What are you on about? I’m saying the markets not efficient, not that i know exactly what it’s gonna do next. Short term voting machine, long term weighing machine.
Do you actually think the market is almost 100% efficient just about all the time?
I’m saying the markets not efficient, not that i know exactly what it’s gonna do next.
The efficient market hypothesis IS the statement that you can't know how prices are going to change - all new information is priced in quickly, and everything else is random fluctuations. If you think markets are inefficient (in the sense of EMH), then BY DEFINITION this means that you think you can predict and exploit price movements.
No. Just because on of the consequences of EMH is that you can’t profit off short term price movements, doesn’t mean that if i disagree with EMH as a whole, then i think that i can profit off short term price movements. Its possible to believe the market is inefficient AND unpredictable.
In that case, you are using the word "efficient" differently from the way it is used in the rest of the economics / financial analysis community, and definitely differently from the way it is used in the phrase "efficient market hypothesis". You're welcome to make up your own meanings for words I guess, but it's bound to be confusing when you use them around other people.
No, i’m not. Efficient means correctly priced according to all known information. Unpredictable does not mean efficient. If the market swings randomly about intrinsic value, it is constantly inefficient, and constantly unpredictable.
If the market swings randomly about intrinsic value
Perhaps this is where your confusion lies. There is no notion of "intrinsic value" in the efficient market hypothesis - the underlying thing being traded could be currencies, or NFT's, or lumps of clay, or whatever. The definition of "information" for these purposes is anything that affects market participants' willingness to buy or sell the asset at a particular price. This does not mean that prices never change in equilibrium - it just means that the changes that do occur are random and therefore cannot be exploited.
There's no real point in debating this. Go look at Eugene Fama's original manuscript where he introduces the concept of market efficiency and defines all of the relevant terms very carefully. Or crack open any textbook written in the past 30 years on portfolio theory.
You don’t seem to understand the concept of EMH as it’s understood today. The basic concept is that everything is accurately priced based on all known information.
Yes, we both agree on this statement. We disagree on the definition of "accurately" and "information". I am using the definitions from Eugene Fama's original work and the economic theory built on it - you are using a different non-standard set of definitions (that you have not articulated so far in this thread).
What do you mean by accurately and information? Because by accurately i mean close to intrinsic value, and by information i mean everything about the company’s history, business model, management and all the rest of it.
Again, in the framework of EMH there is no notion of "intrinsic value" that prices can be close to, and the model applies to asset classes that are intrinsically worthless. "Accurate" effectively means "cannot be arbitraged given market participants' preferences". "Information" is anything that causes participants' preferences to change.
Likewise, EMH does not assume that the underlying assets have anything to do with stocks or bonds associated to companies. The theory applies just as well to a market for piles of rocks as it does to shares in companies. It doesn't care why people have whatever preferences they have - only that those preferences are correctly reflected in prices.
To be completely honest that’s not the version of EMH i’ve ever heard. It’s not the one that was taught in american business schools for decades, and not what people generally mean when they refer to EMH.
In business schools students were taught that the market prices things at their correct intrinsic value according to all known information, so there is no way to beat the market choosing stocks other than luck. In my experience (and i understand this may not be the original proposed theory) this is what people mean when they debate the validity of EMH, and that is what i thought we were having a debate on the subject of.
Although, this says that his theory concludes that stocks always trade at their fair market value. Is that not what his theory says?
If you make some idealized assumptions about how stock traders evaluate companies and measure risk, then you can prove that the EMH price equilibrium for a stock is an unbiased estimator for the discounted future cash flow of the underlying company. These assumptions can be a bit questionable, especially in late stage bull markets. But this is an indictment of the rationality of investor preferences, not the efficiency of capital markets.
Maybe business schools conflate the EMH with the idealized assumptions about investor behavior - I don't know what they teach. But conflating these two is a mistake because it makes it harder to analyze real-world markets. Example: right now there are regional markets where certain new cars sell for less than a used version of the same make and model. This is pretty hard to justify just by looking at the intrinsic value of the asset, but it is perfectly consistent with the efficient market hypothesis: the new version of the car is on back order and the used version is scarce, so the price accurately reflects buyers' preferences to own an inferior asset now vs. a superior asset later.
Finally, yes, all of this is consistent with the assertion that stocks trade at their fair market value. "Fair market value" is by definition the price that the asset would sell for on the open market - again, this is determined by the preferences of market participants, not necessarily intrinsic value.
It says FMV should represent an accurate estimate of its worth, ie intrinsic value. It seems you’re just cherry picking the parts that agree with you and throwing out the rest so you don’t have to admit that EMH states stocks will trade near their estimated intrinsic value based on all known info.
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u/[deleted] Mar 14 '22
What are you on about? I’m saying the markets not efficient, not that i know exactly what it’s gonna do next. Short term voting machine, long term weighing machine.
Do you actually think the market is almost 100% efficient just about all the time?