EMH, strong or semi-strong or weak form?

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tcorriero
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EMH, strong or semi-strong or weak form?

Post by tcorriero » Sat Oct 17, 2015 10:10 am

New to this world, and forum. Reading a lot about investing according to the EMH. I'm on board. We can't beat the market in the long run.

Yet it seems very important to qualify the EMH by the statement "in the long run".

Apologies for the arm-chair approach to empirically-based economics, but doesn't it just MAKE SENSE that investors who are trading stocks do NOT have perfect information? And the marginal buyer and seller can be trading based on reasons which are truly disconnected from fact and reality? i.e., emotion, or momentum, etc.?

Or approached differently, think about Dimensional Fund Advisors, whose trading is based (i believe?) in large part on the EMH. Take the example of those traders avoiding buying stocks which are being added to an index, and therefore have disproportionately high demand (and therefore prices), so buy them later, or not at all. But if the market is TOTALLY efficient, every time an index fund buys that stock, well, that PERFECTLY reflects all information in the market, right....?

This may be a minor quibble (how many angels can dance on the head of a pin?, or I may be poking my finger in a chasm of difference.

(Apologies as I'm certain people will tell me to look at prior posts, which I have. Still curious for current feedback.)

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Re: EMH, strong or semi-strong or weak form?

Post by tcorriero » Sat Oct 17, 2015 1:28 pm

Bump?

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Maynard F. Speer
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Re: EMH, strong or semi-strong or weak form?

Post by Maynard F. Speer » Sat Oct 17, 2015 1:50 pm

tcorriero wrote:New to this world, and forum. Reading a lot about investing according to the EMH. I'm on board. We can't beat the market in the long run
... on a risk-adjusted basis

I think if you don't mind investing in riskier parts of the market; accepting lower liquidity, less certainty; are willing to hold longer-term .. you give yourself every opportunity of returning more than the market in the long-run

Yes, you could make the case risk is a behavioural aspect of investing you're exploiting .. You could also make the case passive investing creates more market inefficiencies than it ameliorates ... Strong Efficient Market proponents have been likened to the 'flat earth society' - that seems a fairly apt comparison to me ... I'd tend towards an oscillating but fairly sturdy form of EMH
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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Phineas J. Whoopee
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Re: EMH, strong or semi-strong or weak form?

Post by Phineas J. Whoopee » Sat Oct 17, 2015 3:49 pm

Hi tcorriero, and welcome to the forum!

You'll probably get more responses if you ask about what the Efficient Market Hypothesis actually says, rather than about a parody of it promulgated by commissioned salespeople the world over.

Both Investopedia and Wikipedia have it wrong. Morningstar's glossary entry, to which I linked, does a lot better.

PJW

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JoMoney
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Re: EMH, strong or semi-strong or weak form?

Post by JoMoney » Sat Oct 17, 2015 4:03 pm

I'm not so certain about the EMH, but I'm fairly certain that it's not a game I'm going to beat the professionals at. I'm not so certain I could even pick who the winning "professionals" will be over some future time period.
But regardless, there's plenty of reasons not to play the active game even if the EMH is false:
http://marriottschool.net/emp/SRT/passive.html
...the argument for indexing is even stronger for individual investors if the stock market is not efficient. The game of poker provides, in some respects, an instructive analogy. Poker is a zero sum game, similar to active investing compared to indexing, and poker combines luck and skill, consistent with the assumption of a less than perfectly efficient market. An old adage among professional poker players applies to those deciding to participate in the active investing game. "If you don't know who the mark is, get up and leave the table, because it's you."
http://www.marketwatch.com/story/how-to ... 2014-03-28
...Ellis' assertion that professional athletes play a "Winner's Game" and amateur athletes play a “Loser's Game.” For example, the winner of a professional golf tournament must execute difficult shots and outperform the competition. Professional golf is a Winner's Game — the winner defeats his opponent by superior play. The winner of an amateur golf tournament is often the player who makes the fewest mistakes, shuns risky shots and avoids penalty strokes. Amateur golf is a Loser's Game — the loser usually defeats himself by poor play.
...A huge gulf exists between the skill and ability of professional investors and their amateur counterparts; whose actions are often just emotional speculations. Unlike amateur golfers and tennis players, amateur investors play on the same field as the professionals at the same time. Most personal finance books promise market beating strategies; promoting the crazy idea that you can beat the professionals at their own game. Sure, and I can go one-on-one with Tiger Woods.
http://johncbogle.com/speeches/JCB_Brinson0404.pdf
...But we don’t need to accept the EMH to be index believers. For there is a second reason for the triumph of indexing, and it is not only more compelling but unarguably universal. I call it the CMH—the Cost Matters Hypothesis—and not only is it all that is needed to explain why indexing must and does work, but it in fact enables us to quantify with some precision how well it works. Whether or not the markets are efficient, the explanatory power of the CMH holds. ...
But while the precise validity of the EMH may be debatable, there can be no debate about the validity of the CMH. It posits a conclusion that is also, using Dr. Samuelson’s formulation, both “trivially obvious and remarkably sweeping” and it confirms that Bachelier’s argument had to be taken one step further. The mathematical expectation of the speculator is not zero; it is a loss equal to the amount of transaction costs incurred. ...
https://web.stanford.edu/~wfsharpe/art/ ... active.htm
Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: EMH, strong or semi-strong or weak form?

Post by nisiprius » Sat Oct 17, 2015 4:34 pm

First of all, the argument for indexing does not depend on the efficient market hypothesis. All it depends on are the "relentless rules of humble arithmetic" as John C. Bogle calls them, although I think the best source is the essay The Arithmetic of Active Management, from the personal website of William F. Sharpe.

Second, I don't see that it matters much which form of the EMH applies. Even the weak form disqualifies me from beating the market. There's no way I can get my hands on all the publicly available information and make sense out of it. I don't even have a Bloomberg terminal.

My personal belief is that there are active managers who probably can add 0.5% of alpha through skill. I don't have much riding on that, it might not be true, but I'm willing to accept that it might be. The problem is a) how many of them can do that, b) how can I figure out which are the ones who can, and c) this is the biggie--the evidence suggests that they take all the alpha for themselves and don't share any of it with the investors in the funds. That is, they can't beat the market after expenses, because if they could, they'd just charge more in expenses.

This implies that it's a sellers market for alpha--the seller gets to keep almost all the value added--and I'm not sure why that's true, but it seems to be.
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.

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Re: EMH, strong or semi-strong or weak form?

Post by Maynard F. Speer » Sat Oct 17, 2015 4:55 pm

I think the argument that either the efficiency of markets or the untouchable skill of top fund managers make stock-picking a perpetual loser's game for the retail investor has been overstated

As Buffett says, there's a tremendous advantage to being a small investor - his famous "50% returns" quote, if anyone wants to look it up ... i.e. managing a $1m portfolio rather than a $1bn portfolio

If you're a small investor, you can make big returns off companies too small for large funds to invest in - you can find better value opportunities in bonds .. I'd add you can invest in niche/innovative alternative finance before the crowds move in - P2P lending's still providing 'mom & pop' investors stable 10% returns this year .. Equity crowd funding *may* produce phenomenal returns down the line, as a part of the market far too small for hedge funds to get involved in ... The key is knowing you're a small investor - and not investing as if you're managing $1bn
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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Phineas J. Whoopee
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Re: EMH, strong or semi-strong or weak form?

