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Efficient Market - Fact or Fiction?
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ltvalue
Senior |
13-Jan-2008 13:09
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i think that the classic form of 'riskless' arbitrage has disappeared over the past 2 decade. As information becomes a lot more fluid and cheaper, traders have to increasingly increase the risk undertaken to earn ever decreasing spread on their 'riskless' trade. Thus the fall of LTCM in the late 90s. However, i do think the existence of perpetual anomalies may show that the strong form of EMH does not hold true. I think one great example is the success of a small group of value investors consistently outperforming market http://www.smueye.com/resources/Super%20Investors.pdf . Even the fact that statistically low Price-to-Book stocks outperforming market over long run is also an anomaly that cannot be explained away by EMH. |
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IM3athlete
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12-Jan-2008 18:18
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ure very right mr remisier. In fact, one clear cut example would be arbitrage. =) |
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remisier
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20-Dec-2007 23:37
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If one should believe on EMH any study related to investment become useless. We study investment either FA or TA with the intention to outperform the market. The price doesn't immediately reflect all available data and news as EMH touted. But instead the price will gradually adjust to the available data. Gradually means, the price adjusted by the activities of the people closer to the source and followed by the people further from the source. Therefore to me EMH is the theories of lazy people which only believes they can't do anything better than the market ----------------------------------------------------------------------- Successful speculation begins with understanding the big picture ----------------------------------------------------------------------- |
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tatrader
Senior |
20-Dec-2007 23:26
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I think market efficiency is a very interesting topic to be discussed about our markets. The first question to establish is whether technical analysis can be used in todays markets, generally, if there is an existance of a single successful technical analyst, then markets cannot be considered to be weak for efficient (market discount all price patterns). However, it does not mean that markets are inefficient. If we look into some illiquid stocks or stocks which are "cornered" majority stakes are own by a few individuals, you will find price patterns illiquid and it price behavior seems random. |
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ten4one
Master |
05-Dec-2007 06:58
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Let's say The Market has become more and more efficient than it was 10 years ago and still improving. I don't think there is such a thing as a totally efficient Market due to the 'Invisable Hands' at work that could affect the pricing of stocks to their advantage. And also humans' sentiments could change the direction of the Market - a force which has nothing to do with the fundamentals of a company. Cheers! |
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absolutemocha
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04-Dec-2007 22:43
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The stock market remained weakly efficient because of us. The driving mechanism behind the efficient market theory is to seek profit by gaining from the mispricing of stocks. We, as the traders or investor, would attempt to buy stocks until the price reached its percieved value. However, as each of us may have a different percieved value, there would still be some mispricing of the stocks. Therefore the market is weakly efficient. |
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littlemiss
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04-Dec-2007 22:17
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Burton Malkiel of Random Walk fame suggests that the Efficient Market Hypothesis (EMH) is indeed fact. One of his most famous sayings is that bare-assed blindfolded apes tossing a dart at the stocks page of a newspaper have a pretty good chance of outperforming majority of today's active fund managers. Correct me if I'm wrong, but generally the EMH states that share prices are instantaneously (hence, efficiently) priced to include all available data and news as of any moment in time. This is as good as saying that the skills that SMU E.y.E Investment Club seeks to equip its members with are anything but relevant. Because should the market be as efficient as it is touted to be, no amount of skill or knowledge or exotic form of black magic would help you make more than average returns. Nobody would stand out in the realm of investing -- no Warren Buffett, no Peter Lynch, no Benjamin Graham. Paradoxically, if you happen to champion the EMH and you swear by it, chances are you didn't have to know about the EMH in the first place, because you can afford to be an absolutely know-nothing investor and live happily ever after (assuming you're not interested in earning above average returns for the rest of your life, which to me, is more than reasonable but less than rational). In my opinion, nobody should be in a position to wholeheartedly discredit the EMH, because history has shown that people would fare better if they (as Malkiel puts it) "bow to the wisdom of the market". There is some truth in what EMH teaches us. And I emphasize the word some. I agree with EMH to the point that the word instantaneously crops up. As far as I understand, there are many times when value investors are able to go in for the kill by buying stocks of very promising companies when the company is undervalued (in their personal opinions) by the market. This time lag between the value investor spotting a worthwhile buy and the market realising it, is not accounted for by the EMH. Which leads me to conclude that the market is only as efficient as time allows it to be. So does EMH really hold? I'm inclined to say partially. What do you think? |
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