the market. It is priced in probabilistically. Future information that becomes public may change the assessment and be priced in a way where prices reflect a different future expectation.

The point of the efficient market hypothesis is that if you have an insight about investing in a company based on publicly available information, the only way you can profit on it is if you have a better determination of its value than the market in aggregate because the market has already taken its best shot to price it in. (And it is of course illegal to trade on material non-public information.)
+1
guyinlaw
Posts: 727
Joined: Wed Jul 03, 2019 9:54 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by guyinlaw »

May last year TSLA stock price was $179, few days ago $1795. Now it around $1400.

The level on misinformation and hyperbole with Tesla is crazy. This is true about information coming from Elon Musk, Tesla and the funds shorting it.

Look at the example of Self-driving technology.

Musk believes that they are close to level 5 (driver-less taxis) vs critics say it is just glorified cruise control that cannot stop when there are obstacles ahead.

Musk says
already "very close" to achieving the basic requirements of this "level-five" autonomy, which requires no driver input,
https://www.bbc.com/news/technology-53349313

... VS ...

Many experts say that they are barely at level 3. See the example of Model 3 crash in Taiwan with a toppled truck from June 2020. https://www.youtube.com/watch?v=ZmHBA_vV39w. A similar accident happened when the cameras didn't see a turning truck on a highway that killed the driver.

How can a retail investor decide which is true? Hence the large range and volatility in stock price.
Time is your friend; impulse is your enemy. - John C. Bogle
Northern Flicker
Posts: 6854
Joined: Fri Apr 10, 2015 12:29 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by Northern Flicker »

Generally, retail investors are ill-equipped to evaluate stock valuations, and are up against very large, well-funded market participants with tremendous talent and resources. This is not limited to Tesla. I'm not sure how much volatility is driven by retail investors, Generally, it is low, but it seems to have increased some this year.
Risk is not a guarantor of return.
User avatar
Forester
Posts: 1738
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: Efficient Market Theory vs Tesla Stock Price

Post by Forester »

Tesla can stay solvent longer than you can stay rational.
User avatar
CyclingDuo
Posts: 3915
Joined: Fri Jan 06, 2017 9:07 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by CyclingDuo »

Northern Flicker wrote: Sun Aug 02, 2020 10:29 pmGenerally, retail investors are ill-equipped to evaluate stock valuations, and are up against very large, well-funded market participants with tremendous talent and resources. This is not limited to Tesla. I'm not sure how much volatility is driven by retail investors, Generally, it is low, but it seems to have increased some this year.
You mean such as the $82B Oregon Public Employees Retirement Fund that sold Apple, Tesla, and Microsoft in Q2 and bought Intel instead.

•Apple stock surged 43.5% in the quarter, so far in the third quarter, shares have surged 16.5%, compared with a 1.2% rise in the S&P 500 index.

•Microsoft stock soared 29% in the second quarter, so far in the third, the shares have been flat.

•Tesla more than doubled in the second quarter, the outperformance continues, with Tesla stock up 32.5% so far in the third.

••Intel stock was flat for 2020 at the end of June, but since then, shares have slumped 20.2%.

https://www.marketwatch.com/articles/hu ... 1596034133
"Save like a pessimist, invest like an optimist." - Morgan Housel
flaccidsteele
Posts: 1339
Joined: Sun Jul 28, 2019 9:42 pm
Location: Canada

Re: Efficient Market Theory vs Tesla Stock Price

Post by flaccidsteele »

bb wrote: Sun Aug 02, 2020 11:44 am Doesn't the price of Tesla stock disprove the assertion that the market
is always efficient or rationale?
EMH breaks down during extreme euphoria and dysphoria like the laws of physics breaks down at singularities
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
CurlyDave
Posts: 2251
Joined: Thu Jul 28, 2016 11:37 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by CurlyDave »

CyclingDuo wrote: Sun Aug 02, 2020 11:31 pm
Northern Flicker wrote: Sun Aug 02, 2020 10:29 pmGenerally, retail investors are ill-equipped to evaluate stock valuations, and are up against very large, well-funded market participants with tremendous talent and resources. This is not limited to Tesla. I'm not sure how much volatility is driven by retail investors, Generally, it is low, but it seems to have increased some this year.
You mean such as the $82B Oregon Public Employees Retirement Fund that sold Apple, Tesla, and Microsoft in Q2 and bought Intel instead.

