A Simple Test In Your Belief In Market Efficiency

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
columbia
Posts: 2934
Joined: Tue Aug 27, 2013 5:30 am

Re: A Simple Test In Your Belief In Market Efficiencypo

Post by columbia »

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!"
Excellent post.
lostdog
Posts: 3179
Joined: Thu Feb 04, 2016 2:15 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by lostdog »

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

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

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

Go figure...

(Disclaimer: I'm personally underweight U.S. equities and overweight EM and European equities :wink:)
If it's in the name of Jack and Warren, the rules don't don't apply.
lostdog
Posts: 3179
Joined: Thu Feb 04, 2016 2:15 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by lostdog »

YearTrader wrote: Sun Feb 02, 2020 4:27 pm Another question is should you rebalance between VTI/VXUS (or VTI/VEA/VWO) if you don't hold VT.

The market cap weight between VTI and VXUS is different 10 years ago.

You don't have to rebalance. It will float.
MotoTrojan
Posts: 10659
Joined: Wed Feb 01, 2017 8:39 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by MotoTrojan »

lostdog wrote: Sun Feb 02, 2020 4:41 pm
YearTrader wrote: Sun Feb 02, 2020 4:27 pm Another question is should you rebalance between VTI/VXUS (or VTI/VEA/VWO) if you don't hold VT.

The market cap weight between VTI and VXUS is different 10 years ago.

You don't have to rebalance. It will float.
I have preached this before but I actually don't believe it is the case.

Let's say there are no IPOs in ex-US but in the US there are enough IPOs to boost it's market cap 10%, while both market returns remain otherwise flat. That would sway the global allocation, without having any impact on the price of VTI or VXUS.

This is a big reason why emerging market indices are not automatically a winning investment even if the economies they invest in grow substantially, since that growth can come from new capital rather than capital growth.
Last edited by MotoTrojan on Sun Feb 02, 2020 4:44 pm, edited 1 time in total.
lostdog
Posts: 3179
Joined: Thu Feb 04, 2016 2:15 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by lostdog »

How come there isn't a two fund thread of Total World Stock and Total World Bond? There is the Jack Bogle two fund thread with Jack quotes. Jack's quotes can apply to the simple world two fund thread?
fortyofforty
Posts: 2083
Joined: Wed Mar 31, 2010 12:33 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by fortyofforty »

lostdog wrote: Sun Feb 02, 2020 4:44 pm How come there isn't a two fund thread of Total World Stock and Total World Bond? There is the Jack Bogle two fund thread with Jack quotes. Jack's quotes can apply to the simple world two fund thread?
Because people argue that, well, bonds are, you know, different.

It's the Boglehead Paradox.
ScubaHogg
Posts: 718
Joined: Sun Nov 06, 2011 3:02 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by ScubaHogg »

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.
“Unexpected Returns dominate the Expected Returns” - Ken French
beehivehave
Posts: 466
Joined: Thu Aug 08, 2019 1:21 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by beehivehave »

fortyofforty wrote: Sun Feb 02, 2020 4:53 pm
lostdog wrote: Sun Feb 02, 2020 4:44 pm How come there isn't a two fund thread of Total World Stock and Total World Bond? There is the Jack Bogle two fund thread with Jack quotes. Jack's quotes can apply to the simple world two fund thread?
Because people argue that, well, bonds are, you know, different.

It's the Boglehead Paradox.
Bonds ARE different. They are supposed to provide low risk stability to portfolios, while stocks are supposed to provide more risk and growth.
Hence, little or no foreign or high risk bonds.
fortyofforty
Posts: 2083
Joined: Wed Mar 31, 2010 12:33 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by fortyofforty »

Does anyone know whether or not investors in China, or India, or Saudi Arabia, or anywhere else are as free to invest in other countries as we are? If they are not, would that tend to inflate stock valuations in those countries?
fortyofforty
Posts: 2083
Joined: Wed Mar 31, 2010 12:33 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by fortyofforty »

beehivehave wrote: Sun Feb 02, 2020 4:56 pm
fortyofforty wrote: Sun Feb 02, 2020 4:53 pm
lostdog wrote: Sun Feb 02, 2020 4:44 pm How come there isn't a two fund thread of Total World Stock and Total World Bond? There is the Jack Bogle two fund thread with Jack quotes. Jack's quotes can apply to the simple world two fund thread?
Because people argue that, well, bonds are, you know, different.