Post by Phineas J. Whoopee » Sat Oct 17, 2015 5:02 pm

^ None of which contradicts the EMH.

The problem isn't whether some investors will do better than the market. Some will. Others won't.

The problem is the parody of the EMH being used to cheat investors.

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Re: EMH, strong or semi-strong or weak form?

Post by small_index » Sat Oct 17, 2015 5:02 pm

My recent reading covered the 3 types of EMH, and I thought I'd help the discussion by describing them:
EMH/strong: public and insider knowledge is reflected in market price.
EMH/semi-strong: public but not insider knowledge is reflected in market price.
EMH/weak: prior prices can't be used to predict future prices

All forms of EMH claim charting will fail. Does EMH/strong mean that those who trade on inside information can't make a profit? Maybe I'm already mis-remembering that one.

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Re: EMH, strong or semi-strong or weak form?

Post by backpacker » Sat Oct 17, 2015 5:10 pm

nisiprius wrote:First of all, the argument for indexing does not depend on the efficient market hypothesis. All it depends on are the "relentless rules of humble arithmetic" as John C. Bogle calls them, although I think the best source is the essay The Arithmetic of Active Management, from the personal website of William F. Sharpe.
I love Jack, but this argument is completely fallacious. The sophists would be proud.

The average employee can't earn more than the average income. So why work harder than average? It's futile! Behold the "humble arithmetic" of slacking off. :wink:

The reason it makes sense to work harder than average is that by raising your productivity, you can not only raise your own income, you can raise the average. Employment is not a zero sum game. If we all worked harder than we are now working, we could all be richer than we otherwise would. The average employee would still be average, but it would be a better average.

It is conceptually possible that by hiring more stock analysts and such, we as a society would be better at allocating capital. Stock investing does not have to be a zero sum game. Smart investments can not only raise the returns of individual investor, they can raise the average returns. The average investor would of course still get the average, but it would be a better average.

Math is not the reason that passive investing makes sense. The reason that passive investing makes sense is that, somewhere along the way, we realized that we as investors were collectively spending too much on capital allocators (i.e. active management). Some of us could stop paying capital allocators altogether and free ride off of all the suckers paying to make the markets efficient. I fully approve of said free riding and like a good free ride myself, but it's not a mathematical fact that we as a society are spending too much on capital allocation. That's a fact about people, a fact that could have been different.

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Re: EMH, strong or semi-strong or weak form?

Post by Phineas J. Whoopee » Sat Oct 17, 2015 5:46 pm

backpacker wrote:...
The average employee can't earn more than the average income. So why work harder than average? It's futile! Behold the "humble arithmetic" of slacking off. :wink:
...
The arithmetic of active management makes no such analogous claim. It's another parody.

If you don't understand, please ask and I'll be happy to explain the arithmetic of active management, but I warn you, we'll have to use addition, subtraction, multiplication, and division. :happy

PJW

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Maynard F. Speer
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Re: EMH, strong or semi-strong or weak form?

Post by Maynard F. Speer » Sat Oct 17, 2015 5:54 pm

Phineas J. Whoopee wrote:
backpacker wrote:...
The average employee can't earn more than the average income. So why work harder than average? It's futile! Behold the "humble arithmetic" of slacking off. :wink:
...
The arithmetic of active management makes no such analogous claim. It's another parody.

If you don't understand, please ask and I'll be happy to explain the arithmetic of active management, but I warn you, we'll have to use addition, subtraction, multiplication, and division. :happy

PJW
Well I think you can take it both ways ... If markets are inefficient, the economy itself suffers

It was always the problem that plagued communism - no one knew what anything was worth
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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Re: EMH, strong or semi-strong or weak form?

Post by JoMoney » Sat Oct 17, 2015 6:12 pm

backpacker wrote:... The reason it makes sense to work harder than average is that by raising your productivity, you can not only raise your own income, you can raise the average. Employment is not a zero sum game. If we all worked harder than we are now working, we could all be richer than we otherwise would. The average employee would still be average, but it would be a better average.

It is conceptually possible that by hiring more stock analysts and such, we as a society would be better at allocating capital. Stock investing does not have to be a zero sum game. Smart investments can not only raise the returns of individual investor, they can raise the average returns. The average investor would of course still get the average, but it would be a better average. ...
I think we could always improve things, and do a better job of allocating capital and increasing returns from the source, i.e. better corporate management/governance, better research and development... but the focus of the financial industry seems to be on selling products that garner extra fees from trading in the secondary markets that isn't doing anything to add value to society.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: EMH, strong or semi-strong or weak form?

Post by backpacker » Sat Oct 17, 2015 6:22 pm

Phineas J. Whoopee wrote:
backpacker wrote:...
The average employee can't earn more than the average income. So why work harder than average? It's futile! Behold the "humble arithmetic" of slacking off. :wink:
...
The arithmetic of active management makes no such analogous claim. It's another parody.

If you don't understand, please ask and I'll be happy to explain the arithmetic of active management, but I warn you, we'll have to use addition, subtraction, multiplication, and division. :happy
It's easy to come up with simple examples where passive investors lose to active investors. They key is that since passive investors accept the price that active investors set, the active investors "move first".

Say that you and I are the only investors. I'm a passive investor and you're an active investor. In other words, I buy whatever portfolio you hold and accept whatever prices you set (just as passive investors own the portfolio that active investors own in aggregate and accept the prices that active investors set). We own equal stakes in livesoft corp. and have $40 in cash. There are no other stocks. Nisiprius comes along and offers a four-share IPO in Nisi Inc. You buy three share for $10 each. Nisiprius sells me the forth share for $10. But now I don't own the market. I need another share of Nisi Inc. and you're the only one who has any to sell. Seeing this, you set the ask for one share at $30. I buy it. We now both own the market portfolio, but you have $40 and I have nothing.
Last edited by backpacker on Sat Oct 17, 2015 6:24 pm, edited 3 times in total.

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Re: EMH, strong or semi-strong or weak form?

Post by Epsilon Delta » Sat Oct 17, 2015 6:22 pm

Maynard F. Speer wrote:I think the argument that either the efficiency of markets or the untouchable skill of top fund managers make stock-picking a perpetual loser's game for the retail investor has been overstated

As Buffett says, there's a tremendous advantage to being a small investor - his famous "50% returns" quote, if anyone wants to look it up ... i.e. managing a $1m portfolio rather than a $1bn portfolio

If you're a small investor, you can make big returns off companies too small for large funds to invest in - you can find better value opportunities in bonds .. I'd add you can invest in niche/innovative alternative finance before the crowds move in - P2P lending's still providing 'mom & pop' investors stable 10% returns this year .. Equity crowd funding *may* produce phenomenal returns down the line, as a part of the market far too small for hedge funds to get involved in ... The key is knowing you're a small investor - and not investing as if you're managing $1bn
This argument is just silly. There are professionals who manage portfolios less than $1bn. Even if there wasn't it would still be worth assigning an intern to spend the morning picking up the odd thousand. And that intern still has better tools and more information than you do.

