If the efficient market hypothesis is true, then why do low P/E stocks perform...

lostmypassword
lostmypassword

If the efficient market hypothesis is true, then why do low P/E stocks perform better than the market indexes in the long term?

All urls found in this thread:
https://faculty.chicagobooth.edu/john.cochrane/teaching/35150_advanced_investments/Luck%20versus%20Skilll%20in%20the%20Cross%20Section%20of%20Mutual%20Fund%20Returns.pdf
http://www.multpl.com/shiller-pe/
Poker_Star
Poker_Star

@lostmypassword
If the efficient market hypothesis is true
It's not. See: Buffett.

Dreamworx
Dreamworx

It helps if you actually understand what EMH states, rather than making uninformed assumptions. EMH doesn't mean that the markets are always and instantaneous in a state of perfect and perpetual efficiency. Rather, it means that traded assets are priced efficiently based on public information over statistically significant periods of time. While anomalous prices can exist in a market, they are neither predictable in timing, direction, or magnitude. As a consequence, it is prohibitively difficult (if not impossible) to trade successfully based on these inefficiencies. Consequently, active trading, on a risk-adjusted basis, it pointless and ultimately sub-optimal due to costs.

Also, any time you're looking at historical data for low P/E stocks, you have massive survivor bias. For example, your chart shows 20-year performance results. What about all the low-P/E stocks that didn't survive 20 years? Or 10, or even one?

Lastly, EMH is an evolving concept. It is not a unifying theory of the markets. Even its original author has refined his theories since publishing the first description of EMH. That doesn't mean EMH isn't true. It simply means that to understand the markets you can't stop at EMH and pretend you know everything. While it would be nice if there were simple rules that governed the all world's financial markets, the system just doesn't work that way.

Raving_Cute
Raving_Cute

@lostmypassword

Economics isn't science.

Lunatick
Lunatick

@Dreamworx
Why not just admit there's no rational basis for the EMH?

Skullbone
Skullbone

@lostmypassword
Counterpoint to the EMH:
Since there is no guidebook which tells the market how a piece of public information should affect securities pricing, the market must make this judgme itself
Since the market is just people, price decisions rely on human analysis re: public information as it relates to value of a security
Since humans are falliable, even in groups, the markets analysis of public information re a security's price can be faulty, underpricing or overpricing a security
Therefore the EMH is false
QED

CouchChiller
CouchChiller

@Poker_Star
One guy did it by luck, so hypothesis rejected

Stupidasole
Stupidasole

@CouchChiller
by luck
Lel. I'd like to see some evidence of this claim.

Stark_Naked
Stark_Naked

@Dreamworx
I know what the EMH is.

Also, you moved the goalposts. You made up an argument that was never even made, and made a counter-argument against it. You assumed that someone thought that EMH mean that markets are always Pareto efficient - no one ever said that here.

Maybe instead of trying smart by parroting basic definitions on a Japanese comic board, you could actually spend some time studying the various effects which lead to long-term irrational pricing.

eGremlin
eGremlin

@Stupidasole
He fell for the survivor bias

happy_sad
happy_sad

@Dreamworx
You contradict yourself

markets correct to an efficient price over long periods of time
it is impossible to predict what will happen to anomalous prices

According to your theory, they will always correct to keep the market efficient. Therefore you only need to know if something is under or over valued to profit. Which is what Buffet has been saying for 60 years, like the other user pointed out

idontknow
idontknow

@eGremlin
hurrr nobody can [x]
what about this guy who did/still does
its just luck lol
So what would it actually take for you to accept you're wrong?

Garbage Can Lid
Garbage Can Lid

@happy_sad
According to your theory, they will always correct to keep the market efficient.
It's not my theory. It's the theory supported by the vast majority of leading economic researchers who have academic credentials vastly superior to you. But yes, the markets always correct to an efficient standpoint with a relatively short (I never said long) period of time IF the relevant information becomes public. EMH is only about public information.

Therefore you only need to know if something is under or over valued to profit.
If you could effectively spot the inefficiencies while they exist in a market, then of course you profit from them. The problem is, you can't and no one else can either. You can guess about them, but you're just as likely to be wrong as right. It's prohibitively difficult and expensive to accurately find market inefficiencies that can be exploited for enhanced returns. For most, it's simply not possible. For those with the resources and technology to try, the cost of doing so is greater than the marginal return generated by the exercise. Therefore, it's a losing proposition.