It's the Boglehead Paradox.
Bonds ARE different. They are supposed to provide low risk stability to portfolios, while stocks are supposed to provide more risk and growth.
Hence, little or no foreign or high risk bonds.
So, adding diversification increases risk?
Unladen_Swallow
Posts: 784
Joined: Tue Dec 10, 2019 6:12 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by Unladen_Swallow »

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

Do you want the son, daughter, sister-in-law, brother-in-law of a corrupt dictator messing with your shares?
I agree.

To add: Investing in the US is not necessarily a home country bias for some. It is just investing in the US based on their best judgment.

I grew up overseas. Corruption is still a big issue in some countries that have brilliant minds and great innovation. I would have had a US bias even if still living overseas. People could now categorize this as home country bias because I have now lived here for ages. So be it.

I don't see home country bias (or being overweight in US) as an unreasonable thing.

I am now more familiar with the US economy than other countries. It is a somewhat known quantity. I am part of this economy. My friends are. My mentors are. My family are. I know of Enron, I know of World Com. I know of the housing crisis and dot com bubble. I am not blind to the failures. I choose to take my chances with this machine because of these failures, not in spite of them. I am part of the system that might fail, and must rebuild again. I can deal with that.

There is a saying- choose the known devil over the unknown god.

I am not advocating others feel this way, just explaining where I am coming from.
"I think it's much more interesting to live not knowing than to have answers which might be wrong." - Richard Feynman
beehivehave
Posts: 466
Joined: Thu Aug 08, 2019 1:21 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by beehivehave »

fortyofforty wrote: Sun Feb 02, 2020 4:57 pm
beehivehave wrote: Sun Feb 02, 2020 4:56 pm
fortyofforty wrote: Sun Feb 02, 2020 4:53 pm
lostdog wrote: Sun Feb 02, 2020 4:44 pm How come there isn't a two fund thread of Total World Stock and Total World Bond? There is the Jack Bogle two fund thread with Jack quotes. Jack's quotes can apply to the simple world two fund thread?
Because people argue that, well, bonds are, you know, different.

It's the Boglehead Paradox.
Bonds ARE different. They are supposed to provide low risk stability to portfolios, while stocks are supposed to provide more risk and growth.
Hence, little or no foreign or high risk bonds.
So, adding diversification increases risk?
Yes, it does in the case of foreign bonds - the risk of currency fluctuation relative to the USD, unless you pay more to get hedging. Granted, you could benefit from currency change, but it is still a risk. If you want currency risk, buy foreign stocks, as the potential for capital gain is greater than for bonds.
PVW
Posts: 652
Joined: Mon Dec 29, 2014 11:01 am

Re: A Simple Test In Your Belief In Market Efficiency

Post by PVW »

Random Walker wrote: Sun Feb 02, 2020 2:31 pm how can a true believer in efficient markets be anywhere else than roughly world market cap weighting of their equity portfolio?

Dave
Are there any true believers in efficient markets? Does anyone really believe all the traders in China or Russia are working with the same information? I don't.
fortyofforty
Posts: 2083
Joined: Wed Mar 31, 2010 12:33 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by fortyofforty »

beehivehave wrote: Sun Feb 02, 2020 5:14 pm
fortyofforty wrote: Sun Feb 02, 2020 4:57 pm
beehivehave wrote: Sun Feb 02, 2020 4:56 pm
fortyofforty wrote: Sun Feb 02, 2020 4:53 pm
lostdog wrote: Sun Feb 02, 2020 4:44 pm How come there isn't a two fund thread of Total World Stock and Total World Bond? There is the Jack Bogle two fund thread with Jack quotes. Jack's quotes can apply to the simple world two fund thread?
Because people argue that, well, bonds are, you know, different.

