Markets Aren't 100% Efficient But You Still Can't Beat Em:

Nearly 40 years after the first edition of "A Random Walk Down Wall Street" the legendary Princeton Professor Burton Malkiel has released the latest version of the text: "The Time-tested Strategy for Successful Investing".

If one were to judge a book by its title, they might think Malkiel was making the case that there is no order to the stock market and that stock prices move randomly. But, that's not exactly the case. "It is not that stock prices are capricious in any sense, it is quite the contrary," says Malkiel. "[Prices are] essentially unpredictable, not capricious, but unpredictable because true news is unpredictable." He argues that all news is not equal.

Many headlines are efficiently already baked into stock prices before the events actually happen. Take for example the much talked about QE2 in the second half of 2010. There was so much speculation that the Federal Reserve would move again to buy up Treasuries that the market had largely adjusted for the decision before it actually happened. But, "true news" is very random, he says. For example, no one would have expected North Korea to unleash deadly artillery fire on the South, as occurred last month.

To his point, the event sent markets reeling, at least temporarily, evidence for why it's impossible to predict the short-term ups and downs of the market. You Can't Beat the Market Malkiel's book is essentially a brief on the Efficient Market Hypothesis, which states that stock prices efficiently incorporate all information available at any given time and trade at fair value. There are no profits sitting around, waiting to be picked up by investors. In the accompanying clip, Dan notes the "efficient market" theory has recently taking a beating; not just with the spectacular housing bubble and burst, but also due to the work of behavioral economists that have been studying irrational behavior.

But, Malkiel thinks the theory still holds up. "The efficient market hypothesis does not mean that prices are always right," he says. "We don't know at any one time whether [they are] too high or too low."

Read the full article here. 

Ralph Vince comments: 

This notion is silliness, grandiose academia at its worse.

There seems to be great oscillations in the collective thinking of men. We go from feeling we know everything there is to know, that we can, essentially, control everything, to that we know nothing, and all is beyond our control.

The EMH is akin to the 19th century notion that everything has been discovered and there is nothing new to discover. It does not account for those of us who regularly make profits other than to proclaim then as just lucky.

I don't need a bull market to make money and I can do it with any stock on the long side, without even having the choice of when to get in. I had to learn how to do it.

Simply because you cannot learn it in a university program doesn't mean it is any less of a learned skill.

Ralph Vince writes: 

I'm wondering though if maybe I don;t understand what Malkiel is saying, or what he IS saying is commensurate with the argument you guys are making.. He asserts most managers list money, others make money, but that seems to rotate around.

Ok, let's assume his empirical evidence in that regard is correct (I have no reason to doubt that). I think the larger question is "Is there a subgroup, within that revolving group of profitable managers, however small, that does NOT revolve, that DOES consistently make money. "…diamonds in the rough, for us clowns in the buff!"


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