This is big business brother, which means it needs a lot of fresh meat. And don`t expect them to understand what they`re doing. The difference between pro trader and average "customer investor" is dramatical. If You are pro, it means You`ve been through tons of educational garbage. From this perspective whole biz looks funny, doesn`t ? But from this point whole world seems to be this way...
THE MARKET'S LEVEL OF EFFICIENCY IS DEPENDENT ON THE PROFICIENCY OF THE PARTICIPANT WITHIN THE MARKET The dynamics of the market (for this example, market means all markets -- the global set of all smaller markets) are such that opportunities exist for a participant to make money. As the participant's level of knowledge increases, the market becomes less efficient to that participant. This knowledge can consist of market dynamics knowledge or inside knowledge that is not shared by the mass of other participant's who have yet to acquire the knowledge. MARKET'S TREND Markets move in such a fashion as to constantly cycle between overbought and oversold levels on many timeframes at once. The result is a chaotic mess -- but one that makes opportunities available to proficient participants. MARKET'S ARE NOT RANDOM Markets move from the emotions of the participants. Chaos does not equate to randomness. AS THE PARTICIPANT'S LEVEL OF INFLUENCE WITHIN A MARKET GROWS LARGER, THE MARKET GROWS MORE EFFICIENT As the level of funds being pushed around by a participant within the market approaches a higher ratio to the total worth of the market itself, that participant will find that the liquidity of the market is such that the participant will find it extremely hard to increase the worth of the portfolio. Look at Peter Lynch and the crash of 1987 and see what happens when you try trading the market when you basically ARE the market. I want you all to study those 4 things until it sinks in your head.
are you guys still posting to this thread? well i didn't miss a lot over the last couple of days, just want to say one or two things. first, if it is obvious to all how a newbie economist/wannabe trader can be so pigheaded, then you haven't seen anything, how about a tenured professor with lots of publications in those pamphlets they call finance journals? impossible to have a rational conversation... economists seem to think that science is a piss contest where he/she that pushes and hard-sells their argument more than anybody else is the best economist. They are so afraid of losing, of looking bad, you will never hear anyone of them "i was wrong, what i'm doing wrong, how can i do things better" but it is exactly that flaw that brings their own demise. The ltcm guys thought they couldn't be wrong. With more than 40 billions at risk in the markets what they were doing? playing golf, on vacation, whatever, but not thinking: "i may be wrong, how can the market screw me, what can i do to survive if that happens" second, there is a thread somewhere else on this board called epistemological epics or something like that, and i agree that as someone wrote, that the methodology, the way of thinking is the true "holy grail", this proves to me that a lot of people hanging here are smarter than any inflated academic. There are no hard and soft sciences. There is only science period. If economists had any clue what is "science" what is "knowledge" if they at least followed Popper, as good scientists do we wouldn't be discussing market efficiency. And finally there is a neverending supply of evidence that the "efficient market theory" is crap, i just came across the article below today. EMT cannot be true because if most people believed it's true, then markets are not efficient. The article also makes clear why the EMT is successful in academia. Not because is scientifically proper, it is because EMT covers MBA mutual fund managers asses when their clients lose money and because CEOs don't have the whole population looking at their financial statements. Of course, university professors are rewarded for their "intellectual" efforts: company board positions, endowment contributions, new buildings etc etc. The article is my next post, it's from today's financial times.
Investment is an increasingly theoretical discipline. And much of the theory, in my view, tends to distort markets rather than make them genuinely efficient. How pleasant, then, to come across a splendidly robust assault on the academics from Frederick Sheehan, a director of John Hancock Financial Services in Boston. Writing in a personal capacity in Marc Faber's The Gloom, Boom and Doom Report, Sheehan offers the following thesis. Investment talent is akin to an artistic quality, given only to a small minority of innately contrarian folk. There is too little of it about to cope with money management's expansion into a mass production industry. At the same time only a limited number of under-financed ideas goes begging in the modern world. So when 8,000 mutual fund and 5,000 hedge fund managers spot one it is enough to kill the opportunity. The academics, with their mathematical models, have come to the industry's rescue by turning investing into a commodity. Modern portfolio theory and the efficient market hypothesis are the twin brand names under which it is marketed to the masses. Yet Sheehan believes, as do I, that they contributed to the stock market bubble and bust. Modern portfolio theory encourages investors to focus on tightly constructed and exactly defined asset classes. This downgrades the analysis of corporate performance. It also discourages people from asking whether stocks are cheap or expensive, preferring a sanitised world of efficient frontiers and calculated risk levels, in which no security is a rip-off or bargain. Complex academic gobbledigook is then used to justify a set of simplistic injunctions about asset allocation such as "stocks for the long run" or "buy the dips". Then comes bubble trouble. As for the efficient market hypothesis, it leads directly to index tracking and closet indexing. These have the huge advantage of permitting economies of scale in money management, with as much benefit as in the selling of shampoo of cars. Active management is confined to stocks that fall in and out of the indices, distorting the market as they do so. Once again, companies do not matter. The implicit assumption about stock valuation is that what is, is right. More help, in fact, for bubbles, more fibre-optic gear in the junkyard. This is all wonderful for the industry. As long as everybody continues to create efficient frontiers that lose the same amount of money for investors, most people keep their jobs. And the gobbledigook ensures that plan sponsors and consultants cover their legal rear-ends. I would not go so far as to say that all financial theory is devoid of merit. But Sheehan inhabits the real world and demolishes a great deal of what he describes as academic mental doodling. It makes for a superb read.