It's the Boglehead Paradox.
Bonds ARE different. They are supposed to provide low risk stability to portfolios, while stocks are supposed to provide more risk and growth.
Hence, little or no foreign or high risk bonds.
So, adding diversification increases risk?
Yes, it does in the case of foreign bonds - the risk of currency fluctuation relative to the USD, unless you pay more to get hedging. Granted, you could benefit from currency change, but it is still a risk. If you want currency risk, buy foreign stocks, as the potential for capital gain is greater than for bonds.
At least in the case of some Vanguard bond funds, they are hedged back to the U.S. dollar. Most of such objections also apply equally to international equities, of course, but for some reason those "risks' are accepted, even encouraged.
Topic Author
Random Walker
Posts: 4611
Joined: Fri Feb 23, 2007 8:21 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by Random Walker »

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

Dave
User avatar
arcticpineapplecorp.
Posts: 6212
Joined: Tue Mar 06, 2012 9:22 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by arcticpineapplecorp. »

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.
Last edited by arcticpineapplecorp. on Sun Feb 02, 2020 5:44 pm, edited 2 times in total.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
Dead Man Walking
Posts: 1001
Joined: Wed Nov 07, 2007 6:51 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by Dead Man Walking »

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
I’m not a true believer in world market cap weighting and believe that markets are efficient only to the extent that the information available is accurate. I remember Enron! My portfolio has a slight tilt toward small/mid caps. I recently invested in Vanguard Global Minimum Volatility Fund not only because of its minimum volatility but also because of its small/mid cap weighting. I have a domestic tilt which is exacerbated by the performance of the US market and by my failure to rebalance regularly.

DMW
User avatar
andromeda2k12
Posts: 45
Joined: Sun Oct 13, 2019 10:22 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by andromeda2k12 »

willthrill81 wrote: Sun Feb 02, 2020 4:22 pm
andromeda2k12 wrote: Sun Feb 02, 2020 4:16 pm
willthrill81 wrote: Sun Feb 02, 2020 4:06 pm
Normchad wrote: Sun Feb 02, 2020 4:01 pm I am personally a strong believer in the EMH; and I really think it underpins the basic Jack Bogle tenet.
I believe that Bogle's costs-matter hypothesis is both much more accurate and actionable than the EMH.
They’re mutually exclusive though no?
No, they are independent (i.e. one being accurate does not impact the accuracy of the other).
Ah yes, that’s what I meant, easy to confuse the two. So why put them at odds then? Like I was saying, the cost matters hypothesis says nothing about intl allocation (at least today where markets can be accessed fairly cheap). Seems reasonable for someone to believe both if they do believe in the EMH?
sambb
Posts: 2946
Joined: Sun Mar 10, 2013 3:31 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by sambb »

Whether it is international stocks or bonds, or active managed funds (wellesley, wellington), or customer service between companies, there are biases here that are not necessarily logical. One has to make their own mind.
User avatar
willthrill81
Posts: 20975
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by willthrill81 »

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.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
User avatar
willthrill81
Posts: 20975
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by willthrill81 »

andromeda2k12 wrote: Sun Feb 02, 2020 5:44 pm
willthrill81 wrote: Sun Feb 02, 2020 4:22 pm
andromeda2k12 wrote: Sun Feb 02, 2020 4:16 pm
willthrill81 wrote: Sun Feb 02, 2020 4:06 pm
Normchad wrote: Sun Feb 02, 2020 4:01 pm I am personally a strong believer in the EMH; and I really think it underpins the basic Jack Bogle tenet.
I believe that Bogle's costs-matter hypothesis is both much more accurate and actionable than the EMH.
They’re mutually exclusive though no?
No, they are independent (i.e. one being accurate does not impact the accuracy of the other).
Ah yes, that’s what I meant, easy to confuse the two. So why put them at odds then?
Unlike the EMH, the CMH can be directly tested, and the data robustly indicate that costs are the single best predictor of forward returns (i.e. inverse relationship between the two). As such, I adhere to the CMH and care nothing for the EMH.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
Topic Author
Random Walker
Posts: 4611
Joined: Fri Feb 23, 2007 8:21 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by Random Walker »

Unladen_Swallow wrote: Sun Feb 02, 2020 5:08 pm
I don't see home country bias (or being overweight in US) as an unreasonable thing.
Perhaps it’s similar to preferring large growth stocks: preference for less risky investments with lower expected return.

Dave
bck63
Posts: 1318
Joined: Fri Sep 28, 2018 4:59 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by bck63 »

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
Have you read the latest news about the coronavirus? China covered up the outbreak in the early stages. They forced a doctor who publicized it to sign a paper admitting he broke the law. He is being "reprimanded." God help him.

