Go to Jeff Salisbury LWGate Home Page.From: "Michael Kurela" <mkurela@hotmail.com>
Subject: Re: Investing
Date: Mon, 31 Aug 1998 00:31:06 EDT
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>Date: Wed, 26 Aug 1998 23:15:29 -0400
>From: "Steve Foulks" <steve_foulks@up.bresnan.net>
>Subject: Re: Investing
>In order for stock markets to be efficient there have to be some
>nonbelievers who believe that there is some reward for analyzing >stock
data... In your case, assuming you aren't a person paid for
>analyzing stocks, you are simply wasting your time.
Stock markets are efficient ONLY in the broadest sense of the terms. In
the short-term, they are not efficient. The research and facts on which
you are basing your statement is predicated on statistical analysis of
stocks and the random walk that the prices exhibit. Statistical
analysis requires large stretches of chronological data (large samples)
by which to make inferences. The data normally used is the price at
close. I conducted research (unpublished) while working on my masters
of intraday prices and bid-ask spreads of 100 NASDAQ securities that
demonstrated intraday inefficiencies. INTRADAY means short-term,
between market open and market close on a single day.
Whether there are nonbelievers or believers of efficient markets, it is
not the belief that causes the market efficiency but the collective
activity over long periods of time. The effects of supply and demand
can also raise or decrease the price of a security, whether new
information has been released to the market or not. I would not
consider the human trait of wanting something that is low in supply and
willing to pay more to obtain it a contributing factor to market
efficiency. However, once the higher price is paid and the market price
of the security increases THEN the market efficiency paradigm has been
satisfied. *sigh* Now if we could only predict human nature.
There is some pretty interesting research I've read about the psychology
of the market. Just think, if a statistically significant portion of
trading volume is due to irrational investors who do not care about the
price or information inherent in the price of a security, their
irrationality is driving the prices higher or lower. Some of the
greatest experts in the world will tell you, "Oh, well that
irrationality is captured in Beta."
>Capital Market efficiency isn't a religion, so believing in it isn't
>important. What do empirical tests show? Given that tests of the
>proposition are always going to be somewhat deficient (i.e., they
>require a mathematical definition of risk), they do show that markets
>are highly efficient.
Empirical tests become increasingly inaccurate as samples of data become
smaller. How, then, do you propose to empirically test for market
efficiency if your data set is not large, contiguous, and rationally
gathered ? How do you ensure a proper definition of market risk ? The
standard is to use Treasuries, but I have seen arguments against the use
of them as the proxy for market risk. Does risk change when the Fed
increases the discount rate and Treasury yields respond accordingly ?
Monetary policy should not drive the definition of the risk-free rate of
return that one would desire to use in an empirical test of market
efficiency.
>First, Microsoft was not a two bit company when it went public. It
>wrote the operating system used on all PC computers. Secondly, if
>they followed your strategy (below) of never holding a position for a
>week, those people would have never had the excellent long run >returns
that you mention.
You are taking my statement out of context. Your recommendation was to
invest in strictly Blue Chip Securities and I was pointing out that
there are good investment opportunities outside of the Blue Chips. I
also provided the reader(s) with examples of trades I had executed to
support my individual methodology. Microsoft was not a Blue Chip when
it went public.
>This shows is that you don't have a clue, what it means for capital
>markets to be efficient. It simply hypothesizes the following with
>respect to the stock market:
>STOCK MARKETS PRICES REFLECT ALL INFORMATION WHICH COULD EFFECT A
>STOCK, INSTANTLY, AND CORRECTLY.
Is your only method of debate to insult people who offer differing
opinions and evidence to support their opinions ? I certainly hope that
you are a better educator in the class when responding to your students'
comments. I *do* have a clue what the efficient market hypothesis
states and I happen to believe that it does not hold in the short-term.