•Apple stock surged 43.5% in the quarter, so far in the third quarter, shares have surged 16.5%, compared with a 1.2% rise in the S&P 500 index.

•Microsoft stock soared 29% in the second quarter, so far in the third, the shares have been flat.

•Tesla more than doubled in the second quarter, the outperformance continues, with Tesla stock up 32.5% so far in the third.

••Intel stock was flat for 2020 at the end of June, but since then, shares have slumped 20.2%.

https://www.marketwatch.com/articles/hu ... 1596034133
As a southern Oregonian, I read that article with open-jawed amazement.

Although the words do not say this, what the article is really telling me is leave this to the "experts" here in Portland and everything will work out just like you think it will. :oops:
HawkeyePierce
Posts: 1755
Joined: Tue Mar 05, 2019 10:29 pm
Location: Colorado

Re: Efficient Market Theory vs Tesla Stock Price

Post by HawkeyePierce »

langlands wrote: Sun Aug 02, 2020 12:50 pm Tesla is a very polarizing company where no one can agree on the correct valuation. There are professional investors who right now think Tesla should have a price of $3000 and others who think it should have a price of $0 (well there are much fewer of those now). It seems difficult to disprove EMH based on this example when there is no objectively correct answer to Tesla's valuation.

I think Hertz is a better example. The price spiked literally as the company was going into bankruptcy. There was really no justifiable reason for that price action.
The Boredom Markets Hypothesis.
Northern Flicker
Posts: 6854
Joined: Fri Apr 10, 2015 12:29 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by Northern Flicker »

CyclingDuo wrote: Sun Aug 02, 2020 11:31 pm
Northern Flicker wrote: Sun Aug 02, 2020 10:29 pmGenerally, retail investors are ill-equipped to evaluate stock valuations, and are up against very large, well-funded market participants with tremendous talent and resources. This is not limited to Tesla. I'm not sure how much volatility is driven by retail investors, Generally, it is low, but it seems to have increased some this year.
You mean such as the $82B Oregon Public Employees Retirement Fund that sold Apple, Tesla, and Microsoft in Q2 and bought Intel instead.

•Apple stock surged 43.5% in the quarter, so far in the third quarter, shares have surged 16.5%, compared with a 1.2% rise in the S&P 500 index.

•Microsoft stock soared 29% in the second quarter, so far in the third, the shares have been flat.

•Tesla more than doubled in the second quarter, the outperformance continues, with Tesla stock up 32.5% so far in the third.

••Intel stock was flat for 2020 at the end of June, but since then, shares have slumped 20.2%.

https://www.marketwatch.com/articles/hu ... 1596034133
I don't think I mentioned them. But look at the data carefully:
The pension sold 55,633 Apple shares in the second quarter to end the period with 685,131 shares of the iPhone maker.
They sold 7.5% of the position in Apple. Were they overweight Apple? Did they sell it at the beginning or end of the quarter? What was the portfolio return moving forward?

And they bought Tesla in Q1, saw a 2.5x explosiin in their holding in about 5 months, and trimmed 1/3 of it adter that, continuing to see anither 32% gain on the 2/3 they kept, arill leaving them with a stake jn Tesla that is double the size of what they bought at the beginning of the year.

These look like rebalancings after some outsized, market-beating gains.
Risk is not a guarantor of return.
inbox788
Posts: 7801
Joined: Thu Mar 15, 2012 5:24 pm

Re: Efficient Market Theory vs Tesla Stock Price

Post by inbox788 »

bb wrote: Sun Aug 02, 2020 11:44 am Doesn't the price of Tesla stock disprove the assertion that the market
is always efficient or rationale?
If/when Tesla makes it into the big passive index funds it's not already in or underweight, like the SP500, will that drive the price further up? Is that efficient?