If they would do that with the coronavirus, what do they do with their equity markets?
Last edited by bck63 on Sun Feb 02, 2020 6:36 pm, edited 1 time in total.
bck63
Posts: 1318
Joined: Fri Sep 28, 2018 4:59 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by bck63 »

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

Do you want the son, daughter, sister-in-law, brother-in-law of a corrupt dictator messing with your shares?
+1000
bck63
Posts: 1318
Joined: Fri Sep 28, 2018 4:59 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by bck63 »

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

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

Dave
So in other words it's okay to pay less but still get ripped off? Makes no sense.
columbia
Posts: 2934
Joined: Tue Aug 27, 2013 5:30 am

Re: A Simple Test In Your Belief In Market Efficiency

Post by columbia »

As I like to say: If someone wants to hand you their wallet, let them.
JonnyB
Posts: 688
Joined: Sun Jan 19, 2020 5:28 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by JonnyB »

livesoft wrote: Sun Feb 02, 2020 2:41 pm Do you want the son, daughter, sister-in-law, brother-in-law of a corrupt dictator messing with your shares?
Okay, now you have me worried.
fortyofforty
Posts: 2083
Joined: Wed Mar 31, 2010 12:33 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by fortyofforty »

Free, open, fair markets are relatively efficient, when information is able to flow freely. I can easily imagine situations in which a government controls information in order to manipulate market forces.
User avatar
bertilak
Posts: 7847
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: A Simple Test In Your Belief In Market Efficiency

Post by bertilak »

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

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

Dave
The Market also sets the price of Tulip Bulbs and Disney Collectables. Should we therefore invest in those as well? Cap-weighted Little Mermaid dolls anyone?

I think the fallacy is in thinking there is only one market, or that all markets are equivalent.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
columbia
Posts: 2934
Joined: Tue Aug 27, 2013 5:30 am

Re: A Simple Test In Your Belief In Market Efficiency

Post by columbia »

bck63 wrote: Sun Feb 02, 2020 6:23 pm
Random Walker wrote: Sun Feb 02, 2020 2:31 pm The world equity market cap is roughly 50% US and 50% non US. Some people argue that because of expenses and because this is where US investors will spend their investment savings that there is some reason for modest overweighting of US equities in a US investor’s portfolio. Other than those fairly minor exceptions, how can a true believer in efficient markets be anywhere else than roughly world market cap weighting of their equity portfolio?

Dave
Have you read the latest news about the coronavirus? China covered up the outbreak in the early stages. They forced a doctor who publicized it to sign a paper admitting he broke the law. He is being "reprimanded." God help him.

If they would do that with the coronavirus, what do they do with their equity markets?
This is super important. +1
User avatar
willthrill81
Posts: 20975
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by willthrill81 »

bertilak wrote: Sun Feb 02, 2020 7:00 pm
Random Walker wrote: Sun Feb 02, 2020 2:45 pm
livesoft wrote: Sun Feb 02, 2020 2:41 pm
Random Walker wrote: Sun Feb 02, 2020 2:31 pm... how can a true believer in efficient markets be anywhere else than roughly world market cap weighting of their equity portfolio?
Are other markets as transparent as the US market? No, they are not.
Are other markets as regulated as the US market? No, they are not.

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

Dave
The Market also sets the price of Tulip Bulbs and Disney Collectables. Should we therefore invest in those as well? Cap-weighted Little Mermaid dolls anyone?

I think the fallacy is in thinking there is only one market, or that all markets are equivalent.
Excellent point.

I believe that it is incumbent on those claiming that two or more markets are equivalents to demonstrate that it is so rather than claiming it as a given.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
User avatar
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by watchnerd »

willthrill81 wrote: Sun Feb 02, 2020 3:17 pm
The argument for cap-weighting bonds is very weak IMHO, even if the bond market was 'completely' efficient. The individual investor's time horizon and purpose for holding bonds in the first place should matter far more than whatever the sum total of the Bloomberg Barclay's Aggregate index is.
I agree, but if you're going to be a Sharpe Portfolio Puritan*, you gotta do the bonds, too. Worldwide.

*he "cheats" by managing individual risk via a 'riskless' TIPS ladder outside the 'risky' portfolio, which is a workaround to solve the problem you mentioned.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP
User avatar
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by watchnerd »

bertilak wrote: Sun Feb 02, 2020 7:00 pm
Random Walker wrote: Sun Feb 02, 2020 2:45 pm
livesoft wrote: Sun Feb 02, 2020 2:41 pm
Random Walker wrote: Sun Feb 02, 2020 2:31 pm... how can a true believer in efficient markets be anywhere else than roughly world market cap weighting of their equity portfolio?
Are other markets as transparent as the US market? No, they are not.
Are other markets as regulated as the US market? No, they are not.

