Comments on: Efficient Market Theory: Do you buy it?

By: Roger

Roger — Sat, 13 Jun 2009 03:07:23 +0000

For me, once I heard of it, given how well passive investing works, the EMH certainly makes sense. From what I’ve read there are various “strengths” of this hypothesis. The practical upshot seems to be that to outperform the market by X, one would have to incur extra expenses (overall) of at least X. Also, obvious WELL DOCUMENTED outliers like Warren Buffett had most of their outperformance before powerful computing technology became commonplace. Technology seems to have raised the difficulty in outperforming in recent decades.

The thing I learned about a while back that suddenly made the EMH make intuitive SENSE is the “Wisdom of Crowds” concept. With the investor universe, you essentially have a “crowd” of everybody, and everybody involved has an extremely strong self interest (profits) in voting correctly – thus, IMO, likely the wisest crowd of all.

By: From a small city near a big city

From a small city near a big city — Wed, 29 Apr 2009 17:48:18 +0000

Your comment includes the fact that EMT addresses the “known knowns”, i.e. all the information that is known. Over the long term, the stock’s price factors in all the information that is known by everybody. All information, however, is not known by any one person at any given point in time. The one person only “knows what he knows” and that includes the stock price. When the stock price is lower or higher than the person’s own information supports, then person “knows there is something he doesn’t know” and may speculate or try to learn what that is. But there is also the “unknown unknowns”. I suspect the “unknown unknowns” are what are keeping the market undervalued compared to last year. For example, until Obama has been in office a while, no one knows proposed price tag(s) nor whether they will pass or not. Or in other words, there is an awful lot of worldwide uncertainty priced into almost every security right now. Just my $1.84 worth.

By: SJ

SJ — Wed, 29 Apr 2009 16:15:05 +0000

People are irrational?
Isn’t that the save-all of all economic/game theory?

By: Mike

Mike — Wed, 29 Apr 2009 14:50:27 +0000

Hi Weakonomist.

You’re right about the publicly traded vs entire economy point. Thank you for pointing that out.

As to what EMT states, my understanding (which could be wrong) is that there are different levels of it, some more strict than others.

My understanding is that the most strict version of EMT states that at every moment each stock is priced to include all known information. (Or at least, the price will reflect the new information within minutes of it being released.)

By: The Weakonomist

The Weakonomist — Wed, 29 Apr 2009 14:41:04 +0000

Some clarifications, the economy is not worth 40% less, large, publicly traded are.

Also, EMT does not assume that at a given moment in time the stock is priced perfect, just that over the long term it is. Perhaps a differences without a distinction, perhaps not.

I’ve struggled with EMT since college, but as of right now I am a believer and dollar cost averaging picks up the slack.