VTI hold 4,229,915 $4,567,504,516 (around 3100/3501 alphabetically -- 400 from bottom) [about 1/10 MSFT or AAPL]
https://investor.vanguard.com/etf/profi ... o-holdings

Maybe it's perfectly rational with all the hedge funds holding Tesla waiting to dump the stock on the index funds and momentum traders, driving the price lower after index funds buy them at a higher price.

Greater fool theory

BTW, I don't think the EMT says the market is ALWAYS efficient or rational. I'm not sure those are mathematically defined, measurable or testable.
RomeoMustDie
Posts: 280
Joined: Sat Mar 14, 2020 6:07 pm

Re: Efficient Market Theory vs Tesla Stock Price

Post by RomeoMustDie »

Efficient market hypothesis only exists because market participants believe it exists.

All price action is based on speculation and bias.
Valuethinker
Posts: 41722
Joined: Fri May 11, 2007 11:07 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by Valuethinker »

CurlyDave wrote: Mon Aug 03, 2020 12:27 am
CyclingDuo wrote: Sun Aug 02, 2020 11:31 pm
Northern Flicker wrote: Sun Aug 02, 2020 10:29 pmGenerally, retail investors are ill-equipped to evaluate stock valuations, and are up against very large, well-funded market participants with tremendous talent and resources. This is not limited to Tesla. I'm not sure how much volatility is driven by retail investors, Generally, it is low, but it seems to have increased some this year.
You mean such as the $82B Oregon Public Employees Retirement Fund that sold Apple, Tesla, and Microsoft in Q2 and bought Intel instead.

•Apple stock surged 43.5% in the quarter, so far in the third quarter, shares have surged 16.5%, compared with a 1.2% rise in the S&P 500 index.

•Microsoft stock soared 29% in the second quarter, so far in the third, the shares have been flat.

•Tesla more than doubled in the second quarter, the outperformance continues, with Tesla stock up 32.5% so far in the third.

••Intel stock was flat for 2020 at the end of June, but since then, shares have slumped 20.2%.

https://www.marketwatch.com/articles/hu ... 1596034133
As a southern Oregonian, I read that article with open-jawed amazement.

Although the words do not say this, what the article is really telling me is leave this to the "experts" here in Portland and everything will work out just like you think it will. :oops:
We'd have to look at the total portfolio and how it was managed.

That move suggests that they are running a Value tilt. The value ETFs I hold (which have underformed massively) from ishares & VG hold Intel, but not the other stocks. Conversely, there have been times in recent memory when Apple has stood up well as a value stock (huge cash reserves, PE around 16x), and Microsoft before that (one of the few tech stocks that paid a decent yield, huge, albeit slow growing, desktop software market share).

But they may also have broader index funds.

One complication is that Intel is also a major employer in Oregon? I don't know whether that political consideration would come into play- it should not, but it may do so. I think ERISA places limits on how much of its own company stock an employer-sponsored plan can hold, but that would not apply to a state pension plan?
JustinR
Posts: 1396
Joined: Tue Apr 27, 2010 11:43 pm

Re: Efficient Market Theory vs Tesla Stock Price

Post by JustinR »

JonnyDVM wrote: Sun Aug 02, 2020 12:51 pm Same with the wrong Zoom being bid up to astronomical levels. That is also not efficient.
The human lack of attention to detail was priced in.
User avatar
vineviz
Posts: 8520
Joined: Tue May 15, 2018 1:55 pm

Re: Efficient Market Theory vs Tesla Stock Price

Post by vineviz »

JonnyDVM wrote: Sun Aug 02, 2020 1:41 pm
whereskyle wrote: Sun Aug 02, 2020 1:37 pm
bb wrote: Sun Aug 02, 2020 11:44 am Doesn't the price of Tesla stock disprove the assertion that the market
is always efficient or rationale?
Efficient and rational people change their minds about things everyday. The market is not omniscient. People think new things. People do new things. The market reflects their behavior. Using the market as a template for building a portfolio almost always yields enviable long-term returns. Thus, buyers seem to be buying at reasonable prices most of the time.
That implies that there are inefficiencies that can be exploited.
Not necessarily. To be exploitable, any “inefficiencies” would need to be both systematic and economically significant.