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

Dave
The Market also sets the price of Tulip Bulbs and Disney Collectables. Should we therefore invest in those as well? Cap-weighted Little Mermaid dolls anyone?

I think the fallacy is in thinking there is only one market, or that all markets are equivalent.

Mermaid dolls too small to show up on this:

Image
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP
User avatar
Watty
Posts: 20709
Joined: Wed Oct 10, 2007 3:55 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by Watty »

Random Walker wrote: Sun Feb 02, 2020 2:31 pm The world equity market cap is roughly 50% US and 50% non US.
One complication is that just because a company is traded on a US exchange, and may have their headquarters in the US, it does not totally mean that it is a pure US business.

About 40% of S&P 500 companies sales are international sales.

Someone who just invests in a US index fund may have less "home bias" than it might appear.
User avatar
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by watchnerd »

Watty wrote: Sun Feb 02, 2020 7:59 pm
Random Walker wrote: Sun Feb 02, 2020 2:31 pm The world equity market cap is roughly 50% US and 50% non US.
One complication is that just because a company is traded on a US exchange, and may have their headquarters in the US, it does not totally mean that it is a pure US business.

About 40% of S&P 500 companies sales are international sales.

Someone who just invests in a US index fund may have less "home bias" than it might appear.
The same is true the other way around, too.

Toyota doesn't do all of its business in Japan, nor does Nestle do all of its business in Switzerland.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP
palanzo
Posts: 1399
Joined: Thu Oct 10, 2019 4:28 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by palanzo »

Normchad wrote: Sun Feb 02, 2020 3:40 pm Even Malkiel didn't say the markets were perfectly efficient....

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

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

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

And, part of the efficient market hypothesis, I think, is that all information that is knowable, that affects price, is available to everybody. I certainly do not believe that to be true in a lot of foreign countries. I don't think it's 100% true here, either. But I suspect it is much worse elsewhere.
s
But I am honestly torn. Nothing lasts forever, not even the Roman Empire. So I do have a pretty big portion in VSMGX, which is 40% international....
International is not just China. UK, Germany, Sweden, Switzerland, Australia, Canada and others all have strong government and regulatory mechanisms in place and individual property rights are protected.
Unladen_Swallow
Posts: 784
Joined: Tue Dec 10, 2019 6:12 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by Unladen_Swallow »

Random Walker wrote: Sun Feb 02, 2020 5:59 pm
Unladen_Swallow wrote: Sun Feb 02, 2020 5:08 pm
I don't see home country bias (or being overweight in US) as an unreasonable thing.
Perhaps it’s similar to preferring large growth stocks: preference for less risky investments with lower expected return.

Dave
Actually it is not. Foreign markets are not promising me a higher return for more risk. I only see unacceptable risk to me.

I don't accept the risk of investing heavily outside the US.
Others don't accept the risk of investing heavily in the US.


Acceptable risk and unacceptable risk is different for everyone. One must invest accordingly. There are no absolute guarantees and I can't see into the future.
"I think it's much more interesting to live not knowing than to have answers which might be wrong." - Richard Feynman
User avatar
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by watchnerd »

*sigh*

And once again, the old "US vs International debate".....

Okay, I'm out of this re-run.

I've seen this movie too many times already.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP
fortyofforty
Posts: 2083
Joined: Wed Mar 31, 2010 12:33 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by fortyofforty »

watchnerd wrote: Sun Feb 02, 2020 8:22 pm *sigh*

And once again, the old "US vs International debate".....

Okay, I'm out of this re-run.

I've seen this movie too many times already.
At least we know how the show ends.

Thread locked.
palanzo
Posts: 1399
Joined: Thu Oct 10, 2019 4:28 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by palanzo »

watchnerd wrote: Sun Feb 02, 2020 8:02 pm
Watty wrote: Sun Feb 02, 2020 7:59 pm
Random Walker wrote: Sun Feb 02, 2020 2:31 pm The world equity market cap is roughly 50% US and 50% non US.
One complication is that just because a company is traded on a US exchange, and may have their headquarters in the US, it does not totally mean that it is a pure US business.

About 40% of S&P 500 companies sales are international sales.

Someone who just invests in a US index fund may have less "home bias" than it might appear.
The same is true the other way around, too.

