Efficient Markets: Killing Off the Monster

From the Economist:

Having lived through the financial crisis of 2007-08, the man in the street might find the idea that markets are “efficient” incredible. But the efficient-market hypothesis, like a Hollywood monster, has proved very hard to kill off. From the truism that the average investor could not beat the market after costs, academics developed the insight that obvious market-beating opportunities would quickly be arbitraged away.

Here is a great example of efficient markets — not:

That chart could only have been effectively traded as a trend following trader. You used fundamentals to trade that? You are full of it or you were flipping coins and hit heads.

5 thoughts on “Efficient Markets: Killing Off the Monster

  1. It seems there are three forces at work here:
    1. Those who believe in EMH. 2. Those who don’t, but are flapping in the wind with no plan.
    3. Those who know EMH is full of s**t, but have a plan.

    In my business, I rarely meet 1 & 3, which is a good thing because at least these people think you can beat the market, but just don’t know how.

  2. The media is clueless for the most part when it comes to trading and markets in general… EMH has been blown out of the water so many times…

  3. It’s amazing that so many passive investors base their “buy and hold” strategy on EMH, especially when you consider that without the bailouts the DOW would have gone to 2000/3000 and buy and hold would have been rightly destroyed for good!

  4. For fun, go to Bloomberg videos from Friday Feb 18 where the Executive VP at Citibank says in no uncertain terms that oil will NOT go up over the long week-end because Saudi Arabia has more than enough reserves to cover Libya’s shortfall…NOT!!

    When it comes to fundamentals, who cares? The speculators control 98% of oil contracts, so this guy analyzing things from a commercial point of view is out to lunch in the short term, and any average joe that listened to “the expert” missed out big time.

  5. The Efficient Market Hypothesis has a certain appeal in its surface elegance. It would be so nice if only it worked.

    It’s like a girl who is absolutely no fun to be with and everybody knows it, but who has a great body. She will always have dates because there will always be guys who will ignore common sense and the experience of others and hope it will work out differently when they try.

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