Decades of evidence tell us that those two conditions are rarely both present.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
nisiprius
Advisory Board
Posts: 42552
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Efficient Market Theory vs Tesla Stock Price

Post by nisiprius »

bb, everything depends on where you are going with this.

Often, challenges to the efficient market hypothesis--by the way, it is the efficient market jhypothesis (EMH), not the efficient market theory--are just the opening move in a "salesperson's syllogism" that goes something like this:

a) You can't possibly really believe that the market is perfectly efficient.

b) Therefore, there must be huge inefficiencies that can be easily exploited for lucrative gains.

c) Warren Buffett obviously knows how to do it. Jim Simon of Renaissance Technologies obviously knows to do it.

d) Therefore, there are people who know how to do it.

e) Therefore, I can do it.

f) Therefore, pay me to do it for you. Buy my mutual fund, advisory services, newsletter, hedge fund...

To me, arguments that the market might or might not be efficient are just a big "so what?" I came to my own conclusions a long time ago, which is that the EMH might be true, probably is close to true, maybe, maybe not, what the heck, it doesn't matter. It's one of these meaningless things--like the proselytizer who figures that if they can get you to believe the universe isn't completely random, then it follows that the religion they are promoting must be the true one.

What matters is whether I can pick stocks. I can't.

What matters is whether I can pick people who can pick stocks. I can't.

What matters is whether I can identify a surefire strategy (small-cap value tilt) that will beat the market and not have such long periods of underperformance that I can stick to them. Probably not.

My personal mental model is that why yes, well-informed professionals who spend forty weeks at it and have access to information resources I can only dream of probably can add between 0.5% and 1.0% of return annually, but they earn it and they know it and they charge 0.5% to 1.0% for their services.

One of the most stunning real-world demonstrations was the famous "long bet" between Warren Buffett and one Ted Seides of a firm called Protégé Partners. Buffett bet Seides a million dollars on January 1st, 2008 that over the next ten years, an S&P 500 index fund would outperform, not just a hedge fund, but a portfolio of six hedge funds selected by Seides' firm--portfolios of multiple hedge funds is what they do. Seides had complete freedom to pick the best of the best, and his firm represents itself as having expertise in doing exactly that. Buffett won.

Seides has dozens of annoying alibis, but if nothing else it proves that indexing invest is not crazy and is not easily beaten by any old competent, knowledgeable, professional investor. In fact, over the fifteen-year period 2005-2019 inclusive, 90% of actively managed large-cap mutual funds underperformed the S&P 500 index. (The data, from the S&P SPIVA report only refer to the index, so I can't literally say that they underperformed an S&P 500 index fund but the funds track the index so perfectly they probably beat, if not 90%, then 89.5% of the active funds).
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
nisiprius
Advisory Board
Posts: 42552
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Efficient Market Theory vs Tesla Stock Price

Post by nisiprius »

I'm afraid this analogy won't be useful to many people but here goes. Yeah, let me start by saying the stock market is not like electrical engineering (and I was never an electrical engineer, anyway, I just picked up some stuff along the way).

In electrical engineering, there is a device called an "op amp." An op amp is just a package of pure gain. You feed a signal into it and it comes out 200,000 times as large. 200,000! The input signal swings by 5 microvolts and the output swings by one volt. It is used to provide negative feedback in a circuit. X and Y are different points in that circuit. Without the op amp, the voltage at X is some function of Y, X = f(Y)

You connect X to the op amp input. You connect the op amp output to Y. If the voltage at X starts to rise a bit, the op amp feeds -200,000 times that voltage back into Y, which goes through the circuit and tends to reduce the voltage at X.

In designing and analyzing the circuit, you just assume that the voltage at X is magically zero, and that the op amp solves the differential equation f(Y) = 0. This really works for a lot of practical and useful circuits.

The point is that we pretend that the op amp has infinite gain and f(Y) = 0. It doesn't. That's logically impossible. There has to be some nonzero voltage at X or there would be nothing for the op amp to amplify and feed back. But for most practical purposes the gain is so big and the voltage at X is so small that it doesn't matter.