The markets are complex. Please avoid the temptation to characterize them in simplistic terms. It only makes you look ignorant.

@idontknow
So what would it actually take for you to accept you're wrong?
Compile the evidence and publish your findings in a peer-reviewed academic journal. That's what Fama did when he proved that it was all luck. He won a Nobel Prize for it. Maybe you can win one for proving him wrong.

I won't be holding my breath,

Lord_Tryzalot
Lord_Tryzalot

@Garbage Can Lid
Except it isnt impossible at all. This is the entire point of securities analysis: finding undervalued/overvalued stocks.

Thousands of people have been doing, succeeding, and showing us all their methods for decades now. And yet you say they all just got lucky? That seems very unlikely

Evilember
Evilember

@lostmypassword
Yeah but this strategy only works if you own like a thousand low PE stocks. (Good luck with the brokerage fees...)

If you just own one or two low PE stocks, they're more likely to just perform badly (unless you get lucky) because low PE stocks generally have something else fundamentally wrong with them like cash flow problems, debt etc.

ZeroReborn
ZeroReborn

@Dreamworx
Fama 's EMH has been BTFO literally so many times that the only reason why its still around is to grade and filter out people during economics exams.

Daily price changes of markets follow lognormal distributions with generally an extreme positive bias (or negative bias).

The trend of the stock or index is generally determined by insider trading amongst big institutions liek pension funds, hedge funds and banks.

Veeky Forums type investors (your so called """rational investor""" that EMH assumes) normally arrive late to the party, often when the stock market is already peaking at all time highs before the inevitable dip.

whereismyname
whereismyname

@Lord_Tryzalot
This is the entire point of securities analysis: finding undervalued/overvalued stocks.
The entire point of "securities analysis" is to convince suckers like you to trade, as frequently as possible. It's nice that you want to continue to make the industry profitable, but some of us are more interested in the growth of our own wealth.

yet you say they all just got lucky? That seems very unlikely
Again, not me. Eugene Fama. Professor at the University of Chicago, founder of his own family of passive index funds, and Nobel Laureate. You got a problem with the math, take it up with him.

https://faculty.chicagobooth.edu/john.cochrane/teaching/35150_advanced_investments/Luck%20versus%20Skilll%20in%20the%20Cross%20Section%20of%20Mutual%20Fund%20Returns.pdf

Until then, you're just in denial of accepted truth.

@ZeroReborn
The trend of the stock or index
And into the trash you go. There's no such thing, idiot.

farquit
farquit

@Garbage Can Lid
Nobel Prize

Given that Shiller shared the Nobel with Fama that year largely for behavioral economics work that pretty much argues against Fama's EMH, that is a stupid kind of appeal to authority.

Economics has never been particularly certain or scientific, and the EMH is one of those constructs, like homo economicus, that is elegant at the cost of ignoring much of reality. "You can't beat the market," you say, and then when it is pointed out that certain factors or industries have shown consistent outperformance over the long run, such as consumer staples, oil, value traits such as low P/E, EMH apologists move the goalposts to "risk-adjusted" returns (ignoring that most people in the real world would consider risk as "chance of permanent loss" rather than volatility) and "what if there is short-term underperformance," when all of that is irrelevant to the original point about verifiably consistent superior returns in the long run.

TreeEater
TreeEater

@farquit
Given that Shiller shared the Nobel with Fama that year largely for behavioral economics work that pretty much argues against Fama's EMH, that is a stupid kind of appeal to authority.
It's far more intellectually honest and logically sound than simply showing up in a thread, anonymously, and making claims about EMH one way or another. In any event, an appeal to authority really isn't suspect when the authority is an actual expert on the proposition being argued.

As for the rest of you post, I never said "you can't beat the market." Approximately 5-10% of those that try do indeed outperform indexing. Those are terrible odds, and it proves that it's a suboptimal strategy, but regardless it would be nice if you didn't put words in my mouth.

