The Less-Efficient Market Hypothesis 42
Abstract of a paper by Clifford Asness of quant investor AQR Capital: Market efficiency is a central issue in asset pricing and investment management, but while the level of efficiency is often debated, changes in that level are relatively absent from the discussion. I argue that over the past 30+ years markets have become less informationally efficient in the relative pricing of common stocks, particularly over medium horizons. I offer three hypotheses for why this has occurred, arguing that technologies such as social media are likely the biggest culprit. Looking ahead, investors willing to take the other side of these inefficiencies should rationally be rewarded with higher expected returns, but also greater risks. I conclude with some ideas to make rational, diversifying strategies easier to stick with amid a less-efficient market.
Warren Buffet has ALWAYS laughed at this! (Score:4, Interesting)
He said it's always been ballony.
What change in a business makes it's value go up 3% one day and down 6% the next. NOTHING CHANGED!
This is how Warren Buffet makes his money. HE MAKES MONEY BY TAKING ADVANTAGE OF INEFFIECIENT MARKETS!
Re: Warren Buffet has ALWAYS laughed at this! (Score:3)
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This is why I always point out that the "value" of a company is always somewhat abstract.
The traditional way to value something is to sell it - the value is what you can get somebody else to pay for it. Everything else is something of an estimation.
For publicly traded companies, we generally take the last sale of a fraction of the company, take the sale price per share, multiply by the total number of shares in the company, and that's the company's estimated value.
Never mind that we know full well that if
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Or like in farming, where you plant a crop and then the expected value of it changes based on the weather, including in other parts of the world. And you can't count your chickens before they're hatched, their real or estimated value now can only ever be a guess that you'll learn more about next year. Absent psychic powers, this means value will fluctuate wildly.
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Re: Warren Buffet has ALWAYS laughed at this! (Score:2)
Just because the value can't be quantified in a formula does not mean the value does not exist.
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You want to know the value of a company? You need to get its balance and result, and analyse it.
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Translation: Buffett gets rich off idiots investing wrong.
His description of the investment markets sounds a lot like IT: fads and BS. I can't believe how many frameworks and software engineers fuck up a stack chasing fads, or at least technologies that are an ill-fit for the given shop.
I can't tell if they are just morons or are padding their resume with buzzwords so they can find a bigger sucker to pay them more. Many buzzword chasers do know how to fluff PHB's, a social skill my Asperger mind doesn't do
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Comments like this always irk me. Being mad at Agile for ruining your dev experience is like being mad at shovels because you're tired of digging. A) Shovels as a tool aren't to blame (even if yours happens to suck), and B) if you switched to digging with a spoon (ie. waterfall) you'd hate things even more.
In my entire career as a dev I've worked almost exclusively at agile shops. Some sucked, and some were awesome, but agile was never the cause of either: the people were.
Similarly, you may have had some
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Agile requires too many ducks to be lined up properly in order to be a net advantage. But most shops, especially if IT is considered a "cost center" instead of a strategic partner, are dysfunctional with IT, making agile worse than more traditional approaches.
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yeah, the ecosystem it lives in determines what works and what doesn't.
Any project can be agile. The issue is the interfaces with the rest of the business are generally...not agile.
My issue with Agile is it has a shelf life. You can only change the 'process' a certain number of times before human nature just checks out and people are no longer invested in it. If you're changing your process for the 4th time in 2 months...something else is wrong and usually that isn't something you're allowed to change.
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> What change in a business makes it's value go up 3% one day and down 6% the next. NOTHING CHANGED!
You're right that (probably) nothing changed in that particular company's operations, but things change all the time in the world. Most notably, the Fed, which is always full of surprises. When these bureaucrats decide to cut rates just a bit more than the consensus expectation, stocks go up. This is rational, as the Fed is essentially creating artificial inflation, which the market then anticipates.
I am f
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> Most notably, the Fed, which is always full of surprises.
No they aren't. If one looks at the current employment rate, GDP, and inflation rate, the Fed R. are pretty predictable in their responses. One can almost write a formula to predict their behavior.
There is some controversy, like whether Volcker should have murdered the economy so quickly to get inflation under control in the early 80's. Our household had rough times due to the "Volcker Valve" shutting the econ down. So I do wonder if it could hav
Re:Warren Buffet has ALWAYS laughed at this! (Score:4, Interesting)
He said it's always been ballony.
What change in a business makes it's value go up 3% one day and down 6% the next. NOTHING CHANGED!
This is how Warren Buffet makes his money. HE MAKES MONEY BY TAKING ADVANTAGE OF INEFFIECIENT MARKETS!
You seem to be describing temporal arbitrage, which is not at all what Warren Buffet does, it's what he very specifically ignores. Other market participants attempt to capitalize on the small shifts you mention, particularly (but not only) high frequency traders -- and that's actually a good thing. The existence of people attempting to profit from the small random shifts actually serves to smooth them out and minimize them, i.e. to increase efficiency. Buffet's strategy is to find companies whose long-term prospects are better than their market value reflects -- or companies whose long-term prospects he can make better.
In the broadest sense, this is making money from inefficient markets, but in that sense anyone who generates market-beating returns is by definition taking advantage of inefficient markets. In a perfectly-efficient market, all possible information about the future of an enterprise would be priced in, so the only way to consistently beat the market would be to use insider information. No one believes markets are perfectly efficient.