Well, I think of market inefficiencies as being like that. I'm sure they must be there, because the market has to be able to sense them and react to them in order to arbitrage them away, but as a practical matter in personal investing, they don't matter.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
CyclingDuo
Posts: 3915
Joined: Fri Jan 06, 2017 9:07 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by CyclingDuo »

Northern Flicker wrote: Mon Aug 03, 2020 12:50 am
CyclingDuo wrote: Sun Aug 02, 2020 11:31 pm
Northern Flicker wrote: Sun Aug 02, 2020 10:29 pmGenerally, retail investors are ill-equipped to evaluate stock valuations, and are up against very large, well-funded market participants with tremendous talent and resources. This is not limited to Tesla. I'm not sure how much volatility is driven by retail investors, Generally, it is low, but it seems to have increased some this year.
You mean such as the $82B Oregon Public Employees Retirement Fund that sold Apple, Tesla, and Microsoft in Q2 and bought Intel instead.

•Apple stock surged 43.5% in the quarter, so far in the third quarter, shares have surged 16.5%, compared with a 1.2% rise in the S&P 500 index.

•Microsoft stock soared 29% in the second quarter, so far in the third, the shares have been flat.

•Tesla more than doubled in the second quarter, the outperformance continues, with Tesla stock up 32.5% so far in the third.

••Intel stock was flat for 2020 at the end of June, but since then, shares have slumped 20.2%.

https://www.marketwatch.com/articles/hu ... 1596034133
I don't think I mentioned them. But look at the data carefully:
The pension sold 55,633 Apple shares in the second quarter to end the period with 685,131 shares of the iPhone maker.
They sold 7.5% of the position in Apple. Were they overweight Apple? Did they sell it at the beginning or end of the quarter? What was the portfolio return moving forward?

And they bought Tesla in Q1, saw a 2.5x explosiin in their holding in about 5 months, and trimmed 1/3 of it adter that, continuing to see anither 32% gain on the 2/3 they kept, arill leaving them with a stake jn Tesla that is double the size of what they bought at the beginning of the year.

These look like rebalancings after some outsized, market-beating gains.
I'm sure the SEC filing was, as you say, most likely due to some strategy of rebalancing and allocation that very well may have been triggered by sticking to their chosen discipline, but was simply having fun pointing out the randomness and attribute Bogle always exposed "nobody knows nothing". In spite of their discipline, they left money on the table with their timing, and lost money on top of that by what they did purchase in spite of being well-funded, a team with tremendous talent and resources to counter your statement that retail investors are ill-equipped to evaluate stock valuations, and are up against very large, well-funded market participants with tremendous talent and resources.

They are underwater with their Intel purchase, and the Barron's article mentioned another stock as well. Oregon also bet big on GE in April - which they appear to still be underwater with that purchase based on the date of the SEC filing. Time will tell if this resourceful team's selling and buying of those particular equities (for whatever strategical reasons) improves their pension fund performance or not.

There are plenty of these large fund trades you can follow to get an idea if, indeed, large funds with resources and talent do actually outperform in the short, intermediate, and long term - or if a "stand there and do nothing" approach would be a greater benefit to the fund in some of those time frames. :mrgreen:

https://newstral.com/en/article/en/1157 ... it-bought-

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel
Anon9001
Posts: 1110
Joined: Fri Dec 20, 2019 9:28 am
Location: भारत

Re: Efficient Market Theory vs Tesla Stock Price

Post by Anon9001 »

I am confused this is like asking a vegan how healthy meat is. You will not get any objective answers here as passive investing requires EMH to be correct. Any theory that does not take into account emotions of people who are trading and investing in securities market will not make sense in real life.
Land/Real Estate:89.0% Equities:5.0% Bonds:2.0% Gold:1.7% Cash:1.7% Cryptocurrency:0.2%
acegolfer
Posts: 2335
Joined: Tue Aug 25, 2009 9:40 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by acegolfer »

Anon9001 wrote: Mon Aug 03, 2020 7:55 am I am confused this is like asking a vegan how healthy meat is. You will not get any objective answers here as passive investing requires EMH to be correct. Any theory that does not take into account emotions of people who are trading and investing in securities market will not make sense in real life.
Seems you are stereotyping. Investing is not black or white. Many BHs fall somewhere in-between and most answers given so far are pretty objective. People disagreeing with you don't make their views subjective.
User avatar
firebirdparts
Posts: 2058
Joined: Thu Jun 13, 2019 4:21 pm