Finally, if you took the time to read the thread, you'd know that it was me (@Dreamworx
) who pointed out that EMH is an evolving concept, me who pointed out that EMH interacts with other market theories, and me that pointed out that even Fama himself has been revising the original formulation of the theory (specially related to factor-based analysis).

Lastly, your dismissal of risk-adjusted returns as a basis for academic analysis undermines whatever credibility your post might have had. To pretend that any serious inquiry into the markets would somehow ignore risk as a core component of returns is simply childish.

CodeBuns
CodeBuns

@whereismyname
This look like a normal distribution to you as EMH requires it to be, fuckhead?

@TreeEater
I really want you to put your entire life savings into an equity index fund right now.

Please do it.

Please.

For Veeky Forums

Sir_Gallonhead
Sir_Gallonhead

@CodeBuns
as EMH requires it to be
Please go learn what EMH is, and isn't. You sound like an idiot when you get triggered as a consequence of your own ignorance.

put your entire life savings into an equity index fund
A substantial portion of my assets are already in equity funds, which the remainder in other asset classes suitable for my goals and needs. While your entire net worth can be easily assembled from the cushions of your mom's couch, those of us with actual portfolios don't have the ability to play stupid games with our wealth, even for the lulz.

girlDog
girlDog

@Skullbone

And then your shiny value investor knight rides along and outperforms the market because he is infalliable?

SomethingNew
SomethingNew

@Sir_Gallonhead
You seem like an intelligent person. You got twitter, buddy? I want to follow you.

takes2long
takes2long

@SomethingNew
Dont be fooled. These index fags only sound reasonable because we're at the peak of an artificially inflated 8 year index bullrun.

They are so full of double speak they may as well be the Press Secretary..
markets have everything priced in
but not over short periods of time
but nobody could possibly identify those periods of inconsistency
"But look at all these people who have!"
they don't exist or got lucky
but if you invested in indexes in 2000, 8 years later you had only gained 1 or 2 percent
muh 2% dividend reinvestment
"anyways it's impossible to beat markets, goyim"
"But why do small cap value stocks beat markets consistently?"
uhh umm uhhh
"What about Ben Graham and the entire theory of value investing?"
"It's all a massive conspiracy aimed at stealing $10 trade fees"
It's sad really. Like listening to Alex Jones

Gigastrength
Gigastrength

@TreeEater
ignore risk

Who's putting words into mouths again? My point was that to the average long-term investor, the academic definition of volatility as risk does not apply because the "real" risk for a real life long-term investor is loss of purchasing power.

For example, oil stocks have displayed consistent long-term outperformance with greater volatility. If an investor chose between the S&P500 and oil stocks to lock money away 30, 40, 50 years ago without looking at it, do you think that investor cared that money put into oil equities fluctuated more than the S&P when he was left with more money in the end?

Now it is perfectly fine to note that this may not suit everyone, especially people closer to retirement who would prioritize preservation over growth of capital. However, it's simplistic dogmatism to deny that there are in fact fairly simple

I'm not even getting into the "anomalies" which in EMH land often means "things that contradict the hypothesis that are easily explained by common sense." See: low volatility, momentum.

Methshot
Methshot

@Gigastrength
*fairly simple factors that have been shown to outperform consistently

cum2soon
cum2soon

@TreeEater
@Gigastrength
here, on my computer now.

In any event, an appeal to authority really isn't suspect when the authority is an actual expert on the proposition being argued.

It's suspect, or at least pointless, to bring it up when another authority won the Nobel the exact same year for research that questions the EMH. I mean, CAPM got a Nobel as well, and Fama is one of those criticizing CAPM for useless for almost every real life application.

The value of index funds lies in the benefits of passivity and diversification, which are separate from EMH itself.

Playboyize
Playboyize

If EMH is true, then the problem that most people will run into with it is time.

If the market is overall always efficient on a long enough time line, but you only have so many years of life, then you have a dilemma with your personal finances.

AwesomeTucker
AwesomeTucker

@Playboyize
Time is the most important factor regardless of EMH. Pretty much everyone agrees that markets are efficient in the long run.

Time is only a problem if you invest too blindly during periods of massive overvaluation and have to wait too long for valuations to rebalance. This is the main problem I have with trusting too much in market efficiency. EMH is right in that markets are hard to beat, but prices do matter.

