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Do you believe markets are efficient?

Ari

Ari

Joined
5/15/15
Messages
22
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13
Hey everyone,
Maybe not the right category for this question, but wasn't sure where else to put it.

So I'm just getting my feet wet with the efficient market hypothesis (I know, I'm still a newbie). And have come across many books either arguing for (e.g. A Random Walk Down Wall Street) or against (The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street). Wondering what people on the forum think about it? Although it seems clear there is no consensus, do a majority of people believe one over the other? Are there some that are agnostic to the idea? How does it affect your investing (believing one vs. the other)?

Thanks,
Ari
 
To put it briefly: markets are efficient but not in the sense that nobody can beet them but in the sense that even if you have a system that beats the market, the market will (rather sooner than later) adapt and beat you (unless you adapt more quickly).

Edward Thorp (after beating casinos in BlackJack as warming-uo) has once beaten the market. However, he was not able to do it eternally because he was not the only brilliant guy, so more and more smart people exploited that market inefficiency and finally exhausted it.

Look at this guy:
Platintrader Mission erfüllt!!
1000% of return in two years by the maximum drawdown of just -16,21% - fantastic!
And it is not the result of a single bet by means of a highly leveraged derivative. This is a systematic result (the complete trade history is open, as a small exercise calculate yourself the probability of achieving such result under assumption of the Random Walk hypothesis).

My results are much milder but still better than DUCKS(=DAX, German blueprint of DowJones)
Somewhat better than DUCKS

I, myself, don't dare to make a pledge to beat the market continuously.
But I do state that sometimes the market itself gives you an opportunity.
My best one was shortly before the downgrade of US-Rating in 2011. The VIX (volatility index) was so down that it hardly could fall further. But if it would have jumped ... and it did! :) (see attachment)
 

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yetanotherquant said:
I, myself, don't dare to make a pledge to beat the market continuously.
But I do state that sometimes the market itself gives you an opportunity.
My best one was shortly before the downgrade of US-Rating in 2011. The VIX (volatility index) was so down that it hardly could fall further. But if it would have jumped ... and it did! :) (see attachment)
Click to expand...
John Paulson did the same thing in 2007 :) , when he bought very cheap CDS on AAA CDO's, mainly based on price. I am not sure if he had a thesis at the time. But he was lucky and the CDO market collapsed and Paulson & Co posted 15 bn USD profit. His post-crisis performance is not that glamorous. He went full Peter Schiff and was very bullish on gold which decreased in value.

Buying CDS at that time was a very advantageous way to short, especially if you bought it cheap. That is why CDS market is dying. Buying cheap stuff is neither ingenious nor creative. Even insurance companies buy cheap junk bonds nowadays because it would take a tiny portion of their capital.

As for market efficiency, I love Robert Shiller's interpretation that markets are perfectly efficient for an average Joe but people with commitment, experience and skills can beat the market over time. My own thesis is "Stay away from very juicy looking investments which you do not fully understand". But there is always the possibility of falling for a bad investment which you thought you fully understood (Type 2 error :D ).

I do feel like everybody believes in market efficiency to some degree but nobody can quantify it. 20% or 60% or 80% :D It looks like one of those silly how sure are you about God's existence questions.
 
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BTW, yesterday I was again better than market.
Most of "experts" believed that the Supermario would not shock the market.
My idea was: ok, to be on the safe side I sell and after his report I buy back.
I did buy back but at much better prices ;)
 
yetanotherquant said:
BTW, yesterday I was again better than market.
Most of "experts" believed that the Supermario would not shock the market.
My idea was: ok, to be on the safe side I sell and after his report I buy back.
I did buy back but at much better prices ;)
Click to expand...
lol
 
I am not sure if he had a thesis at the time. But he was lucky and the CDO market collapsed and Paulson & Co posted 15 bn USD profit.

The book "The Greatest Trade Ever" tell more. It was just a matter of time until the property markt would crash..

Pelligrini did a lot of the research. Basically, property is a bad investment.

Some of us suspected the impending property crash in 2006.

Wilmott Forums - The Housing Market
 
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