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Re: EMH, strong or semi-strong or weak form?

Post by Phineas J. Whoopee » Sat Oct 17, 2015 6:23 pm

small_index wrote:...
All forms of EMH claim charting will fail. Does EMH/strong mean that those who trade on inside information can't make a profit? Maybe I'm already mis-remembering that one.
Recent convictions for insider trading, most notably of high-level employees of the hedge fund SAC Capital (although founder Stephen A. Cohen himself hasn't been indicted), would tend to indicate those who trade on inside information can make a profit, and can go to jail for it.

The Efficient Market Hypothesis does not claim that nobody can make a profit, nor that nobody's returns can be higher than those of the market as a whole.

Investopedia and Wikipedia get it wrong. Morningstar, in its glossary to which I linked, does much better.

The Efficient Market Hypothesis isn't even a theory. It's a hypothesis, a proposal for further inquiry. No serious academic claims the EMH explains observed phenomena so well that it would be perverse to withhold provisional support.

The EMH has its weaknesses, on which it can be legitimately criticized. If anybody's against it economically, philosophically, or ideologically, why not attack it on its weak points instead of making up something else to attack?
On the other hand, he also suggested that one anger his enemy, and confuse him, so maybe the attacks on parodies do fit in with his advice.

PJW

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Re: EMH, strong or semi-strong or weak form?

Post by Phineas J. Whoopee » Sat Oct 17, 2015 6:25 pm

Maynard F. Speer wrote:...
It was always the problem that plagued communism - no one knew what anything was worth
Thank you. May I have another?
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Re: EMH, strong or semi-strong or weak form?

Post by Phineas J. Whoopee » Sat Oct 17, 2015 6:27 pm

backpacker wrote:...
I see.

If you care to respond to what I wrote I'll be happy to respond to what you write.

PJW

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Re: EMH, strong or semi-strong or weak form?

Post by David Jay » Sat Oct 17, 2015 6:32 pm

Maynard F. Speer wrote:
Phineas J. Whoopee wrote:
backpacker wrote:...
The average employee can't earn more than the average income. So why work harder than average? It's futile! Behold the "humble arithmetic" of slacking off. :wink:
...
The arithmetic of active management makes no such analogous claim. It's another parody.

If you don't understand, please ask and I'll be happy to explain the arithmetic of active management, but I warn you, we'll have to use addition, subtraction, multiplication, and division. :happy

PJW
Well I think you can take it both ways ... If markets are inefficient, the economy itself suffers

It was always the problem that plagued communism - no one knew what anything was worth
Bingo. This is one of the most under-appreciated points that Hayek makes and many of the Chicago School (Friedman in particular) repeat. Prices are communication. That is why price controls always result in shortages: All supply and demand information is removed from the supply chain.
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Re: EMH, strong or semi-strong or weak form?

Post by JoMoney » Sat Oct 17, 2015 6:36 pm

backpacker wrote:...
Say that you and I are the only investors. I'm a passive investor and you're an active investor. In other words, I buy whatever portfolio you hold and accept whatever prices you set (just as passive investors own the portfolio that active investors own in aggregate and accept the prices that active investors set). We own equal stakes in livesoft corp. and have $40 in cash. There are no other stocks. Nisiprius comes along and offers a four-share IPO in Nisi Inc. You buy three share for $10 each. Nisiprius sells me the forth share for $10. But now I don't own the market. I need another share of Nisi Inc. and you're the only one who has any to sell. Seeing this, you set the ask for one share at $30. I buy it. We now both own the market portfolio, but you have $40 and I have nothing.
If you're arguing about the math in the active 'arithmetic of active management', you cant introduce a new portfolio that includes "Nisi Inc." and compare it to the portfolios prior to the existence of it. You have to use the same market constituency and same start and end points. If a passive investor has to buy "Nisi Inc." any active investor who is starting from that same point in time would also have to pay the same price to buy it. You're trying to compare the passive investor to an active investor that had a different starting point / price.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: EMH, strong or semi-strong or weak form?

Post by Phineas J. Whoopee » Sat Oct 17, 2015 6:37 pm

^^ And that's perfectly fine, David, as long as our loyal readers understand the Austrian school, which you invoked with your reference to Hayek, is unorthodox economics. That doesn't mean it's wrong. It might be right, or partially right. But it is unorthodox. That's a fact.
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Re: EMH, strong or semi-strong or weak form?

Post by backpacker » Sat Oct 17, 2015 6:41 pm

Phineas J. Whoopee wrote:
backpacker wrote:...
I see.

If you care to respond to what I wrote I'll be happy to respond to what you write.

PJW
I need an argument to have something to respond to. :)

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Re: EMH, strong or semi-strong or weak form?

Post by Phineas J. Whoopee » Sat Oct 17, 2015 6:44 pm

backpacker wrote:...
I need an argument to have something to respond to. :)
I carefully quoted, in its entirety, your response to my words that you quoted. That is to say, you didn't respond. Respond and we can have a conversation. Don't, and we can't.
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Re: EMH, strong or semi-strong or weak form?

Post by hafius500 » Sat Oct 17, 2015 6:50 pm

tcorriero wrote:... doesn't it just MAKE SENSE that investors who are trading stocks do NOT have perfect information? And the marginal buyer and seller can be trading based on reasons which are truly disconnected from fact and reality? i.e., emotion, or momentum, etc.?
In an efficient market it is not required that the price-setting buyers and sellers possess 'perfect' information.

Think of an exporting US company :

Both analyst A and B possess imperfect information:

The analyst A (who performs fundamental analysis) predicts that the company will be able to sell more units to foreigners. This analyst recommends to buy the stock.

The analyst B (who predicts currencies) predicts that the USD will rise and he recommends to sell the stock.

The market price will reflect both predictions.
Or approached differently, think about Dimensional Fund Advisors, whose trading is based (i believe?) in large part on the EMH
I don't think this is true. The DFA strategies are based upon 'factor models'. The EMH can be true even when the factor models are wrong.
Take the example of those traders avoiding buying stocks which are being added to an index, and therefore have disproportionately high demand (and therefore prices), so buy them later, or not at all. But if the market is TOTALLY efficient, every time an index fund buys that stock, well, that PERFECTLY reflects all information in the market, right....?
Don't confuse 'indexing' with passive investing.

The one and only passive portfolio is the cap-weighted portfolio of investable assets. This portfolio only buys when new securities are issued. It sells securities when they are retired (e.g., when a stock company goes private).
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Re: EMH, strong or semi-strong or weak form?