For example, the returns on Japanese stock from the peak since 1989 have been terrible because the overvaluation was so extreme in 1989. But surprisingly, Japanese equities since 1970 have had a 9-10% annual return just like the European and American markets. It's just that the returns on Japanese stock especially from 1980-1989 were so bubbly.

In the very long run, time is not the problem but the solution.

Methnerd
Methnerd

This is a good thread.

I wonder if the S&P500 truly reflect roughly fair value or over inflated prices.

CodeBuns
CodeBuns

@Gigastrength
@Methshot
@cum2soon
You typed a lot of words to say that adding risk can increase your rate of return. Yes, it can. And it can lower it too. Next time let's not backtest with an example that you already know has a certain outcome, kay?

If, for some reason, you think adding risk is somehow inconsistent with indexing, you're mistaken. Matching portfolio composition to the investor's goals, needs, and tolerances applies equally in indexing as any other strategy. There are no "one size fits all" indexing strategies. Even Vanguard's all-in-one funds have dozens of flavors and variants.

The value of index funds lies in the benefits of passivity and diversification, which are separate from EMH itself.
You left out tax efficiency and low fees, as well as ease of implementation, but we'll forgive you since you're not an advocate. As for the part of indexing that aligns with EMH, it would be the focus on long-term holding. Since indexers know the folly of chasing entry and exit points -- because EMH proves that its pointless -- we know to buy and hold.

@AwesomeTucker
prices do matter
Only with the benefit of hindsight, which, unfortunately, we never have.

TreeEater
TreeEater

@CodeBuns
I emphasized that the academic view of risk as volatility is irrelevant for real-life purposes. The purpose of the oil vs broad market example was to illustrate that to an investor whose goal is purely to maximize long-term return, the higher volatility of oil equities is irrelevant. I noted that investors do have other goals and life situations.

As for "backtesting," you might as well call any example of systemic outperformance backtesting then. Is it backtesting if I point out that investor would have outperformed with consumer staples, or small cap, or value? I believe Jeremy Siegel commented about outperformance of oil industry as tied to traditional value metrics that will persist and therefore make it likely that oil will continue to outperform in the long run (for example relatively lower price-book, lower price-earnings, higher dividends, etc.)

The problem is that the entire CAPM concept of risk as volatility, in terms of "adding risk can increase your returns," also does not hold. Why do low volatility stocks outperform on a "risk-adjusted" basis if you can only get higher returns from more risk? This is an "anomaly" only for people who think volatility is an adequate way to define risk when this is more of a result of economists choosing elegance of models over real-life applicability.

Only with the benefit of hindsight
See, this is where you ignore the actual drivers behind historical stock performance.

We all agree that the stock market is efficient in the long run, yes? But if you ask yourself why that is, it boils down to 1) as pieces of ownership in a company, the values track long-term business performance and 2) equity valuations normalize over time. For example, consumer staples outperform over the long run precisely because the core economics of consumer staples, the long-term business performance, are excellent, while in contrast airlines have been a terrible long-term investment because the economics of that industry are poor.

DeathDog
DeathDog

@TreeEater
This is an "anomaly" only for people who think volatility is an adequate way to define risk
I'm pretty sure you're the only one equating volatility and risk. No one here is disputing that time smooths over volatility quite effectively for the long term investor. The trick isn't adding volatility; it's adding alpha. Because no matter how much risk you add, there's simply no guarantee that you've adding incremental alpha to your portfolio.

you ignore the actual drivers behind historical stock performance
Actually you're the one that apparently doesn't know the long term market drivers. The real answer lies in the reasons why the markets are not a zero-sum game. Populations are growing, demand is rising, technology is advancing, and more and more people live in capitalist and quasi-capitalist economies. All of that (and more) is what drives the market's long-term growth.. Maybe with some speed-bumps along the way, but upwards nonetheless.

Do I know which companies are going to take advantage of these factors? No, and I don't care. Because I do know that efficient markets means that someone will do it. And I will own them. Because I own all of them.

FastChef
FastChef

@girlDog
No, my position is merely that by analyzing available information better than the rest of the market it is possible in principle to profit from its mistakes.

