Go to Jeff Salisbury LWGate Home Page.From: "Steve Foulks" <steve_foulks@up.bresnan.net>
Subject: Re: Investing
Date: Wed, 2 Sep 1998 13:50:48 -0400
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Michael Kurela stated: >Stock markets are efficient ONLY in the broadest sense of the terms. In >the short-term, they are not efficient. This is a nonsensical statement about capital market efficiency. Here is the efficient market hypothesis once again: STOCK MARKETS PRICES REFLECT ALL INFORMATION WHICH COULD EFFECT A STOCK, INSTANTLY, AND CORRECTLY. It is an instantaneous concept, not a short or long term concept. Information comes out, and the market instantly adjusts prices to reflect that information. The information could be news about a company, the economy, rumors, methods of analyzing investments or strategies for making abnormal returns, psychology about investors, etc. Either the market is efficient at this moment, or it isn't. If you told me that the market is inefficient, I can accept that as a rational proposition, or perhaps what you are saying is that there are times when it is inefficient, and times when it is efficient - that's a logical proposition also. Each proposition could be tested empirically, but given that this audience probably isn't interested in such a debate, I think I can demonstrate in terms that everyone can understand, why it is likely that most markets are efficient. I don't know how many can remember the Arab oil embargo, but as soon as the Arabs announced they were not going to ship oil to the US, lines formed instantly at gas pumps in the US, even though tankers in transit continued to deliver their oil, and there were normal oil supplies in the US. Even though there was not a shortage on that day, people realized that they had to act quickly to take advantage of this information. Sometime later, I was watching national TV news and they showed people in Japan fighting over toilet paper, because their was a shortage. The reporter then said that unless their was an increase in capacity in this US, this shortage would affect the US in a few years. I went to the store to pick up some food a few days later, and I thought maybe I should pick up some toilet paper. There was no toilet paper, no paper towels, napkins, not even any paper plates!! Morale of this story - markets react instantly to new information, they don't wait for shortages. If you want to make abnormal profits in the stock market you need to pick winners at the right time. If you were the only market participant you wouldn't have to be in a hurry to analyze new information to determine when to buy or sell. But if you had just one competitor, you would have to act before they do. Given there are millions of investors, many of whom are very adept at analyzing data in the marketplace, it is logical that the time frame from data decimation to market reaction become extremely close to instantaneous. This is the logic behind the efficient market hypothesis. Mike claims that the stock market is inefficient and he is able to make tremendous abnormal profits due to this inefficiency. I presume that it is inefficient in his mind because it doesn't take advantage of his strategy for becoming infinitely wealthy. If this strategy truly worked, then I would use it, the managers of mutual funds would use it - in fact everyone would use it because we all want to become infinitely wealthy. Since so many people are now using this strategy, the speed at which you must implement this strategy becomes very short until you have an infinitely short period of time to implement it. In other words, it potential success makes it worthless. I applaud Mike's efforts because I benefit from it - he is helping to make the market efficient for me. If the market is efficient, I can't make extra money by analyzing stocks, so why not just buy a diversified portfolio of stocks, earn the normal return which is very satisfactory, and spend my extra time doing something I like? There are inefficient markets out there. Occasionally we hear about someone going to a yard sale (a market) and buying a Rembrant for a $1 from an unsuspecting owner. Most publicly held company's, because they are small, seldom traded, and closely held, have almost no one following their progress. These markets are likely to be inefficient, but because there are tens of thousands of these companies, the cost of analyzing which are over, or undervalued, would probably outweigh the benefits. Steven M. Foulks, CPA, CFP, PhD <http://www-instruct.nmu.edu/business/sfoulks/> Northern Michigan University <http://www.nmu.edu/home.shtml> - -
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