Toyota doesn't do all of its business in Japan, nor does Nestle do all of its business in Switzerland.
Very true. Some on this thread would have us believe that Toyota and Nestle are run by corrupt dictators.
Topic Author
Random Walker
Posts: 4611
Joined: Fri Feb 23, 2007 8:21 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by Random Walker »

Unladen_Swallow wrote: Sun Feb 02, 2020 8:16 pm
Random Walker wrote: Sun Feb 02, 2020 5:59 pm
Unladen_Swallow wrote: Sun Feb 02, 2020 5:08 pm
I don't see home country bias (or being overweight in US) as an unreasonable thing.
Perhaps it’s similar to preferring large growth stocks: preference for less risky investments with lower expected return.

Dave
Actually it is not. Foreign markets are not promising me a higher return for more risk. I only see unacceptable risk to me.

I don't accept the risk of investing heavily outside the US.
Others don't accept the risk of investing heavily in the US.


Acceptable risk and unacceptable risk is different for everyone. One must invest accordingly. There are no absolute guarantees and I can't see into the future.
That’s one of my points though. Markets price risk. If the collective wisdom of the market perceives more risk in some market outside the US, then it will be incorporated into the price, and thus into expected returns. Currently valuations in Developed Int and EM are lower. These markets are perceived as more risky with higher expected return. Of course the risk could show up.

Dave
MotoTrojan
Posts: 10659
Joined: Wed Feb 01, 2017 8:39 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by MotoTrojan »

Do any nations in a developed market index have dictatorship governments?
columbia
Posts: 2934
Joined: Tue Aug 27, 2013 5:30 am

Re: A Simple Test In Your Belief In Market Efficiency

Post by columbia »

palanzo wrote: Sun Feb 02, 2020 8:35 pm
watchnerd wrote: Sun Feb 02, 2020 8:02 pm
Watty wrote: Sun Feb 02, 2020 7:59 pm
Random Walker wrote: Sun Feb 02, 2020 2:31 pm The world equity market cap is roughly 50% US and 50% non US.
One complication is that just because a company is traded on a US exchange, and may have their headquarters in the US, it does not totally mean that it is a pure US business.

About 40% of S&P 500 companies sales are international sales.

Someone who just invests in a US index fund may have less "home bias" than it might appear.
The same is true the other way around, too.

Toyota doesn't do all of its business in Japan, nor does Nestle do all of its business in Switzerland.
Very true. Some on this thread would have us believe that Toyota and Nestle are run by corrupt dictators.
The dogma is that the only acceptable choice is VT or VXUS for ex-US exposure; developed ex-US do exist for those disinterested in relying on sketchy investing scenarios.
palanzo
Posts: 1399
Joined: Thu Oct 10, 2019 4:28 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by palanzo »

columbia wrote: Sun Feb 02, 2020 8:53 pm
palanzo wrote: Sun Feb 02, 2020 8:35 pm
watchnerd wrote: Sun Feb 02, 2020 8:02 pm
Watty wrote: Sun Feb 02, 2020 7:59 pm
Random Walker wrote: Sun Feb 02, 2020 2:31 pm The world equity market cap is roughly 50% US and 50% non US.
One complication is that just because a company is traded on a US exchange, and may have their headquarters in the US, it does not totally mean that it is a pure US business.

About 40% of S&P 500 companies sales are international sales.

Someone who just invests in a US index fund may have less "home bias" than it might appear.
The same is true the other way around, too.

Toyota doesn't do all of its business in Japan, nor does Nestle do all of its business in Switzerland.
Very true. Some on this thread would have us believe that Toyota and Nestle are run by corrupt dictators.
The dogma is that the only acceptable choice is VT or VXUS for ex-US exposure; developed ex-US do exist for those disinterested in relying on sketchy investing scenarios.
The "sketchy" part of VXUS or VTIAX is about 20% so personally I don't think that is too much of a risk. My point above is that some people here seem to exhibit xenophobia.