Re: Efficient Market Theory vs Tesla Stock Price

Post by firebirdparts »

bb wrote: Sun Aug 02, 2020 11:44 am Doesn't the price of Tesla stock disprove the assertion that the market
is always efficient or rationale?
If you have to ask... Then it doesn't. Better not to ask.
A fool and your money are soon partners
User avatar
firebirdparts
Posts: 2058
Joined: Thu Jun 13, 2019 4:21 pm

Re: Efficient Market Theory vs Tesla Stock Price

Post by firebirdparts »

Anon9001 wrote: Mon Aug 03, 2020 7:55 am I am confused this is like asking a vegan how healthy meat is. You will not get any objective answers here as passive investing requires EMH to be correct.
This is totally wrong. You have no idea what you're talking about.
A fool and your money are soon partners
whereskyle
Posts: 1293
Joined: Wed Jan 29, 2020 10:29 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by whereskyle »

Anon9001 wrote: Mon Aug 03, 2020 7:55 am I am confused this is like asking a vegan how healthy meat is. You will not get any objective answers here as passive investing requires EMH to be correct. Any theory that does not take into account emotions of people who are trading and investing in securities market will not make sense in real life.
The EMH takes into account the emotions of people who are trading and investing. It is rational to pay more for Microsoft if one thinks others will pay more for it, even if one thinks others will act irrationally in doing so. The EMH does not maintain that all investors are always rational. It maintains that the price is the sum of investor behavior and that adding up all of the rationalities and irrationalities results in market price. It is amazing to me that there are still debates about the EMH when in debates about the EMH the only thing those attacking it can say is, "Look, the price changed."

The EMH helpfully cautions that investors who see price changes should not become enamored with the idea that price changes occur because the prices were previously "incorrect" or "inefficient." People who "rationally" see "bubbles" everywhere are WRONG most of the time, waiting several years before their bearish or bullish calls "pay off," simple as that. (Most of the time they do not pay off because of the time and money necessary to make short bets). Most of the time, the EMH is obviously right. Markets are not crashing and zigzagging by double-digit percentages everyday. Some of the time, the EMH is not obviously right, and this is most clearly the case when a bubble pops. Bubbles popping, however, are usually the result of new information, or at least more market participants learning of this information, which then makes it "efficient" to change the price.

All this is to try to say what I believe Nisiprius already tried to say: the only difference between someone who believes in the EMH and one who does not is that the one who believes in the EMH does not think it is worthwhile to try to outsmart the market and the one who does not believe in it thinks it is worthwhile to try to outsmart the market. That is really the only variable we should be discussing when discussing the merit of the EMH.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
TNWoods
Posts: 142
Joined: Sun Feb 10, 2019 10:04 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by TNWoods »

The EMH is generally correct. Things that are generally correct can't necessarily be applied to specific instances.

"Men are stronger than women."

This is generally true.

Joe Biden, however, is not stronger than Serena Williams.

And Serena's strength compared to Biden's does not disprove the generally true statement that "Men are stronger than women".

Also, these days the EMH has to contend with Robinhood.com and its Merry Traders. Those traders are notorious for not caring about traditional stock market trading norms.

TNWoods
User avatar
nisiprius
Advisory Board
Posts: 42552
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Efficient Market Theory vs Tesla Stock Price

Post by nisiprius »

Anon9001 wrote: Mon Aug 03, 2020 7:55 amYou will not get any objective answers here as passive investing requires EMH to be correct.
No. It does not. That's a misconception.