Post by backpacker » Sat Oct 17, 2015 6:51 pm

JoMoney wrote:
backpacker wrote:...
Say that you and I are the only investors. I'm a passive investor and you're an active investor. In other words, I buy whatever portfolio you hold and accept whatever prices you set (just as passive investors own the portfolio that active investors own in aggregate and accept the prices that active investors set). We own equal stakes in livesoft corp. and have $40 in cash. There are no other stocks. Nisiprius comes along and offers a four-share IPO in Nisi Inc. You buy three share for $10 each. Nisiprius sells me the forth share for $10. But now I don't own the market. I need another share of Nisi Inc. and you're the only one who has any to sell. Seeing this, you set the ask for one share at $30. I buy it. We now both own the market portfolio, but you have $40 and I have nothing.
If you're arguing about the math in the active 'arithmetic of active management', you cant introduce a new portfolio that includes "Nisi Inc." and compare it to the portfolios prior to the existence of it. You have to use the same market constituency and same start and end points. If a passive investor has to buy "Nisi Inc." any active investor who is starting from that same point in time would also have to pay the same price to buy it. You're trying to compare the passive investor to an active investor that had a different starting point / price.
Well, this is the point, in a way. The market of publicly traded stock isn't fixed. Companies enter and leave. As long as companies enter and leave, there is at least the conceptual possibility that the active investors front-run the passive investors and that they are so successful that it pays for their extra trading. This has, in fact, been an actual major problem with certainly poorly constructed indexes. Actual problems can't be ruled out by mathematics.

If the arithmetic of passive investing is for a hypothetical market where the constituents never change, that's fine. But since the actual market doesn't work like that, there has to be a further step explaining why the argument has implications for actual investors.

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Re: EMH, strong or semi-strong or weak form?

Post by David Jay » Sat Oct 17, 2015 6:53 pm

Phineas J. Whoopee wrote:^^ And that's perfectly fine, David, as long as our loyal readers understand the Austrian school, which you invoked with your reference to Hayek, is unorthodox economics. That doesn't mean it's wrong. It might be right, or partially right. But it is unorthodox. That's a fact.
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I am not willing (or able) to defend their entire body of work, but their observations on the pricing mechanism are spot-on. I await a counter-example but I stand by my statement that "price controls always create shortages". See a certain oil-rich nation on the northern coast of South America and toilet paper.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: EMH, strong or semi-strong or weak form?

Post by Phineas J. Whoopee » Sat Oct 17, 2015 6:58 pm

Venezuela today equals always?
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Re: EMH, strong or semi-strong or weak form?

Post by Maynard F. Speer » Sat Oct 17, 2015 7:01 pm

Epsilon Delta wrote:
Maynard F. Speer wrote:I think the argument that either the efficiency of markets or the untouchable skill of top fund managers make stock-picking a perpetual loser's game for the retail investor has been overstated

As Buffett says, there's a tremendous advantage to being a small investor - his famous "50% returns" quote, if anyone wants to look it up ... i.e. managing a $1m portfolio rather than a $1bn portfolio

If you're a small investor, you can make big returns off companies too small for large funds to invest in - you can find better value opportunities in bonds .. I'd add you can invest in niche/innovative alternative finance before the crowds move in - P2P lending's still providing 'mom & pop' investors stable 10% returns this year .. Equity crowd funding *may* produce phenomenal returns down the line, as a part of the market far too small for hedge funds to get involved in ... The key is knowing you're a small investor - and not investing as if you're managing $1bn
This argument is just silly. There are professionals who manage portfolios less than $1bn. Even if there wasn't it would still be worth assigning an intern to spend the morning picking up the odd thousand. And that intern still has better tools and more information than you do.
Nowadays the only information the intern can (legally) obtain that I can't obtain just as quickly and easily would come from meeting with company management personally - which is often necessary with smaller companies, but obviously incurs certain overheads

The only other exception is if they've got a direct high-speed link to the exchange, in which case they can sometimes obtain pricing information up to 300-400ms faster ... But otherwise I've got access to all the same information, algorithms and research, and can even spy on what top institutional investors are buying and selling
http://www.gurufocus.com/StockBuy.php?G ... nsen&n=100

Here's the Warren Buffett quote:

According to a business week report published in 1999, you were quoted as saying “it's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.” First, would you say the same thing today? Second, since that statement infers that you would invest in smaller companies, other than investing in small-caps, what else would you do differently?

Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today's environment because information is easier to access.

You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map - way off the map. You may find local companies that have nothing wrong with them at all. A company that I found, Western Insurance Securities, was trading for $3/share when it was earning $20/share!! I tried to buy up as much of it as possible. No one will tell you about these businesses. You have to find them.

Other examples: Genesee Valley Gas, public utility trading at a P/E of 2, GEICO, Union Street Railway of New Bedford selling at $30 when $100/share is sitting in cash, high yield position in 2002. No one will tell you about these ideas, you have to find them.

The answer is still yes today that you can still earn extraordinary returns on smaller amounts of capital. For example, I wouldn't have had to buy issue after issue of different high yield bonds. Having a lot of money to invest forced Berkshire to buy those that were less attractive. With less capital, I could have put all my money into the most attractive issues and really creamed it.

I know more about business and investing today, but my returns have continued to decline since the 50's. Money gets to be an anchor on performance. At Berkshire's size, there would be no more than 200 common stocks in the world that we could invest in if we were running a mutual fund or some other kind of investment business.

Source: Student Visit 2005
URL: http://boards.fool.com/buffettjayhawk-q ... e#22803680
Time: May 6, 2005

http://buffettfaq.com/#according-to-a-b ... ifferently
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Re: EMH, strong or semi-strong or weak form?

Post by VictoriaF » Sat Oct 17, 2015 7:03 pm

David Jay wrote:
Maynard F. Speer wrote:
Phineas J. Whoopee wrote:
backpacker wrote:...
The average employee can't earn more than the average income. So why work harder than average? It's futile! Behold the "humble arithmetic" of slacking off. :wink:
...
The arithmetic of active management makes no such analogous claim. It's another parody.

If you don't understand, please ask and I'll be happy to explain the arithmetic of active management, but I warn you, we'll have to use addition, subtraction, multiplication, and division. :happy

PJW
Well I think you can take it both ways ... If markets are inefficient, the economy itself suffers

It was always the problem that plagued communism - no one knew what anything was worth
Bingo. This is one of the most under-appreciated points that Hayek makes and many of the Chicago School (Friedman in particular) repeat. Prices are communication. That is why price controls always result in shortages: All supply and demand information is removed from the supply chain.
Communism is a target state for communist parties that has never been implemented. The USSR was the Union of Soviet Socialist Republics, i.e., a socialist society, not a communist one. The same is true for China.

Communism and capitalism operate at different levels. Communism is a political construct; capitalism is an economic construct. The Soviet economy was centralized. The economy of China is market based.

While prices do convey information, they are not the only way to run an economy. Pharaohs, Roman emperors, and English kings ran their domains of influence without relying on prices.

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Re: EMH, strong or semi-strong or weak form?

Post by backpacker » Sat Oct 17, 2015 7:05 pm

Phineas J. Whoopee wrote:
backpacker wrote:...
I need an argument to have something to respond to. :)
I carefully quoted, in its entirety, your response to my words that you quoted. That is to say, you didn't respond. Respond and we can have a conversation. Don't, and we can't.
PJW
Respond to what? There were only bald assertions. P, therefore P, tends to not be an especially persuasive form of argument. :wink:
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Re: EMH, strong or semi-strong or weak form?

