'Magical' Efficient-Market Theory Rebuked in Era of Passive Investing (yahoo.com) 57
An anonymous reader shares a report: At first blush, stock trading this week is hardly a paragon of the market-efficiency theory, an oft-romanticized idea in Economics 101. After all, big equity gauges plunged on Monday, spurred by fears of an AI model released a week earlier, before swiftly rebounding.
A fresh academic paper suggests the rise of passive investing may be fueling these kind of fragile market moves.
According to a study to be published in the prestigious American Economic Review, evidence is building that active managers are slow to scoop up stocks en masse when prices move away from their intrinsic worth. Thanks to this lethargic trading behavior and the relentless boom in benchmark-tracking index funds, the impact of each trade on prices gets amplified, explaining how sell orders, like on Monday perhaps, can induce broader equity gyrations. As a result, the financial landscape is proving less dynamic and more volatile in the era of Big Passive, according to authors at the UCLA Anderson School of Management, the Stockholm School of Economics and the University of Minnesota Carlson School of Management.
According to a study to be published in the prestigious American Economic Review, evidence is building that active managers are slow to scoop up stocks en masse when prices move away from their intrinsic worth. Thanks to this lethargic trading behavior and the relentless boom in benchmark-tracking index funds, the impact of each trade on prices gets amplified, explaining how sell orders, like on Monday perhaps, can induce broader equity gyrations. As a result, the financial landscape is proving less dynamic and more volatile in the era of Big Passive, according to authors at the UCLA Anderson School of Management, the Stockholm School of Economics and the University of Minnesota Carlson School of Management.
Passive investing dont move markets that quickly (Score:3)
Re:Passive investing dont move markets that quickl (Score:5, Interesting)
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Perhaps "berkcoin" was already taken.
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(Amendment: it is [bitquery.io].)
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It'd be hard to find almost any stock that has any intrinsic worth even vaguely close to where the current market is. Even low-growth consumer crap like Costco is running at a PE of like 56.
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It'd be hard to find almost any stock that has any intrinsic worth even vaguely close to where the current market is. Even low-growth consumer crap like Costco is running at a PE of like 56.
Stock prices reflect expected future growth of a business. That's why they are affected so much by news that alters perception of a company's future.
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I agree that's probably what they mean. I don't think I agree with the example the article uses though. There's no particular reason to believe that a Warren Buffet would think that a company like OpenAI, which got caught napping by an upstart competitor, was worth more than the people suddenly trying to dump it. "On fundamentals" lots of tech companies are grossly overvalued, depending on what you think fundamentals are.
I think there's more volatility in things like "tech" stocks, which have grown enormous
The stock market (Score:5, Insightful)
A poker game on which the audience gambles on the bribed players while being whispered advice into their ears by marketers and sammers.
No wonder it stumbles at the slightest disturbance.
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No wonder it stumbles at the slightest disturbance.
Indeed. Stability does not mix with a combination of hot air and mindless belief.
Re:The stock market (Score:4, Insightful)
It's not supposed to be like that. It's supposed to be shared risk for shared reward, pooling capital so larger endeavors are possible. There's an inherent gambling risk to a venture of course, but that's it.
All this extra stuff is more layers of gambling that are unnecessary for anything other than giving more opportunities to skim and game the system.
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So... you just posted exactly what I did. Why?
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It's not supposed to be like that. It's supposed to be shared risk for shared reward, pooling capital so larger endeavors are possible. There's an inherent gambling risk to a venture of course, but that's it.
Pooling capital for large endeavours only happens at IPOs and related events. Most of the stock market activity is just owners trading shares between each other, and none of that money has any real connection to what the company is doing. The only real financial connection happens if the company pays dividends, and that's only meaningful for long-term (multiple years) investors; dividends are generally much smaller than the price swings that short-term traders are after.
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No, the stock market is not a poker game. There's certainly some risk, but it's not at all the same as gambling.
For one thing, there's only one winner in a hand of poker. Everyone else loses everything they bet on the hand. That's not true for companies in an industry or the people who invest in them. Sure, you can have losses, but you only lose everything if a company goes bankrupt, and if you see even a hint of that coming you can get out early and live to "play" another day.
Second, the stock market grows
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The biggest difference is poker isn't rigged.
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The biggest difference is poker isn't rigged.
People who try to "rig" the stock market go to jail.
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Its not illegal to refrain from trading based on insider information. In aggregate, its rigged. And there's nothing anyone can do about it.
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Its not illegal to refrain from trading based on insider information.
Poorly phrased. You are required by law to refrain from trading on insider information.
In aggregate, its rigged. And there's nothing anyone can do about it.
You may think it's rigged, but it has done well for me, and I had no part of rigging it.
Anyway, if you're so sure it's rigged, I assume you have evidence. Kindly present it.