An eloquent argument for passive investing is William F. Sharpe's The Arithmetic of Active Management; Sharpe is not identified with the efficient market hypothesis, and the word "efficient" occurs nowhere in his essay,

As for "objective," 80% of actively managed large-cap US mutual funds underperformed the S&P 500 index over the last five years

Image

Over the past fifteen, more than 90% of these funds underperformed the S&P 500 index :!: :!: :!:

And more than 80% underperformed
  • in growth and value funds,
  • in large and small-cap funds,
  • in REIT funds,
  • in a period of time including all parts of the business cycle, recession and boom,
  • bull market and bear.
Image

Anon9001, do you accept these as objective statements of simple, numerical, historic fact, or do you believe S&P is presenting inaccurate numbers?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Anon9001
Posts: 1110
Joined: Fri Dec 20, 2019 9:28 am
Location: भारत

Re: Efficient Market Theory vs Tesla Stock Price

Post by Anon9001 »

Okay let's see if it does not depend on market efficiency what is going in China A shares. Burton Malkiel himself is showing active funds out-performing indexes? Seriously what is going on? The arithmetic of active management does not seem to hold here.
Image

Sure you can pull out USA like that but what about a real inefficient market like China A shares? Active seems to smashing indexes here.
Land/Real Estate:89.0% Equities:5.0% Bonds:2.0% Gold:1.7% Cash:1.7% Cryptocurrency:0.2%
alfaspider
Posts: 3165
Joined: Wed Sep 09, 2015 4:44 pm

Re: Efficient Market Theory vs Tesla Stock Price

Post by alfaspider »

JBTX wrote: Sun Aug 02, 2020 4:32 pm I was reading a plan where Musk has a plan to put 12000 satellites in low orbit to create a 5G worldwide network. They guy has electric cars, may control space travel and maybe will control future worldwide communications. He may be the next Rockefeller. Or Dr Evil. Or delusional.

The point is putting a valuation on all that is hard to do.

People keep betting against him and losing.
Yes, but that's not Tesla, it's SpaceX. The "starlink" system already has 500 satellites in orbit and is looking to start rolling out service by the end of the year. That certainly does have to potential to be a game changer for further flung areas of the globe, but I doubt it will be a replacement for existing fiber and terrestrial 5g networks.

Tesla has some potentially "game changer" technologies in its pocket (car automation and grid level energy storage). I agree those are hard to value, but it seems to me unlikely that they can create the profits out of those technologies to support the valuation. Tesla would have to be the world's dominant carmaker by a wide margin to have profits to support current valuations on its car business.

So no, I don't think Tesla is at an "efficient" fair value. But the efficient market hypothesis does't say that the market is efficient on a day to day or even year to year basis. It can take a long time for undervalued stocks to be recognized and overvalued stocks to come back to earth.
JBTX
Posts: 7321
Joined: Wed Jul 26, 2017 12:46 pm

Re: Efficient Market Theory vs Tesla Stock Price

Post by JBTX »

alfaspider wrote: Mon Aug 03, 2020 10:50 am
JBTX wrote: Sun Aug 02, 2020 4:32 pm I was reading a plan where Musk has a plan to put 12000 satellites in low orbit to create a 5G worldwide network. They guy has electric cars, may control space travel and maybe will control future worldwide communications. He may be the next Rockefeller. Or Dr Evil. Or delusional.

The point is putting a valuation on all that is hard to do.

People keep betting against him and losing.
Yes, but that's not Tesla, it's SpaceX. The "starlink" system already has 500 satellites in orbit and is looking to start rolling out service by the end of the year. That certainly does have to potential to be a game changer for further flung areas of the globe, but I doubt it will be a replacement for existing fiber and terrestrial 5g networks.

Tesla has some potentially "game changer" technologies in its pocket (car automation and grid level energy storage). I agree those are hard to value, but it seems to me unlikely that they can create the profits out of those technologies to support the valuation. Tesla would have to be the world's dominant carmaker by a wide margin to have profits to support current valuations on its car business.

So no, I don't think Tesla is at an "efficient" fair value. But the efficient market hypothesis does't say that the market is efficient on a day to day or even year to year basis. It can take a long time for undervalued stocks to be recognized and overvalued stocks to come back to earth.
Thanks for the clarification. For the record I don't own any TSLA and would never buy it (except for hedge fund contest!) at such levels, I was just trying to make a point, which still holds.
Northern Flicker
Posts: 6854
Joined: Fri Apr 10, 2015 12:29 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by Northern Flicker »