Fried_Sushi
Fried_Sushi

@Methnerd
Helicopter money comes from big organizations who can't afford to see Fiat fail. This happened last week in Japan. The indexes are overinflated but can't remain that way forever.

Harmless_Venom
Harmless_Venom

@DeathDog
I'm pretty sure you're the only one equating volatility and risk.

But that is exactly what you are doing if you talk about "risk-adjusted" return from academic studies and when you talk about "alpha," which is terminology from CAPM and portfolio theory that is connected to the concept of beta, or risk equating to volatility.

Populations are growing, demand is rising, technology is advancing, and more and more people live in capitalist and quasi-capitalist economies. All of that (and more) is what drives the market's long-term growth

For someone invoking traditional academic finance theory, I think you are the one grossly misunderstanding here.

Yes, technologies and populations in societies advance, and the stock market represents shares of ownership in the businesses that provide products and services in these societies. However, this does not mean the economics of these individual business sectors and industries are the same, and a societally important business is not the same as a good investment. See, again, airlines as the prototypical example of an industry that reshaped the modern world, provided millions of jobs, represented a triumph of technology, and yet turned out to be terrible long-term stock investments.

A stock derives its value in the theoretical sense from the residual profits, assets, and cash flows of the underlying business, and the underlying business of running airlines is awful. High fixed capital costs, high labor costs, high competition where money-losing rivals are often subsidized by governments, massive boom and bust cycles where the losses during a bust outweigh the cumulative profits of a boom.

On the other hand, tobacco companies have been very profitable long-term investments even as cigarettes have been in decline as a business for over half a century.

Looking at the stock market as a black box that grows with the magic of EMH, regardless of economics or valuation, is I feel too much of an oversimplification.

Sir_Gallonhead
Sir_Gallonhead

@FastChef
Ffs you dont even have to analyze it. There's a panic sell every 2 or 3 months. Volatility everywhere. I made 10% off the Brexit bounceback and I'm sure many others did much better

w8t4u
w8t4u

@Harmless_Venom
See, again, airlines as the prototypical example of an industry that reshaped the modern world, provided millions of jobs, represented a triumph of technology, and yet turned out to be terrible long-term stock investments.
Yeah, you really can't see the forest for the trees. Just using you own example against you, perhaps you can understand that the economic impetus of the airline industry doesn't have to manifest in the airline industry itself. Even if the people flying the planes didn't make a fortune, the technology has dramatically reshaped dozens of other sectors, such as shipping and tourism, not to mention allowing people and companies to more easily seek economic advantages that wouldn't be available without easy air transit.

Looking at the stock market as a black box that grows with the magic of EMH
EMH has very little, if anything, to do with rising markets. I don't anyone who argues that. You're either confused or setting up strawmen.

LuckyDusty
LuckyDusty

@w8t4u
economic impetus of the airline industry doesn't have to manifest in the airline industry itself.

I thought we were talking about stock ownership and drivers behind stock performance, so maybe you are the one missing the point here. The airline example was a contrast to the more relevant fact that certain other sectors like consumer staples, unlike airlines, have historically outperformed the broad market index because of their superior long-run business economics, and therefore one obvious way to outperform the market in the long run without much effort is to overweight consumer staples.

EMH has very little, if anything, to do with rising markets.
I was referring to the mindset. When people invoke EMH it often sounds like they are viewing the stock markets as a black box that exists to make them rich, without considering that the price you pay for an ownership share in those businesses is also an important factor. I know there are people who scream about bubbles and impending crashes that you may be motivated to counterbalance, but that is no reason to ignore that valuations impact long-run returns, which after all is a finding that is evident in academic studies as well as in the real world.

ZeroReborn
ZeroReborn

@LuckyDusty
I thought we were talking about stock ownership and drivers behind stock performance
No, we were talking about markets, not individual stocks. I thought was pretty clear from the context and the content of any one of my posts.

When people
I don't know who "people" are or why you're debating them. To be honest, I don't know anyone who thinks EMH is a driver of market value, so I'm going to stick with my assessment that you're either extremely confused or strawmanning.