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No, you misunderstood the parent. While you cannot trade based on insider information, you can refrain from making a trade that you otherwise would have made. So when you account for fuzz (some percent of positions will be sold every year irrespective of the actual value), in aggregate the prices will be influenced by insider information due to the positions that would have been sold but are not due to inside information.
This analysis only works in aggregate, of course, since a person can't accurately say w
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No, you misunderstood the parent. While you cannot trade based on insider information, you can refrain from making a trade that you otherwise would have made. So when you account for fuzz (some percent of positions will be sold every year irrespective of the actual value), in aggregate the prices will be influenced by insider information due to the positions that would have been sold but are not due to inside information.
In short, you appear to be saying: if insiders are holding, then outsiders have reason to be bullish. That may be true, but I don't see how it means the system is "rigged." Insiders put their sweat into making a company successful. It's not hard to imagine they have positive hopes for the stock.
And there could be many reasons for an insider to refrain from trading. Perhaps they don't have money to buy the stock, or don't need to sell to get the money right now. In any case, insiders must announce their trad
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If you don't think information asymmetry is enough evidence, there's nothing more to say.
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If you don't think information asymmetry is enough evidence, there's nothing more to say.
That's a feeble cop-out.
piojo and I already exchanged posts on this information asymmetry, and I explained why it isn't enough to "rig" the system. If you can demonstrate how that can happen anyway, then do so. Otherwise I'm going to dismiss your claim as unsupported.
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I just replied here: https://slashdot.org/comments.... [slashdot.org]
The point is that I'm not sure an insider can refrain from doing a regular trade, at least not legally. But I'm not familiar in the ways that insiders are legally allowed to buy and sell, except this one. (For instance is an insider allowed to buy $1k of stock every month, as long as they don't increase the amount when they hear about a merger? And is this whole thing kind of a joke because insiders aren't required to make their trades via an automatic p
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I thought I said there wasn't more to say but here you are.....
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Not exactly. I don't think you can identify what insiders are doing with their stocks in general. What I think snowshovelboy meant is that for example every year, some insiders will buy or sell the stock--we can assume for the sake of argument that it's in equilibrium. This is generally legal if they're not using insider information to make the trade, for example if your stock is a windfall you can sell some each year, or if you are investing you can buy some each year. The crux is that when private good ne
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Thanks for the replies. To summarize all of this, I get that what snowshovelboy means is that the absence of action from an insider can influence the price of stock. Well maybe, but in what direction? If they interrupt a habit of buying, then that's a bearish sign. Interrupting a habit of selling is bullish. But the simple absence of action means nothing without that historical context.
It's worth adding some perspective. There's nothing necessarily remarkable about an insider selling their stock, as long as
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And if an insider stops selling then they might trigger an interest in the stock that increases the price, but so what? If it's due to a legitimate positive outlook, then everybody wins, not just the insider. If the insider wants to make it appear the outlook is positive, then the effect is only temporary. After the pause in trading, if the insider is actually concerned about the company's future and wants to cash out, the market will see their pre-planned trades and act accordingly.
I forgot to add that, if an insider sees the future of the company as troubled, then it would again be against their own interest to pause their pre-planned selling. And that negative insider information would only remain so until the next quarterly report from the company, when the market would react by driving the stock price down.
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You keep talking about signals, but If I were to illegally buy or sell or option my company's stock, you would never know about it. Similarly, if I (legally?) refrained from taking a usual action, you could not find out about it. There is no signal. You're talking about a different situation--CEOs, I guess. I have no particular insight on that.
To consider how outsiders get screwed in a market where insiders are prohibited from actions but not inaction, I'd model it as a simpler type of market like a swap me
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How many politicians such as members of Congress have gone to prison for rigging the market?
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How many politicians such as members of Congress have gone to prison for rigging the market?
A few. Here are some I found after a quick google search.
https://www.justice.gov/usao-s... [justice.gov]
https://www.justice.gov/usao-s... [justice.gov]
It's not clear from these pages whether they were in office at the time of their insider trades.
And then there's the 2020 Congressional insider-trading scandal. [wikipedia.org] Lots of hearings and an investigation, but it doesn't look like anyone went to prison.
The point is that congress members are in fact subject to insider-trading laws.
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Yes, it does seem the odd one does go to prison, OTOH, it seems quite a few don't. Also it was only in 2012 that the STOCK Act mandated reporting on stock trades. Many countries have strong conflict of interest laws, America not so much, though perhaps that is just an impression from the outside looking in.
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"The Market" is crap (Score:2, Troll)
What else is new? But I guess as it has been used as the gospel so long in economics (which barely qualifies as a Science due to the lack of good theory), it takes time for people to come round.
Thank you John Bogle (Score:1)
That's not the Efficient Market Theory (Score:5, Insightful)
EMT does not mean the market is always "rational". It states, roughly, that there is no consistently risk-adjusted _profitable_ way to predict market movements. Within EMT, there are strong forms (never possible) and weak forms (possible with insider information).
