Mushindo,

How many ants and insects are they on this planet ?

Answer: Trillions upon trillions !

From your logic, insects are more successful than humans.

newson: “period 1968-1982 casts doubt on whether the share market is likely to benefit, medium term.”

I see that period as being slightly different from today because of the Vietnam war. The guv was spending most of the new money that the Feds created and that translated into cpi inflation and not asset inflation. Of course, the guv is spending a lot today to stimulate the economy, so that raises the likelihood of cpi increases. Since then, Fed pumping tends to increase asset values and lead to bubbles and not so much cpi increases.

Fed Up said:

How many ants and insects are they on this planet ?

Answer: Trillions upon trillions !

From your logic, insects are more successful than humans.

Response: Quite. May I take it even further? In terms of biomass, as observed by the late Steve Gould , on average all life is bacteria. And it s never been materially different – for at least the last 3.5 bn years.

I appreciate the “this is funny” take on the whole EMH debate which is as perfectly academic as it is completely void of relevance to real market participants. Basically: “Who cares?” Further, different markets have various degrees of efficiency. I would say that everything else being equal, the more efficient a market is at disseminating broad knowledge then the less likely a bubble is to occur and vice versa. But that’s like saying: unless there is a storm when the tide comes in the beach gets smaller, and vice versa. How useful is that?

Yet even when everybody knows that the Fed is artificially lowering interest rates to “stimulate the economy” which leads to bubbles everywhere, the band wagon gets bigger and louder. Focusing on how efficient that is only makes sense to someone who doesn’t have any skin in the game and likes to look down from tower windows. “Gee, look at all those brilliant fellows climbing aboard; how efficient they are!”

Ned gets close to it: “What the individual businessman needs in order to avoid losses is knowledge about the date of the turning point at a time when other businessmen still believe that the crash is farther away than is really the case.”

Some of us sold our real estate and stock holdings at the peak of the market and stopped buying more because we believed they were ready to fall in price. Obviously others had to buy what we were selling because they thought that these assets were still increasing in value and were still a good deal. Even if everybody had the same knowledge within any particular market, we all assess the risks and opportunity costs very differently. Thus we can, nay must, each come to opposite conclusions as to what side of a trade to be on. Or there would be no market.

If markets were really super efficient then there would be no trades to speak of. Basically, you don’t have to “beat the market” just the guy on the other side of your deal. This is also why it so often pays to be a contrarian. The rest is window dressing and entertainment.

The references to religious beliefs are getting boring and I don’t see where they have a place here.

to fundamentalist:
i think that once money is created ex-nihilo, then a bubble or distortion is inevitable. we just cannot know precisely where the bubble is, nor its size, nor the timing of its evolution.

i think that as much as the government would like the recent money-creation to return to financial assets, no bubble that has burst is ever revived in exactly the same sector as before. given the low price of commodities in real terms, and the very low gearing of the sector, plus appealing fundamentals, and given also the rich valuation (still) of financial assets in general, i’m still more convinced that this coming period will be a far nastier version of the 1970′s. where financial assets did poorly, and commodities did well.

vietnam yesterday, today iraq and afghanistan.

what are the odds of warren buffett’s risk-adjusted returns after many decades being merely attributable to luck?

i thought the emh denied the possibility of systematic, individual outperformance (on a risk/return adjusted basis), and not just that it was unlikely.

Bob Murphy,

You should refrain from speaking on the topic of biology and Dawkin’s until you become educated on the subjects. This reminds one of the ridiculous creationist posts you used to put on Lew’s site.

The god Dawkin’s is describing subsumes the god of Abraham. It just doesn’t subsume the god of Spinosa. So it wasn’t an attempt to disprove god in the generic ambiguous sense.

It’s quite easy to both logically disprove and empirically falsify certain conceptions of god. Dawkin’s has done so.

You are certainly open to redefining what the god of Abraham is so as to attempt to refute Dawkin’s point but he uses a particular definition so doing so would be equivocation.