Fuzzy_Logic
Fuzzy_Logic

@ZeroReborn
To be honest, I don't know anyone who thinks EMH is a driver of market value
I think he's referring to people who say:
since EMH is true, you can't beat the market over a long period

Spazyfool
Spazyfool

@ZeroReborn
No, we were talking about markets, not individual stocks.

The long-run returns of stock markets is driven by the aggregate performance of the underlying businesses and the valuation of those profits, so your distinction between an individual stock and markets is irrelevant to this particular point. Certain stocks comprising the stock market have had superior returns because they have had either 1) superior business performance or 2) better valuations, which are the two factors relevant to long-run performance. The market's value reflects 1) performance of the underlying businesses in aggregate, among which it is possible to identify certain ones that have better (tobacco) or worse (airlines) economics, and 2) valuation of these underlying businesses, which involves the factors relating to value, etc.

EMH is a driver of market value
Is it some kind of perverse joke to say I am strawmanning while strawmanning me? I said I was mentioning EMH in the context of an unquestioning mindset, such as using EMH to justify stock market investment no matter the cost, or to quibble about how consistently beating the market doesn't count if the money fluctuated more on its way to beating the market over the long run, as if that kind of volatility "risk" matters to long-term investors in real life who care only about having more money in the end.

lostmypassword
lostmypassword

@Fuzzy_Logic
I hope that not what he's saying, because I'm holding out hope that he's partially intelligent. Whether or not an individual investor can beat the market does indeed have EVERYTHING do to with EMH. However, EMH has essentially nothing to do with the inherent positive long-term bias of the markets (i.e., its tendency to rise over time). They're completely different topics.

@Spazyfool
among which it is possible to identify certain ones that have better (tobacco) or worse (airlines) economics
Not without the benefit of hindsight, which you don't have at the time you make any investment decision. I'm already stated this.

You don't know the future price trend of the tobacco or airline industries, and if you pretend that you do, you're an idiot.

valuation of these underlying businesses, which involves the factors relating to value, etc
Putting aside your obvious tautology ("valuation relates to value" ... kek) you left out things that have little to do with the individual business itself, such as growing populations, expanding markets, greater efficiencies in production, transportation, and marketing, even changing social mores in capitalist societies. All of these can drive up the value of a company -- and therefore a market -- independent of any value consideration specific to the company itself.

This is why indexers don;t really bet on individual companies. It's pretty much impossible to guess who's going to get it right in the future, and who's going to screw up. Indeed, many of tomorrow's most profitable companies may not even exist today. Rather than play the lottery by trying to pick individual winning stocks, we bet on the market as a whole. Why? Because in a capitalist society someone will take advantage of those growing populations, expanding markets, and greater efficiencies. And we will own them. Because we own them all.

TreeEater
TreeEater

@lostmypassword
Whether or not an individual investor can beat the market does indeed have EVERYTHING do to with EMH.
Indeed. In fact I feel that EMH strictly precludes market index investing as a viable strategy, since like with every other security the index should be fairly valued such that its as likely to go down as up. In a sense the long term positive bias in indexes is evidence against the EMH

SniperGod
SniperGod

@TreeEater
Indeed. In fact I feel that EMH strictly precludes market index investing as a viable strategy, since like with every other security the index should be fairly valued such that its as likely to go down as up. In a sense the long term positive bias in indexes is evidence against the EMH
I've already explained this earlier in the thread in summary fashion, but once you learn why the markets aren't a zero-sum game in th elong run, you'll understand why you're 100% wrong.

GoogleCat
GoogleCat

@lostmypassword
Not without the benefit of hindsight

Are you serious? You do not need hindsight to see whether certain businesses are good or bad. Tobacco will not stop being addictive. Airlines will not stop needing to buy expensive planes.

You don't know the future price trend of the tobacco or airline industries, and if you pretend that you do, you're an idiot.
If I could actually make a bet with you about this, I would.

I am almost certain, about as much as you are about the positive upward bias of markets over time, that tobacco equities will greatly outperform airlines say over the next 30 years because of the nature of the businesses involved.

This does not require any "hindsight" to see, just as a small business owner who has tried to run a business in more than one field can figure out which business made money easier.