But this weeks movements in the stock market in no way disproves market efficiency or the wisdom of passive/index investing. To the contrary, I haven't seen any geniuses pop up saying "I told you last week that this was going to happen, and I made a ton of money shorting NVDA".
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But this weeks movements in the stock market in no way disproves market efficiency or the wisdom of passive/index investing. To the contrary, I haven't seen any geniuses pop up saying "I told you last week that this was going to happen, and I made a ton of money shorting NVDA".
That's good. You apparently haven't followed the insanity of Fibonacci trading on, e.g., SeekingAlpha.
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If prices are just noise as Fischer Black theorized in "Noise", would the EMH hold because no one could predict the noise better than the noise?
Is economic efficiency at odds with common-sense and engineering efficiency, hence planned obsolescence and waste externalization onto nature?
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Index investing ftw. That's all. Good rant.
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Index investing over a long time-frame ftw. That's all. Good rant.
FTFY
Re:That's not the Efficient Market Theory (Score:4, Insightful)
To the contrary, I haven't seen any geniuses pop up saying "I told you last week that this was going to happen, and I made a ton of money shorting NVDA".
They will pop up. There are always people popping up saying that they made a ton of money shorting whatever it is.
The ones who bet the other way stay silent, of course.
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To paraphrase the Batman (Score:2)
Stock traders are a superstitious and cowardly lot.
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Having something to lose will do that to a person. But don't worry, you will own nothing and be happy anyway. :)
Costs to much to watch that closely (Score:5, Interesting)
PS - never date anyone who measures their free time in hours per month.
Re:Costs to much to watch that closely (Score:5, Interesting)
That sounds like the story that someone running a mutual fund would tell. Statistically, mutual fund managers underperform the index in good years and in bad years, which is kind of crazy given that they're supposedly spending tons of time (and your money) so that they can do better than someone just randomly picking stocks. Nowadays, the only people recommending mutual funds instead of index ETFs are people making a commission on selling you mutual funds.
Inflows to mutual funds fell behind ETFs 10 years ago. Nowadays, mutual funds lose money each year because it's so well documented that actively managed mutual funds underperform much cheaper index funds. Every year, we heard some famous mutual fund manager say, "I know mutual funds have been losers for the past couple decades, but this next decade is going to be different..." Honestly, I'm surprised that there's still so much money in actively managed funds.
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Active funds are the ones that will change the stock prices. The index funds only follow price changes.
Stock prices change based on how many buyers and sellers there are. Those buyers and sellers can be (1) traders for an actively-managed fund; (2) traders for a passively-managed fund (i.e., an index fund); or (3) other institutional traders and individuals.
In short, index-fund traders actually do buy and sell stocks, to invest new money going into the fund, or handle distributions from it. If enough people buy or sell an index fund, stock prices within the fund will change. The other traders I mentioned abo
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That's why they underperform. The article seems to be arguing that the lack of active traders means it took a whole day for people to jump in and buy up bargain tech stocks that had just dropped, while conveniently ignoring that it was a bunch of twitchy active traders who were responsible for the drop in the first place.
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The average fund manager, on average, performs worse than average. You'd think it would be a mathematical impossibility, but the way they achieve this miracle is through use of fees.
Another interesting data point is that, in general instead of putting your money with the manager who did best last year, a better strategy is to put your money with the one who did worst.
Being an active fund manager sounds easy and fun.
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The average fund manager, on average, performs worse than average.
I read that sentence three times, and each time, it made no sense at all. How can an average fund manager perform worse than average? "On average" or otherwise?
Anyway, continuing...
You'd think it would be a mathematical impossibility, but the way they achieve this miracle is through use of fees.
Well, as I said above, it's a logical impossibility. As for fees, all funds charge them, but the actively-managed funds have higher ones. So, all fund managers, average or otherwise, would charge fees, thus reducing the performance of all fund managers, and thus reducing the ... average? So, charging fees does not bring a manage
Algorithms (Score:2)
Or the obvious, it's algorithms betting against other algorithms.
quantitative easing? (Score:1)
More like the market influencers (Score:3)
are trading in patterns which increase the probability that a large swath of those who are passively invested and panic during downturns will lose their shirt.
These folks make their profit off of market volatility and they're hoping that the passive retail investors panic and sell on the dips.
If there was some way to game the market to " L crash" and cause a significant paper loss say (negative 30-60% and stay that way for 5-10 yesrs) to passive index fund investors and it was in their favor, they'd make it happen in a microsecond. I'm not confident they could pull this off, but there is a small chance they could.
It's all about transferring the paper gains from the masses who have their life savings in index funds to themselves.
If you're near retirement, don't be fully invested in the stock market, diversify your portfolio with some bonds.