Here, let me give it a shot. The god of Abraham is a mythical being. Therefore Dawkin’s argument is wrong because one cannot disprove the existence of myths this way. No more than he could disprove the existence of the myth of Santa Claus. Santa certainly exists as a mythical being.

Of course, Dawkin’s would laugh at this, just as he would laugh at your ridiculous argument.

Let’s stick to economics lest the site get bogged down in religion and pseudoscience.

to fundamentalist:
yeah, real estate had a boom in 1973-74, as did all the commodities. but those were the days before the democratization of credit, so the property bubble was infinitely smaller than today. to me, only agricultural property has the winning combination of low debt, and likelihood of rising earnings.

thirty-three years of pain – downtrend in real prices – for the foods, until 2007. in 1972 the breakout from the previous trading range ushered in very much higher prices. i am expecting similar behaviour in the next years.

http://www.futuresbuzz.com/wheatlt.html

yes, congress would face an angry farming sector, and would pass the anti-manna bill.

And block CO2 as well. Because CO2 is plant food, which means more of it gives you more plants, which reduces food prices.

Oh, wait…

Now we are getting somewhere.

Two intelligent questions.

>>that the emh excludes risk-free arbitrage – this seems illogical. surely the very act of arbitrage is itself a proof that risk-free profits are possible, even if they are evanescent. that these profits disappear as they are acted upon doesn’t make them less real.

In the real world pure arbitrage opportunities are few and far between.

The EMH lets options market makers capture profits even when arbitrage opportunities do not exist. And in a volatile, unlimited risk market. How is this possible? The market makers charge a bid-ask spread. The EMH models neutralize (imperfectly) the risk long enough for the market maker to set up a ‘lock’ or risk-free position. Note that if a retail investor or hedge fund uses the exact same strategy he or she will lock in the loss of the bid/ask spread. The game for market takers is very different from the game for market makers.

See the Charles Cottle book for a good description of this.

When options market makers make mistakes calibrating their models they go bust and the clearing firm liquidates their account. This happens on a daily basis. Bad market makers are driven out by good market makers.

>>what are the odds of warren buffett’s risk-adjusted returns after many decades being merely attributable to luck?

Buffett’s returns are based on 100% risk of invested capital (for his stock positions) and > 100% risk of invested capital for his insurance and re-insurance positions. So even if the mathematical odds were 0% that Buffett achieved his results by luck the EMH still holds.

A common misconception about the EMH is that it says that outperformance is impossible/unlikely etc. The EMH in all of its forms refers to risk-free outperformance. So if you tried to use Buffett-style investing in a risk-neutral world, like options market making, you would go bust. In a risk-seeking world, like long-term value investing or short-term speculative trading, the EMH is much more ambiguous.

newson wrote:

“i thought the emh posited that outperformance could only be associated with higher risk…”

The critical ambiguity here is the definition of “higher risk” which is arbitrary and in most real-life cases meaningless. Many textbooks use variance as a risk measure which works well most of the time, until it doesn’t. Fannie and Freddie were low variance stocks for many years. Fannie and Freddie were also low risk investments based on fundamental Graham and Dodd type analysis, which is why they were recommended by noted value managers such as David Dreman and purchased by the mutual funds he managed.

Unlike many ‘value’ investors, market makers in Fannie and Freddie options survived the turmoil. Over the years market makers added critical refinements to the EMH that take into account assymetrical risks. For example, the out-of-the-money puts in many options trade for higher prices than out-of-the-money calls, which should not happen in a pure EMH model like black scholes or the binomial model. These nuances allowed the market makers to adjust their positions and make two-sided markets during the onslaught.

>>to david janello:
>>when i had to study emh, variance was indeed used. but what you’re saying is that emh is not even able to be defined in a black-and-white fashion.

In the real world every trader needs to define his or her own black-and-white definition of the EMH and test it out with real money. So there are a lot of opinions on the best way to do EMH. Over time the best traders become successful traders and the not-so-good traders become former traders.

The things they teach in grad school are interesting in theory, but as Charles Cottle points out in his book Options : Perception and Deception,

‘The difference between theory and practice is the difference between profit and loss.’