Post by Maynard F. Speer » Sat Oct 17, 2015 7:08 pm

Phineas J. Whoopee wrote:
Maynard F. Speer wrote:...
It was always the problem that plagued communism - no one knew what anything was worth
Thank you. May I have another?
PJW
Inefficient markets are less appealing to investors, often more difficult to access, and can inspire unhelpful investor behaviour

Take Chinese A-Shares prior to China opening up the market to foreign investors - passive returns on the major indexes were effectively nothing, so the stock market wasn't seen as a place for long-term investment, but rather as a sort of alternative to sports betting
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Re: EMH, strong or semi-strong or weak form?

Post by JoMoney » Sat Oct 17, 2015 7:41 pm

backpacker wrote:...
Well, this is the point, in a way. The market of publicly traded stock isn't fixed. Companies enter and leave. As long as companies enter and leave, there is at least the conceptual possibility that the active investors front-run the passive investors and that they are so successful that it pays for their extra trading. This has, in fact, been an actual major problem with certainly poorly constructed indexes. Actual problems can't be ruled out by mathematics.

If the arithmetic of passive investing is for a hypothetical market where the constituents never change, that's fine. But since the actual market doesn't work like that, there has to be a further step explaining why the argument has implications for actual investors.
Just about any mathematical model is based on hypothetical situations that often don't reflect reality, but you seemed to be trying to use some faulty logic to argue against the math. If either the passive or active is investing new money, you're setting a new start date for that invested dollar. If you're measuring the already invested dollars, the active investor can't buy the new stock without selling some of some other stock and impacting the market price of both the old stock and the new stock.

Either way, back to what I think you're saying... front-running is an issue, but it's not something that only index investors are subject to. Not trading at all (truly passive), or using a low-turnover investment (like a total market index) is a great way to minimize the impacts.
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Re: EMH, strong or semi-strong or weak form?

Post by VictoriaF » Sat Oct 17, 2015 8:09 pm

Phineas J. Whoopee wrote:Hi tcorriero, and welcome to the forum!

You'll probably get more responses if you ask about what the Efficient Market Hypothesis actually says, rather than about a parody of it promulgated by commissioned salespeople the world over.

Both Investopedia and Wikipedia have it wrong. Morningstar's glossary entry, to which I linked, does a lot better.

PJW
If the OP does not want to ask this question, I do. Here is the text of the Morningstar article:
Morningstar wrote:Efficient Market Hypothesis

A market theory that evolved from a 1960's Ph.D. dissertation by Eugene Fama, the efficient market hypothesis states that at any given time and in a liquid market, security prices fully reflect all available information. The EMH exists in various degrees: weak, semi-strong and strong, which addresses the inclusion of non-public information in market prices. This theory contends that since markets are efficient and current prices reflect all information, attempts to outperform the market are essentially a game of chance rather than one of skill.

The weak form of EMH assumes that current stock prices fully reflect all currently available security market information. It contends that past price and volume data have no relationship with the future direction of security prices. It concludes that excess returns cannot be achieved using technical analysis.

The semi-strong form of EMH assumes that current stock prices adjust rapidly to the release of all new public information. It contends that security prices have factored in available market and non-market public information. It concludes that excess returns cannot be achieved using fundamental analysis.

The strong form of EMH assumes that current stock prices fully reflect all public and private information. It contends that market, non-market and inside information is all factored into security prices and that no one has monopolistic access to relevant information. It assumes a perfect market and concludes that excess returns are impossible to achieve consistently.
What are implications of these definitions?
- Does the weak form allow excess returns due to fundamental analysis, which the semi-strong form does not?
- Why does the strong form refer to public and private information, the semi-strong form refers only to the public information, and the weak form refers to currently available information, without specifying whether it's public or private?

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Re: EMH, strong or semi-strong or weak form?

Post by Maynard F. Speer » Sat Oct 17, 2015 8:48 pm

I think what's interesting from French's data here is in fact momentum's outperformed in every decade it's been measured - making it (I believe?) the most consistent factor premium we know of

Momentum, of course, simply the phenomenon of trends in past prices dictating future prices - a basic tenet of technical analysis .. Also something that seems to pose challenges in its scope to be arbitraged away - in that trying to capture momentum potentially amplifies momentum

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Re: EMH, strong or semi-strong or weak form?

Post by backpacker » Sat Oct 17, 2015 9:04 pm

JoMoney wrote:Either way, back to what I think you're saying... front-running is an issue, but it's not something that only index investors are subject to. Not trading at all (truly passive), or using a low-turnover investment (like a total market index) is a great way to minimize the impacts.
That's a nice point. Jack's argument makes the assumption that passive investors hold the market portfolio. I was thinking that implied that they were committed to updating their portfolios to match the new market portfolio as the market changed because of IPOs etc, but maybe not. Those sorts of investors wouldn't be forced to trade when new companies enter the market.

In any case, I think the cleaner argument is that stock prices influence actual economic results. Companies barter their stock for labor and use it to acquire other companies. When things are working well, high stock prices direct labor and acquisitions to productive companies. When prices are out of kilter, high stock prices direct labor and acquisitions to underserving companies. This process can help or hurt even passive investors because it effects the real productivity of their companies even if they themselves never trade.

Jack showed that the average passive investor does better than the average active investors, at least given certain ideal assumptions. What this doesn't show is that the average investor is better off being a passive investor, which is presumably what most of us care about. The answer to that depends on whether one more active trader would sufficiently improve market efficiency.

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Re: EMH, strong or semi-strong or weak form?

Post by Phineas J. Whoopee » Sat Oct 17, 2015 9:37 pm

VictoriaF wrote:...
If the OP does not want to ask this question, I do. Here is the text of the Morningstar article:
...
Thank you, Victoria. I'd be happy to expound. You truly are the black swan in the white hat! :happy
VictoriaF wrote:What are implications of these definitions?
- Does the weak form allow excess returns due to fundamental analysis, which the semi-strong form does not?
Yes, it does. The weak form, differently stated, says one can't profit simply by knowing public information everybody else who's paying attention already knows. It doesn't claim nobody can analyze and act on the information better - or luckier. The semi-strong form, which is less clearly true, differently stated, says one can't profit simply by knowing breaking news that everybody else can view. It doesn't claim nobody can access, analyze, and act on the information faster or better - or luckier. The EMH speaks of informational efficiency, not perfect pricing and the futility of human effort the parodists, who never seem to say what the external-to-the-market standard for perfect pricing is, pretend it does.