Stock prices do not reflect all information which could affect its price
immediately, instantly, and correctly. To illustrate this with another
example:
I took a class by Chester Spatt, of Carnegie Mellon University, who
developed models to value securities with interest-rate dependent
claims. His research and identification of RJR Nabisco bonds during
mid-January 1991 revealed that the market mispriced the bond by more
than $11 per $100 face value. The article appeared in The American
Economic Review, December 1993, vol. 83 No. 5.
>If people earn more by day trading after hours as you allege, that
>becomes information that the market will use, in which case it can't
>be used to make abnormal profits again.
It is not as I allege, it is a fact. Granted, their trading activity
helps to establish the prices at market open. Your expertise is in
accounting, tax management, and personal finance. Have you researched
market microstructure at all ? Check out margin accounts for Level II
trading.
>Capital market efficiency doesn't preclude an individual from having >a
technique that can earn abnormal profits, but if that person blabs
>about it to the world, and then everyone else uses it because it is >so
great, then it won't work any more. I think you would
>agree that logically everyone can't earn above normal returns.
...and with this market efficiency, the January effect in small cap
stocks still exists. How on earth do abnormal returns occur cyclically
if everyone knows about it ?
>Michael, you are a broker's dream. I hope you use Charles Schwab (I
>own stock in it).
I use a few electronic brokerage firms for trading securities and have
quite a bit in mutual funds such as TIAA-CREF, Vanguard, Alliance, MFS,
and Lexington Troika Dialog. The nice feature of TIAA-CREF and Vanguard
is that I can redistribute between equity portfolios and fixed-income
portfolios without incurring trading costs when I see macroeconomic
evidence that the market shifting. Two weeks ago I moved most of my
mutual fund amounts out of equities and into fixed-income. In my
opinion, we are approaching a period of declining stock values.
>I love your statement about your investment performance, but if you
>have been at it for less than a month, I think it is a little too >soon
to start crowing about how wonderful your system is.
As we debate the hypothesis of market efficiency (note that a hypothesis
is still a hypothesis and not a fact), I have been daytrading for over a
year. My gains at December from stock trading activity alone was a
little over $352,000. I'm not crowing and do not have a "system" that
I'm hawking to anyone - I think it is important to inform others who
want to learn about investing that there is more out there than
believing only in the market efficiency hypothesis and foregoing
portfolio income because self-termed "experts" ramble on that no one can
earn abnormal returns. Successful investing, not just plugging away for
40 years at dollar-cost averaging, requires continuous attention to the
world around you. The U.S. economy right now, for instance, is on a
downward slide. Exports are down, imports are up, U.S. manufacturers
have too much product in the pipeline, credit card debt is high, and
foreign economies are beginning to falter. Why take a 15% loss (oh,
wait, Wall Street is calling it a market correction) on long-term,
dollar-cost averaging in securities when fixed-income securities would
have provided protection against downward slide for the regular investor
and still kept you a little over inflation ?
>Ignoring taxes for a moment let's assume it took you a whole month to
>turn $6M into $23M, that translates into a 283% monthly return, or an
>annualized return of 996,288,900% return(assuming monthly
>compounding)!!!! Even Warren Buffet would be impressed. After one
>year your $6M will be worth $21 billion plus, putting you up there
>with Gates, Buffet and the Sultan of Brunei, and
>after two years you will be worth $210 quadrillion (210 million
>billion), at which time you will own every asset on the face of the
>earth and then some!!!
{laugh} A comedian you are not, so don't quit your day job at Northern
Michigan. However, I hope I am not the first person to tell everyone
that you should never go to an accountant for business or investment
advice ! Accounting advice, yes - but I'd rather have economic profit
than accounting profit personally ;)
>Two things are possible for investors like you, you wake up to >reality
(which is what happened to me), or you waste a lot of time >and money
chasing after the next Microsoft, and give up on investing >altogether
when you have shot your wad.
Or three, they make a respectable amount of money and are intelligent
enough to not continually let it ride and risk it all in securities.
- --mk
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