Putting aside your obvious tautology
I worded it poorly, but I was referring of course to the various factors that research has shown are predictive of outperformance, such as low P/E mentioned in the OP.

All of these can drive up the value of a company -- and therefore a market -- independent of any value consideration specific to the company itself.
Most of the "factors" you mention are not particularly distinct from the normal competitive pressures that consistently outperforming businesses have adapted to throughout history, like consumer staples. The only real argument you're making here relates to capturing the stock performance of new disruptive industries, which is one of the best rationales for an index approach.

One note: "growing populations" is actually not a prerequisite for positive returns. If populations stagnate, as is likely in the future, valuations would simply adjust downward for a no-growth scenario to eventually make possible similar returns as in the past.

Supergrass
Supergrass

@GoogleCat
Just to add, what is really much harder to identify without hindsight is valuation, whether a business is under- or over-valued at the moment.

I presume this is what you actually meant rather than that nonsense about not being able to tell whether a business is good or bad at making money, since it is clearly possible, and even common, to pay too much for a good business, or for the stock of a mediocre business to become so cheap that investment returns become high, when you look in hindsight.

Sir_Gallonhead
Sir_Gallonhead

@GoogleCat
Tobacco will not stop being addictive.
But it might be outlawed on public policy grounds.
Airlines will not stop needing to buy expensive planes.
Unless they get federal subsidies to prevent a second wave of bankruptcies.

You don't know the future, and you can't reliably predict the forward-looking prices of any stocks. If you could, you wouldn't be here' you'd be the highest paid analyst on Wall Street and/or the richest man alive. You are neither of these things. You are simply roleplaying a stock-picking wizard on an anime message board.

Protip: No one buys it.

If I could actually make a bet with you about this, I would.
Hell kid, don't make a bet with me. Make a bet with the market. The options exchange opens in 6 hours and 30 minutes.

I await timestamped photographic evidence of your trade confirmation.

Soft_member
Soft_member

@lostmypassword
If the efficient market hypothesis is true
you owe me money for how shitty this bait is.

Poker_Star
Poker_Star

@lostmypassword
p/e isn't always that low and investors have to decide whether to get into the market immediately and risk seeing it drop further or wait and risk missing an opportunity.

http://www.multpl.com/shiller-pe/

@Lunatick
@Stark_Naked
@happy_sad
@ZeroReborn
The market is efficient to a degree, of course it will never be 100% efficient because this is the real world. I like the way @Dreamworx
described it...

It simply means that to understand the markets you can't stop at EMH and pretend you know everything.

If an inefficiency doesn't stop growing it will reach an extreme and become visible to market actors at which point they will react. If they are better at identifying inefficiencies, for example a speculative bubble or an undervalued company, they will react quicker than others, obtain more capital and compose a greater segment of the market improving overall efficiency.

Gigastrength
Gigastrength

@Sir_Gallonhead
But it might be outlawed on public policy grounds.
Yeah, that would be a small but possible risk. Funnily enough, however, the cumulative negative public policy against cigarettes thus far is one factor in tobacco's continued outperformance because these actions resulted in persistently lower valuations.

Unless they get federal subsidies to prevent a second wave of bankruptcies.
Uh, you know that I mentioned subsidization of money-losers as one of the factors that actually makes the economics for every airline worse, right? Somehow this does not give me confidence about your understanding of business economics.

To clarify, you can observe a comparable situation today in how the profits of every steel company in the world have gone down the toilet the past few years because the Chinese government is subsidizing the output of unprofitable zombie steel companies.

options exchange
I see you have abandoned your attempt to argue that airlines are somehow not a worse business than tobacco, given your sudden shift into the timestamped photography avenue of internet debates.

If I'm going to do something as inane as buying stock because someone said to on an anime imageboard, I apologize but I'm going to have to ask you to go first. if you post timestamped photographic evidence of an airline stock purchase, maybe I'll pick up some RAI or something to humor you.

TreeEater
TreeEater

@SniperGod
That should already be priced in though, per the EMH

Sharpcharm
Sharpcharm

@Raving_Cute
This.

Economics at its best is a philosophy, and at its worst a political ideology. What's certain is that it's not based on reality.