As an aside, there isn't, and can't be, perfect pricing. The basis of commerce is the same thing is worth different amounts to different people at the same time. If that weren't the case, the fruit stand cart person on the corner wouldn't sell me an apple for fifty cents, because it wouldn't be worth it to part with the apple, and I wouldn't buy it, because it wouldn't be worth it to part with the money. Why would either of us waste our time engaging in a fruitless enterprise?
VictoriaF wrote:- Why does the strong form refer to public and private information, the semi-strong form refers only to the public information, and the weak form refers to currently available information, without specifying whether it's public or private?
Because the strong-form suggestion, differently stated, that one can't profit simply by knowing non-public information is far more dubious, as, and as I referred to earlier in the thread, recent felony convictions seem to demonstrate. However:

In all of the forms one must consider market mechanics, which I've written about before. A market price does not mean everybody in the market agrees it's a fair price. Most potential buyers and potential sellers don't, I'll explain further in a moment, and there are an awful lot of owners and potential owners who aren't in the market at all at any given point in time.

Let's confine ourselves to US exchange-listed stocks for this conversation, although the principles apply to non-exchange markets as well, but those don't move as quickly.

The market for any stock on the exchange where it's listed is driven by limit orders, that is, orders to buy or sell but only at a specific price or better (for the order-placer). Limit orders to sell are called asks. Limit orders to buy are called bids. The order book shows all the bids and asks and the quantities the order placers wish to transact for. At level 2, but don't worry too much about that vocabulary term, investors who pay for the privilege (the information is valuable, so nobody should expect to be served it up for free) can see the bids, the orders to buy at certain prices, in order from highest down to lowest. The highest bid is called the best bid, or under regulations (that allegations credibly say aren't always followed), the national best bid. It's the highest price anybody presently in the market and looking to buy is willing to pay.

They can also see the asks, the orders to sell at certain prices, in order from lowest up to highest. The lowest ask is called the best ask, or under regulations (that allegations credibly say aren't always followed), the national best ask. It's the lowest price anybody presently in the market and looking to sell is willing to accept.

When the exchange matches a buyer with a seller, a transaction happens, the next ones in line become the national best bid and ask (an oversimplification because both former bests might not have placed orders to transact the same number of shares), and we call the transacted-at price the current market price. Anybody marking to market (again an oversimplification) marks to that.

If anybody places a market order to buy or sell, they're simply saying accept the national best ask or national best bid, whatever it is.

With me so far (Victoria and anybody eavesdropping)?

The Efficient Market Hypothesis claims the placers of the limit orders take information into account when deciding on their own bid and ask limits.

Who claims they don't, at least in the weak form sense?

The semi-strong form says, in effect, that the fastest and best accessers, analyzers, and actors, move the price as soon as the information comes out. Of course it's silly to claim it happens in zero time, but today the time is measured in microseconds. That's not a typo. Microseconds, not milli. Of course the fastest and best have an advantage, and of course they aren't at disadvantage versus their competitors just because of the speed of light in a fiber-optic cable - I did say microseconds, didn't I?

The semi-strong form, therefore, is demonstrably false, but only over extremely tight timescales.

The strong form claims the traders using illegal inside information take it into account when setting their bid and ask limits, and continue to trade until the market reaches equilibrium with their, better informed, ideas of what the securities are worth at that moment, also taking all old and new public information into account.

Who claims those placing limit orders don't take advantage of information, analytical capacity, and order-placing advantages they pay dearly for?

The "market" may have a consensus price, but nearly all the market participants disagree with it, and those who are trading take all they know into account, as they become aware of it, including the contents of the level two order book.

That's what it says. It's only a hypothesis. It might be right or it might be wrong or partly one and partly the other. One might agree or disagree with it, but that's what it says.

PJW
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Re: EMH, strong or semi-strong or weak form?

Post by JoMoney » Sat Oct 17, 2015 9:40 pm

backpacker wrote:...average passive investor does better than the average active investors, at least given certain ideal assumptions. What this doesn't show is that the average investor is better off being a passive investor...
A couple of other thoughts-
There's decades of empirical studies showing the performance of the majority of mutual funds vs an index. So it's not just theoretical within the universe of mutual funds.
The average invested dollar can't help but be average whether the market is efficient or not... Whether or not the average investor is represented by the average invested dollar might be a different contention though as well... There aren't many Warren Buffetts out there. How many below average investors does it take to produce the above average results of one Jim Simons?
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Re: EMH, strong or semi-strong or weak form?

Post by backpacker » Sat Oct 17, 2015 10:02 pm

JoMoney wrote:
backpacker wrote:...average passive investor does better than the average active investors, at least given certain ideal assumptions. What this doesn't show is that the average investor is better off being a passive investor...
A couple of other thoughts-
There's decades of empirical studies showing the performance of the majority of mutual funds vs an index. So it's not just theoretical within the universe of mutual funds.
The average invested dollar can't help but be average whether the market is efficient or not... Whether or not the average investor is represented by the average invested dollar might be a different contention though as well... There aren't many Warren Buffetts out there. How many below average investors does it take to produce the above average results of one Jim Simons?
I was thinking the average dollar could be better off actively managed too, so long as switching it to active management would improve pricing by, say, increasing how long some analyst somewhere works. The whole question is whether more analysts would pay for themselves by redirecting money to better companies. Emperical research says they don't, but the opposite could have been true.

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Re: EMH, strong or semi-strong or weak form?

Post by small_index » Sat Oct 17, 2015 10:22 pm

Phineas J. Whoopee wrote:
small_index wrote:...
All forms of EMH claim charting will fail. Does EMH/strong mean that those who trade on inside information can't make a profit? Maybe I'm already mis-remembering that one.
Recent convictions for insider trading, most notably of high-level employees of the hedge fund SAC Capital (although founder Stephen A. Cohen himself hasn't been indicted), would tend to indicate those who trade on inside information can make a profit, and can go to jail for it.
My question was about the definition of EMH/strong. You seem to take it as revealing some ignorance on my part, and missed entirely that I was asking about the definition of one of the 3 forms of the EMH. According to the link you provided, the answer to my question is "yes, under EMH/strong any private information is already incorporated into stock prices." I'll quote your linked definition:
The strong form of EMH assumes that current stock prices fully reflect all public and private information. It contends that market, non-market and inside information is all factored into security prices and that no one has monopolistic access to relevant information. It assumes a perfect market and concludes that excess returns are impossible to achieve consistently.
Phineas J. Whoopee wrote:The Efficient Market Hypothesis does not claim that nobody can make a profit, nor that nobody's returns can be higher than those of the market as a whole.
If under the EMH strong form, "current stock prices fully reflect all public and private information", then private information doesn't have an advantage. Because we see insider trading for profit, I would say the EMH "strong" form doesn't apply to our stock market.

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Re: EMH, strong or semi-strong or weak form?

Post by Phineas J. Whoopee » Sat Oct 17, 2015 10:40 pm

small_index,

If I implied any personal disrespect I regret it, and I did so in error. Sometimes my words convey feelings I don't mean to express. It's a known weakness I imperfectly work to overcome.

In terms of the factual question, I expounded at length four posts up.

I'm completely willing to respond to, respectfully (or if not, then correctly call me out on it again), further questions, including to say "I don't know."

PJW

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Re: EMH, strong or semi-strong or weak form?