And this has nothing to do with this paper. The author is arguing that markets have recently become less efficient than they were before, and this is the counter intuitive result of new communication technology. It makes sense to me, though. Social media has increased the impact of non-expert voices in almost every sphere of human endeavor, and has thereby increased the amount of noise and reduced reliable information flow. Market efficiency is yet another victim of this trend.
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Has Warren Buffet been able to find inefficiencies in enough places to park the company's money lately?
It seems the market is efficient enough to at least be efficient when at the scale of Berkshire Hathaway (based on them not over performing).
Agricultural cycle (Score:1)
Monopolies (Score:2)
The author doesn't address monopolies which have always distorted the "free market".
Monopolies are never transparent and always screw the buyer.
Monopoly Capitalism is the problem... Not "social media"
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Monopolies are too inefficient to exist in an open market.
Monopolies don't need to be efficient. Good lord that's some nice koolaid you got there.
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Sorry, but without "government interference" monopolies would be even more intrusive. I'll grant that the government also creates (patents, copyrights, trademarks, etc.) monopolies, but, as the drug wars show, in the absence of government regulation monopolies adopt even more abusive mechanisms.
FWIW, I'll assert that you can't have a "free market" without government support. E.g. without government support you don't have money, just barter. (And I don't consider cryptocurrencies to be proof of the cont
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FWIW, I'll assert that you can't have a "free market" without government support. E.g. without government support you don't have money, just barter. (And I don't consider cryptocurrencies to be proof of the contrary. They depend for what value they have on conversion to a standard currency.)
I agree with you that money needs standards. And nowadays those often come from government. But banking and money have existed without being government-run or government-supported, and this is long before crypto. A Slashdot comment isn't the place for a full proof, so I'll just leave a few breadcrumbs here. Banks across the US used to issue their own notes; communities have printed their own currencies, including in the Great Depression and numerous times since. Meanwhile some government currencies (Zi
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Here you're dealing with a multitude of different factors.
The Banks that printed their own currencies were often state banks. Companies, though, have done the same thing operating company towns with company stores where you buy with company currency, and workers were paid in company currency.
In the first case you're depending on a state government rather than a national government. In the second case I'd assert that the company was acting as a de facto government.
There are also historic currencies that ar
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The "drug wars" were (are?) about wars between criminal cartels that were trying for monopoly control over territory.
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Some countries and towns have tried open standards for such things, and had a lot compatibility problems. It's the network effect: you can't be compatible until you are big, and you can't be big until you are compatible.
If you want to force gov't to be the open-source guinea pigs, you have to be willing to pay more taxes for a while.
> Monopolies are too inefficient to exist in an open market.
You don't see the contradiction in that statement?
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Blaming retail (Score:3)
Before anyone buys into this:
I would suggest reading up on "dark pools" and the dirty details of all of the backdoor short selling that is "lawful but awful" by market makers and their friends.
Retail has also started to learn how to use Wall St traders' tools like options trading against them.
If you want to fix the volatility, it's simple:
1. Require trade resolution without exception by CoB on the last day of the "1 + N" period. Anything beyond 3 days of failure to delivery should be prosecuted as securities fraud.
2. Require all stock trading to happen on the exchanges with dark pools only allowed for manual sale of shares between whales.
3. Either outlaw short selling or make people who allow shares to be sold short to be illiquid until they are returned.
On #3, it's ridiculous that people can both allow their shares to be sold short AND sell them. That's literally a felony in any other property context.
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Well said. The strategic Fails To Deliver of shares that are occurring on a regular basis would be considered fraud or theft in any other context.
Normally in life when you buy something you actually receive it, rather than receiving an IOU with no expiration date that effectively dilutes the supply of the thing that you think you bought (there can be many times more IOUs than the actual shares they represent), with the oversupply lowering the price per share in flagrant contradiction of the laws of supply a
Covered last week in The Economist as well (Score:3, Informative)
https://www.economist.com/fina... [economist.com]
Apologies for the paywall link, but I don't have another source at the moment.
social media - not really (Score:2)
If it was not social media it would be the traditional Wall Street press hype machines or other industrial rags of the 60s, 70s, 80s, and 1000s of 'letters' all pumping out low quality research and theories based minimally informed high level views of this industry or that.
what matters here is the volume of people investing based on this shovel media and how much. There are few real drivers there:
1) Low cost online brokers - cutting friction and costs to consumers so low they really can treat it like a cas
Market Signal Theory (Score:1)
Technical vs fundamentals (Score:2)
New trends (Score:2)
The problem isn't the efficiency and accuracy of the valuation. When one can buy a PlayStation for $500 and sell it the next day for $1200, the problem is, there are a lot of suckers out there: The reward of acquisition is, sooner or later, in the eye of the buyer. Yes, part of the problem is Sony wants high revenue and a high units-sold count but arbitrage is evidence that goods are frequently under-valued. The new trends, Surge Pricing (true capitalism in a sheep's skin) and electronic shelf-tickets,
It's a fashion industry (Score:2)
Everybody piles into Apple, then Nvidia, 'cos they're this year's "cool", just like trainers.