Toyota builds what many consider to be the most reliable vehicles in the world and I'm glad that Toyota has chosen to design and build many of its vehicles in the USA. It might be interesting for some people to read about the history of Nestle and they might get a better appreciation of the contributions made by Henri Nestlé.
User avatar
willthrill81
Posts: 20975
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: A Simple Test In Your Belief In Market Efficiency

Post by willthrill81 »

MotoTrojan wrote: Sun Feb 02, 2020 8:53 pm Do any nations in a developed market index have dictatorship governments?
Any answer to that would certainly be political and, as such, forbidden on the forum.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
MotoTrojan
Posts: 10659
Joined: Wed Feb 01, 2017 8:39 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by MotoTrojan »

willthrill81 wrote: Sun Feb 02, 2020 9:46 pm
MotoTrojan wrote: Sun Feb 02, 2020 8:53 pm Do any nations in a developed market index have dictatorship governments?
Any answer to that would certainly be political and, as such, forbidden on the forum.
Thank you, fair point. I’d say the risks many are refereeing to seem to be emerging market related.
palanzo
Posts: 1399
Joined: Thu Oct 10, 2019 4:28 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by palanzo »

MotoTrojan wrote: Sun Feb 02, 2020 9:53 pm
willthrill81 wrote: Sun Feb 02, 2020 9:46 pm
MotoTrojan wrote: Sun Feb 02, 2020 8:53 pm Do any nations in a developed market index have dictatorship governments?
Any answer to that would certainly be political and, as such, forbidden on the forum.
Thank you, fair point. I’d say the risks many are refereeing to seem to be emerging market related.
Hence my 20% comment above.
lostdog
Posts: 3179
Joined: Thu Feb 04, 2016 2:15 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by lostdog »

palanzo wrote: Sun Feb 02, 2020 8:35 pm
watchnerd wrote: Sun Feb 02, 2020 8:02 pm
Watty wrote: Sun Feb 02, 2020 7:59 pm
Random Walker wrote: Sun Feb 02, 2020 2:31 pm The world equity market cap is roughly 50% US and 50% non US.
One complication is that just because a company is traded on a US exchange, and may have their headquarters in the US, it does not totally mean that it is a pure US business.

About 40% of S&P 500 companies sales are international sales.

Someone who just invests in a US index fund may have less "home bias" than it might appear.
The same is true the other way around, too.

Toyota doesn't do all of its business in Japan, nor does Nestle do all of its business in Switzerland.
Very true. Some on this thread would have us believe that Toyota and Nestle are run by corrupt dictators.
+1

Personal ideologies, biases, political views, paranoia, performance chasing, past performance and over the top hero worship play a big role for some when it comes to U.S. only investing.

I think Jack Bogle said, no one knows nuthin. I'm agnostic so I invest that way. I know when I invest at world market cap I won't be wringing my hands in worry.
lostdog
Posts: 3179
Joined: Thu Feb 04, 2016 2:15 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by lostdog »

palanzo wrote: Sun Feb 02, 2020 9:36 pm
columbia wrote: Sun Feb 02, 2020 8:53 pm
palanzo wrote: Sun Feb 02, 2020 8:35 pm
watchnerd wrote: Sun Feb 02, 2020 8:02 pm
Watty wrote: Sun Feb 02, 2020 7:59 pm

One complication is that just because a company is traded on a US exchange, and may have their headquarters in the US, it does not totally mean that it is a pure US business.

About 40% of S&P 500 companies sales are international sales.

Someone who just invests in a US index fund may have less "home bias" than it might appear.
The same is true the other way around, too.

Toyota doesn't do all of its business in Japan, nor does Nestle do all of its business in Switzerland.
Very true. Some on this thread would have us believe that Toyota and Nestle are run by corrupt dictators.
The dogma is that the only acceptable choice is VT or VXUS for ex-US exposure; developed ex-US do exist for those disinterested in relying on sketchy investing scenarios.
The "sketchy" part of VXUS or VTIAX is about 20% so personally I don't think that is too much of a risk. My point above is that some people here seem to exhibit xenophobia.

Toyota builds what many consider to be the most reliable vehicles in the world and I'm glad that Toyota has chosen to design and build many of its vehicles in the USA. It might be interesting for some people to read about the history of Nestle and they might get a better appreciation of the contributions made by Henri Nestlé.
+1

In before this gets deleted. I agree 💯.

When a forum member recommends a novice investor to hold a 100% US portfolio, they're doing the young one a disservice. Especially planting a seed in their head that most countries in VTIAX are corrupt.
DB2
Posts: 928
Joined: Thu Jan 17, 2019 10:07 pm

Re: A Simple Test In Your Belief In Market Efficiency

Post by DB2 »

If I got a dollar for every duplicate thread on this forum I wouldn't have to invest.
Post Reply