Post by Epsilon Delta » Sat Oct 17, 2015 10:50 pm

Maynard F. Speer wrote:
Nowadays the only information the intern can (legally) obtain that I can't obtain just as quickly and easily would come from meeting with company management personally - which is often necessary with smaller companies, but obviously incurs certain overheads
That's not true. If somebody discover that the "head and shoulders with dandruff" pattern works they don't have to tell you. There's a huge difference between having access to data and being able to do anything with it.
Maynard F. Speer wrote:
Here's the Warren Buffett quote:

According to a business week report published in 1999, you were quoted as saying “it's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.” First, would you say the same thing today? Second, since that statement infers that you would invest in smaller companies, other than investing in small-caps, what else would you do differently?
Either Buffet is exceptional or he is not.

If he is exceptional chances are you're not Warren Buffett. So it doesn't matter if there's the odd $500k to be picked up because you can't do it, and neither can anybody else.

If he is not exceptional there are other Buffett's arround (and even more Buffett-minuses who are just a bit worse than the original) There is no reason fund managers can't hire as many as they need to invest their billions.

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Re: EMH, strong or semi-strong or weak form?

Post by VictoriaF » Sat Oct 17, 2015 10:51 pm

Phineas J. Whoopee wrote:
VictoriaF wrote:...
If the OP does not want to ask this question, I do. Here is the text of the Morningstar article:
...
Thank you, Victoria. I'd be happy to expound. You truly are the black swan in the white hat! :happy
Thank you, Phineas J. Whoopee! If I may, I have some follow-up questions.
Phineas J. Whoopee wrote:
VictoriaF wrote:What are implications of these definitions?
- Does the weak form allow excess returns due to fundamental analysis, which the semi-strong form does not?
Yes, it does. The weak form, differently stated, says one can't profit simply by knowing public information everybody else who's paying attention already knows. It doesn't claim nobody can analyze and act on the information better - or luckier.
This implies that the weak form anticipates some skillful investing, such as active management or hedging, that would enable one to exceed market returns.

Also, does not luck play role in all forms of EMH, not only in the weak one?

Phineas J. Whoopee wrote:The semi-strong form, which is less clearly true, ...
Are you saying that the weak form is true? Or are you saying that there is a truth continuum, and the weak form is closer to the real truth than the semi-strong form?

Phineas J. Whoopee wrote:... differently stated, says one can't profit simply by knowing breaking news that everybody else can view. It doesn't claim nobody can access, analyze, and act on the information faster or better - or luckier.
The Morningstar description of the semi-strong form is that "excess returns cannot be achieved using fundamental analysis." Your statement seems to apply to the weak form but not to the semi-strong form. Or I am still missing a critical distinction between semi-strong and weak.


Phineas J. Whoopee wrote: {snip}
The market for any stock on the exchange where it's listed is driven by limit orders, that is, orders to buy or sell but only at a specific price or better (for the order-placer). Limit orders to sell are called asks. Limit orders to buy are called bids. The order book shows all the bids and asks and the quantities the order placers wish to transact for. At level 2, but don't worry too much about that vocabulary term, investors who pay for the privilege (the information is valuable, so nobody should expect to be served it up for free) can see the bids, the orders to buy at certain prices, in order from highest down to lowest. The highest bid is called the best bid, or under regulations (that allegations credibly say aren't always followed), the national best bid. It's the highest price anybody presently in the market and looking to buy is willing to pay.

They can also see the asks, the orders to sell at certain prices, in order from lowest up to highest. The lowest ask is called the best ask, or under regulations (that allegations credibly say aren't always followed), the national best ask. It's the lowest price anybody presently in the market and looking to sell is willing to accept.

When the exchange matches a buyer with a seller, a transaction happens, the next ones in line become the national best bid and ask (an oversimplification because both former bests might not have placed orders to transact the same number of shares), and we call the transacted-at price the current market price. Anybody marking to market (again an oversimplification) marks to that.

This is very interesting. So, there is not a single price spread but a ladder of bids and asks. Bids are ranked top-down and asks are ranked bottom-up. Some bids and asks can probably overlap so that the highest bid is above the lowest ask. But the most remarkable part is that best bids and best asks form couples, and after the best couple is matched and removed, the next best couple sets the next price without anyone deciding anything!

Phineas J. Whoopee wrote:If anybody places a market order to buy or sell, they're simply saying accept the national best ask or national best bid, whatever it is.

With me so far (Victoria and anybody eavesdropping)?

The Efficient Market Hypothesis claims the placers of the limit orders take information into account when deciding on their own bid and ask limits.

Who claims they don't, at least in the weak form sense?

The semi-strong form says, in effect, that the fastest and best accessers, analyzers, and actors, move the price as soon as the information comes out. Of course it's silly to claim it happens in zero time, but today the time is measured in microseconds. That's not a typo. Microseconds, not milli. Of course the fastest and best have an advantage, and of course they aren't at disadvantage versus their competitors just because of the speed of light in a fiber-optic cable - I did say microseconds, didn't I?

The semi-strong form, therefore, is demonstrably false, but only over extremely tight timescales.
I think I am getting it now. The semi-strong form says that "I" can't outperform the market by using the speed of light. It does not say that "no one" is using the speed of light (plus a few micro-seconds). In fact, "the others" using the speed of light means that there is no room for "my" advantage.

Phineas J. Whoopee wrote:The strong form claims the traders using illegal inside information take it into account when setting their bid and ask limits, and continue to trade until the market reaches equilibrium with their, better informed, ideas of what the securities are worth at that moment, also taking all old and new public information into account.

Who claims those placing limit orders don't take advantage of information, analytical capacity, and order-placing advantages they pay dearly for?
Let's say some insiders are using illegally obtained information to set their bid and ask limits, which become the best bids and asks. I happen to place a market buy order at that moment. Would not my order execute at the best ask price? If yes, I would be inadvertently taking advantage of the insider information.

Phineas J. Whoopee wrote:The "market" may have a consensus price, but nearly all the market participants disagree with it, and those who are trading take all they know into account, as they become aware of it, including the contents of the level two order book.

That's what it says. It's only a hypothesis. It might be right or it might be wrong or partly one and partly the other. One might agree or disagree with it, but that's what it says.

PJW
Excellent analysis. Thank you again,

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

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Maynard F. Speer
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Re: EMH, strong or semi-strong or weak form?

Post by Maynard F. Speer » Sun Oct 18, 2015 12:18 am

Epsilon Delta wrote:
Maynard F. Speer wrote:
Nowadays the only information the intern can (legally) obtain that I can't obtain just as quickly and easily would come from meeting with company management personally - which is often necessary with smaller companies, but obviously incurs certain overheads
That's not true. If somebody discover that the "head and shoulders with dandruff" pattern works they don't have to tell you. There's a huge difference between having access to data and being able to do anything with it.
Maynard F. Speer wrote:
Here's the Warren Buffett quote:

According to a business week report published in 1999, you were quoted as saying “it's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.” First, would you say the same thing today? Second, since that statement infers that you would invest in smaller companies, other than investing in small-caps, what else would you do differently?
Either Buffet is exceptional or he is not.

