Aretae

The virtue of excellence

Thursday, April 28, 2011

EMH

There are lots of technical discussions of the EMH...and lots of qualifications made. How does it impact your life, though? Here's the line:

There are other people playing the stock market who are (a) smarter, (b) better informed, and (c) more devoted to it than you are. This all but guarantees that index funds (Falkenstein: low volatility index funds) give you a better expected return than any other investing strategy (and once you count trade-costs, it's a slam dunk).
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4 comments:

Jehu said...

There are two ways to do better than the EMH. The first is to have superior information, either inside or through political connections. A distressing amount of the stock market has a disturbing amount of political risk right now. The second way is to take advantage of the way in which neurotypical humans are predictably irrational---they feel a loss of X approximately the same magnitude as a gain of 2X. This is the central tenet of value investing in the Grahman/Buffet school but it requires a seriously strong stomach and more state control than most can muster. Index funds are a lot better for most folks.

April 28, 2011 at 1:21 PM
Aretae said...

Jehu,

Absolutely, I agree with #1...but doesn't #2 very quickly fall prey to the same issues that all the other investing strategies fall?

April 28, 2011 at 1:43 PM
Jehu said...

Value investing would cease to work if too many people actually adopted it---they'd bid away the premium available for using bad news as a buying opportunity. The nature of the human neurotypical mind makes this fairly unlikely though---although if I recall there are a few species of primates that value gains of X similar to losses of X. Grahman's disciples have made a pretty good showing for themselves over the years.

April 28, 2011 at 3:02 PM
Aretae said...

Jehu,

While I agree that it's anti-neurotypical...I'd think that all it took was a couple G-S stats guys with some mighty deep pockets to end it.

April 28, 2011 at 7:58 PM

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