RumChicken
RumChicken

@SniperGod
Also since you can't beat the market which index do you go for? The US market, UK market, China market, Japan market, German market, or someone else's? Does it make any difference? It shouldn't if each is fairly valued per the EMH. Yet there is quite severe variance in the performance of these markets, like the Japanese who've been in the red for like 20 years.

StonedTime
StonedTime

@Sir_Gallonhead
Hello iHaz, i see you no longer post with your tripcode since you started noticing how quickly you got filtered.
No worries,your pedantic and verbose writing style gives it away.
Allow me to educate you once again

Oh and posting .edu links isn't exactly an argument per itself. I know plenty of college professors believing in psychic powers. Does it mean i just have to post their .edu and it's all good?

ZeroReborn
ZeroReborn

@StonedTime
the difference here being that one team (dunn) got the performance of 18% p.a. whilst anyone at all culd have had access to the 12% of the s&p 500 via ETFs

AwesomeTucker
AwesomeTucker

@ZeroReborn
We're, if I'm not mistaken, discussing the possibility of beating the market, not the ease with which it may be done.

GoogleCat
GoogleCat

@AwesomeTucker
The whole thread is b8 from the start. iHaz usually disappears when the S&P is down, comes back to gloat when is up
@whereismyname
Ah yes, argumentum ad auctoritatem. A nobel prize said that so it must be true.
Well, it worked out so well for Robert Merton and LTCM, didn't it?
Also economics/econometrics aren't exactly hard sciences (since the theory influences the underlying), so i'm not exactly sure what you are trying to accomplish here, except maybe indulging your autism

Illusionz
Illusionz

@RumChicken
Also since you can't beat the market which index do you go for? The US market, UK market, China market, Japan market, German market, or someone else's?
Yes. All of them. In proportion to your risk tolerances, goals, and currency considerations.

In general, the more asset classes and markets you own, the better your indexing strategy will work. However, that increases the difficulty of maintain appropriate portfolio allocations, and therefore only people with substantial investable assets are going to diversify with that degree of granularity. For others, board market index funds are sufficient.

@AwesomeTucker
We're, if I'm not mistaken, discussing the possibility of beating the market, not the ease with which it may be done.
No, we're definitely talking about the difficulty of doing it, as well as the probability (not the possibility).

Is it possible to beat the markets: yes, of course.

Is is probable or an effective strategy: fuck no.

Sir_Gallonhead
Sir_Gallonhead

@Illusionz
Is is probable or an effective strategy: fuck no.
Hey look, my super cool moving averages just btfo the index. Boy, that was surely a coincidence

Or it is maybe that big funds are having a hard time beating the index because of their size/inability to get in and out as they please/investors redeeming as soon as they see a small drawdown? Or maybe because many fund managers just use heavy tail risk strategies that trade frquently thus generating a lot of commissions for themselves, while yielding smooth equity curves before blowing up?
Maybe we shoud take a look at individual futures traders performances, what do you say?

takes2long
takes2long

@GoogleCat
The whole thread is b8 from the start. iHaz usually disappears when the S&P is down, comes back to gloat when is up
Is iHaz Jewish? He seems to skulk away into the shadows once named. And his argumentation style seems similar too.

kizzmybutt
kizzmybutt

@takes2long
Is iHaz Jewish?
He is just autistic. His favourite game is pretending to be a successful attorney, yet he spends the majority of his days between here and /pol/ making cringy threads about supporting Bush and Iraq War. Got banned more than once as well because of his ability to reply even 20 times a day in the same thread if he saw something that fiddled his autism

Don't get me wrong, Veeky Forums is autism central but iHaz has the nasty habit of showing up in trading threads and shitting everything up. Trading threads are usually shit as well, but sometimes you get someone who knows his stuff and is genuinely here to give good advice.

Make no mistakes, he is probably looking for some other EMH obscure 50 yo economics paper he didn't even bother to read to post here, as we speak

TurtleCat
TurtleCat

@takes2long
@kizzmybutt
JIDF detected
pol was right

5mileys
5mileys

@TurtleCat
No, you're just retarded

Firespawn
Firespawn

EMH is a hypothesis not a universal truth. Hench the word hypothesis. Anyway, there's nothing wrong with losing to market returns when they are good.

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