If he is exceptional chances are you're not Warren Buffett. So it doesn't matter if there's the odd $500k to be picked up because you can't do it, and neither can anybody else.

If he is not exceptional there are other Buffett's arround (and even more Buffett-minuses who are just a bit worse than the original) There is no reason fund managers can't hire as many as they need to invest their billions.
If you're investing in very small companies - such as local businesses, or equity crowd-funding - there's no reason you can't access plenty of information fund managers don't have, along with local knowledge ... You can get wealthy off these kind of opportunities - hedge fund investors are often paid more than your president, and are expected to return that many times over

You seem to have an idea of paying an office boy to go and invest 0.1% of a firm's assets in nano-caps or penny stocks .. I don't think it could be done well or efficiently in existing structures

The second part, you reminded me of that old economist's joke:

Two economists are walking down a street together. The young economist looks down and sees a $20 bill on the street and says, “Hey, look a twenty-dollar bill!”

Without even looking, his older and wiser colleague replies, “Nonsense. If there had been a twenty-dollar lying on the street, someone would have already picked it up by now”
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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David Jay
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Re: EMH, strong or semi-strong or weak form?

Post by David Jay » Sun Oct 18, 2015 5:25 am

Phineas J. Whoopee wrote:Venezuela today equals always?
PJW
I listed one example, but what I asked for was a counter-example. One instance where severing the pricing information flow through the supply chain did NOT create shortages.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

IlliniDave
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Re: EMH, strong or semi-strong or weak form?

Post by IlliniDave » Sun Oct 18, 2015 6:47 am

Going back to the OP, my take is this:

I think the market accurately reflects the aggregate belief of investors as to the near-term value of its components on an ongoing basis. But even in the aggregate humans can err. Likely the largest contributor to the "error" is the unknowable future. So in principle there are opportunities to outguess the market, but those guesses are guesses at the unknowable future. So most of the "opportunity" comes down to luck.

I don't know where that might fall in the continuum from strong to weak regarding the hypothesis. But I think an individual investor assuming he cannot systematically outguess the market is probably a prudent basis for an investing strategy.
Don't do something. Just stand there!

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Phineas J. Whoopee
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Re: EMH, strong or semi-strong or weak form?

Post by Phineas J. Whoopee » Sun Oct 18, 2015 1:28 pm

David Jay wrote:
Phineas J. Whoopee wrote:Venezuela today equals always?
PJW
I listed one example, but what I asked for was a counter-example. One instance where severing the pricing information flow through the supply chain did NOT create shortages.
The burden of proof rests with the person making the affirmative claim.
PJW

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Epsilon Delta
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Re: EMH, strong or semi-strong or weak form?

Post by Epsilon Delta » Sun Oct 18, 2015 1:59 pm

Maynard F. Speer wrote:
Two economists are walking down a street together. The young economist looks down and sees a $20 bill on the street and says, “Hey, look a twenty-dollar bill!”

Without even looking, his older and wiser colleague replies, “Nonsense. If there had been a twenty-dollar lying on the street, someone would have already picked it up by now”
That's a straw man. It's not that you shouldn't pick up stray $20 if you happen to see one. It's that going around looking for stray $20s is a losing game.

Your original claim amounts to "somebody with $100,000,000,000 to invest cannot take advantage of an opportunity to invest $1,000,000." That is simply nonsense. The only thing that could limit small investments is their ability to manage large number of investments. But that can be delegated to whatever level of underling has the skill. If you have the skill they can find that underling.

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David Jay
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Re: EMH, strong or semi-strong or weak form?

Post by David Jay » Mon Oct 19, 2015 1:22 am

Phineas J. Whoopee wrote:
David Jay wrote:
Phineas J. Whoopee wrote:Venezuela today equals always?
PJW
I listed one example, but what I asked for was a counter-example. One instance where severing the pricing information flow through the supply chain did NOT create shortages.
The burden of proof rests with the person making the affirmative claim.
PJW
Sorry, I am not a philosopher. I come from the scientific/engineering side, where a single demonstration falsifies the hypothesis.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Maynard F. Speer
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Re: EMH, strong or semi-strong or weak form?

Post by Maynard F. Speer » Mon Oct 19, 2015 3:58 am

Epsilon Delta wrote:
Maynard F. Speer wrote:
Two economists are walking down a street together. The young economist looks down and sees a $20 bill on the street and says, “Hey, look a twenty-dollar bill!”

Without even looking, his older and wiser colleague replies, “Nonsense. If there had been a twenty-dollar lying on the street, someone would have already picked it up by now”
That's a straw man. It's not that you shouldn't pick up stray $20 if you happen to see one. It's that going around looking for stray $20s is a losing game.

Your original claim amounts to "somebody with $100,000,000,000 to invest cannot take advantage of an opportunity to invest $1,000,000." That is simply nonsense. The only thing that could limit small investments is their ability to manage large number of investments. But that can be delegated to whatever level of underling has the skill. If you have the skill they can find that underling.
Keeping an eye out for money dropped on the ground shouldn't be a losing game

You're arguing with Warren Buffett's appraisal of his own company .. If they wanted to capture fractional gains in niche markets they'd simply buy more investment firms

"At Berkshire's size, there would be no more than 200 common stocks in the world that we could invest in if we were running a mutual fund or some other kind of investment business."
http://buffettfaq.com/#according-to-a-b ... ifferently
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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Epsilon Delta
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Re: EMH, strong or semi-strong or weak form?

Post by Epsilon Delta » Mon Oct 19, 2015 9:45 am

Maynard F. Speer wrote:
Epsilon Delta wrote:
Maynard F. Speer wrote:
Two economists are walking down a street together. The young economist looks down and sees a $20 bill on the street and says, “Hey, look a twenty-dollar bill!”

Without even looking, his older and wiser colleague replies, “Nonsense. If there had been a twenty-dollar lying on the street, someone would have already picked it up by now”
That's a straw man. It's not that you shouldn't pick up stray $20 if you happen to see one. It's that going around looking for stray $20s is a losing game.

Your original claim amounts to "somebody with $100,000,000,000 to invest cannot take advantage of an opportunity to invest $1,000,000." That is simply nonsense. The only thing that could limit small investments is their ability to manage large number of investments. But that can be delegated to whatever level of underling has the skill. If you have the skill they can find that underling.
Keeping an eye out for money dropped on the ground shouldn't be a losing game

You're arguing with Warren Buffett's appraisal of his own company .. If they wanted to capture fractional gains in niche markets they'd simply buy more investment firms

"At Berkshire's size, there would be no more than 200 common stocks in the world that we could invest in if we were running a mutual fund or some other kind of investment business."
http://buffettfaq.com/#according-to-a-b ... ifferently
The market cap of Berkshire Hathaway is smaller than the largest mutual fund, which manages to invest in 3809 stocks. And even if he couldn't there are many more funds smaller than that. If your not competing with the biggest pros there are plenty of smaller pros to compete with.

As for whether keeping an eye out for money dropped on the ground being a loosing game I don't see how should enters into it. It either is or isn't. The only people I know who make a living at it live under bridges.

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