cyclingduo wrote: They are underwater with their Intel purchase, and the Barron's article mentioned another stock as well. Oregon also bet big on GE in April - which they appear to still be underwater with that purchase based on the date of the SEC filing. Time will tell if this resourceful team's selling and buying of those particular equities (for whatever strategical reasons) improves their pension fund performance or not.
You are still missing the point that you have to look at the entire portfolio, not individual stocks in it. Contributions to index funds made at those points in time also bought GE and Intel. A large pension holds a large diversified portfolio. They will diversify away security specific risk. They will hold winners and losers because they are diversified and understand, unlike some amateur investors, that they cannot pick the winners reliably. They may even still be overweigting TSLA, MSFT, and AAPL.
Last edited by Northern Flicker on Mon Aug 03, 2020 12:06 pm, edited 1 time in total.
Risk is not a guarantor of return.
User avatar
nisiprius
Advisory Board
Posts: 42552
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Efficient Market Theory vs Tesla Stock Price

Post by nisiprius »

Anon9001 wrote: Mon Aug 03, 2020 10:49 am...Sure you can pull out USA like that but what about a real inefficient market like China A shares? Active seems to smashing indexes here...
It's not just the USA. In fact,
Active funds of foreign exposure underperform their benchmarks more severely.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Northern Flicker
Posts: 6854
Joined: Fri Apr 10, 2015 12:29 am

Re: Efficient Market Theory vs Tesla Stock Price

Post by Northern Flicker »

Anon9001 wrote: Mon Aug 03, 2020 7:55 am I am confused this is like asking a vegan how healthy meat is. You will not get any objective answers here as passive investing requires EMH to be correct. Any theory that does not take into account emotions of people who are trading and investing in securities market will not make sense in real life.
You have it backwards. Active investing requires EMH to be wrong. Passive investing does not require it to be correct.

Again EMH just says that publicly known information is already priced in. It is a statement about past information and current price. It is not a prediction of future returns, and future behavior of traders is not in the scope of its statement.

EMH may or may not be true. I personally believe it is mostly true, but that there are some not cery visible anomalies where it fails, but my ooinion about that is not worth anything. But it is not easy to falsify EMH. If your view if investing nakes it intuitively obvious that EMH is wrong, there probably are sone assumptions you are making about investing or about EMH that would be worth re-evaluating.
Last edited by Northern Flicker on Mon Aug 03, 2020 12:25 pm, edited 1 time in total.
Risk is not a guarantor of return.
Anon9001
Posts: 1110
Joined: Fri Dec 20, 2019 9:28 am
Location: भारत

Re: Efficient Market Theory vs Tesla Stock Price

Post by Anon9001 »

nisiprius wrote: Mon Aug 03, 2020 11:54 am
Anon9001 wrote: Mon Aug 03, 2020 10:49 am...Sure you can pull out USA like that but what about a real inefficient market like China A shares? Active seems to smashing indexes here...
It's not just the USA. In fact,
Active funds of foreign exposure underperform their benchmarks more severely.
I think we need to be clear here the China A shares is a market where significant retail ownership is present. This is not present in foreign benchmarks you specify all them are either EM or DM countries. Surprising they don't include China. This should give as a test to see if market efficiency is not required. It is required. The retail investors are influencing the index so much that active management even though it is expensive relative to a index is out-performing.
Last edited by Anon9001 on Mon Aug 03, 2020 12:19 pm, edited 1 time in total.
Land/Real Estate:89.0% Equities:5.0% Bonds:2.0% Gold:1.7% Cash:1.7% Cryptocurrency:0.2%
Anon9001
Posts: 1110
Joined: Fri Dec 20, 2019 9:28 am
Location: भारत

Re: Efficient Market Theory vs Tesla Stock Price

Post by Anon9001 »

I personally think inefficiency is on a spectrum and markets where institutions control majority of stock market volume is more likely to be efficient than inefficient regardless of EM,DM designation. Markets where retail investors control majority of stock market like Frontier Markets and China A shares is where the real inefficiency starts and should serve as a test to see if a index could work in a environment where "dumb money" is setting prices. The data that we get from China A shares is saying No. I would like to see data for other Frontier Markets.
Land/Real Estate:89.0% Equities:5.0% Bonds:2.0% Gold:1.7% Cash:1.7% Cryptocurrency:0.2%
Post Reply