Hey I'll jump in here for some action. Let me ask you something. Have you read Taleb? You know the black swan problem. Well by definition a theory has to be able to be proven wrong right? And If I can find one black swan in your theory then your theory is not correct. Now take X amount of leverage times the black swan you encounter and you will blowup. This is a mathematical certainty. Now a few words on LTCM. The edge they had over the public was not in the trades they put on but the way they were able to finance them. They used reverse repo agreements at no cost to finance over 1 trillion dollars in notional value, not actual value, of various derivatives. Most banks have to put up at least 5% on repo agreement. Thats 50 billion dollars right there. They got these sweet financing deels everywhere. Why? Well there was a vested interest in giving it to them. One was every bank on the street wanted the order flow information. Two, the commisions were still nice even though they were at a huge discount. I believe their actual returns from trading were somewhere in the area of .05% a year before leverage. I think its been pointed out also that the trades they put on were simple relative value convergence spreads. Everyone on wall street was doing these. The difference again was in the way LTCM fiananced them and the leverage they used on them. Funny how LTCM blew up on these trades but all the other big banks and trading firms are still standing. I wonder why. Also a lot of the trades LTCM put on were total crap shoots. They did a lot of short equity volatility. Over a billion dollars worth. That is insane. They had no hedge on that so pure naked exposure there. They also began speculating on stocks and junk debt. They lost billions on this stuff. Lets ignore all this for a moment and stick to the mathematical arbitrage trades. The fact of the matter is their bet was wrong. Anyone can make the claim that they had to get out of their trades early and if they just had enough capital they could have weathered it out. Ever heard of the saying the markets can remain irrational longer then you can remain solvent? If we use your rationality, that given enough time they would have come out ahead then why can't everyone use that excuse. Hell given enough time most good companies bounce back right, most sports teams, most businesses, most marriages, the weather, traffic, you name it, any pattern in nature, even evolution. As mark twain once said, in the long run we are all dead. Well in the long run we are all right. A 6 year old child can make predictions and be even right in the long run. A broken clock is right twice a day right? So if I am out on the street screaming the wrong time. Eventually, given enough time, I will be right at least twice. The problem is I don't see the skill in that. I don't see your edge. Now as far as credit spreads go in the fixed income market, everyone knows that they always come back to some normal level. The trick is being able to time it, not in the prediction that it will eventually happen. So your arguements are flawed on almost every single level. But here is the kicker. If you read Taleb he discusses in detail how are society is full of people who make money every day on flawed theories due to random luck yet call it skill. But given enough time, every man that has made his living on luck and false theories eventually gets to meet his black swan. And you know what he says when he comes face to face with that black swan. He tells everyone that what happened to him was a once in a thousand year event. Something that could have not been predicted. But then he will go on to say that if he had been able to wait it out or if he had more capital, given enough time, he would have been right. Anyone have a watch? What time is it?
You raise some very good points, vladiator, perhaps I (and others) are expecting too much from economics. Is Economics a Hard Science or Just a Science that is Hard? Hard Science = Accurate Causal Models I suppose I evaluate the scientific merits/basis of economics, or any field, in terms of its ability to create causal models of great predictive accuracy. Thus, I wholeheartedly agree with you that a science should be much more than just descriptive. The entire notion of a scientific experiment is defined by the ability to accurately hypothesize the outcome of some experimental treatment of a system. If the theory cannot predict the outcome of the experiment, the theory is rejected. In this way, true science is extrapolative -- letting one predict outcomes in new or fabricated scenarios. I'm Just a Cranky Engineer with High Expectations And I suppose that my engineering background helps raise the high bar that I set for economics. To me, theory is only useful and true to the extent that it lets me design something that does exactly what I want and expect it to do. To the extent that the discipline of economics can lead to accurate decisions (whether in interest rate policy or the trades made by LTCM) is the extent that it qualifies as a true hard science. For this reason, I find economics lacking, although I am now learning that I have made extremely unreasonable demands on the field. My Excessive Expectations of Economics: I admit that I, and others, probably judge economics too harshly. One problem is that people have such high expectations of economics because it has such a substantive impact on quality of life. Nobody gets mad at meteorologists when they fail to predict next year's weather (OK, maybe farmers get a little pissed). Nobody expects weather predictions to be accurate more than a few days into the future. In contrast, everyone gets mad when inaccuracies in next year's economic predictions drive interest rate decisions that turn out poorly. The problem is that, like meteorology, economics must cope with predicting the behavior of a massive, globally distributed nonlinear system. This severely limits the predictive horizon of economics. Lyapunov Exponent of the Economy is High and Increasing: At some level economists are trying to do their jobs under far worse conditions than those suffered by meteorologists. All paranoid anecdotes aside, the behavior of solar radiation, water vapor, and air masses don't change when they hear the weather forecast. In contrast, economists face the ugly reality that the very subjects of their predictions make deliberative changes in response to the predictions that economists seek to create. The sometimes atrocious investment decisions made with respect to entities that are "too big to fail" are a prime example of this (people take risks that they really should not on the basis that government will step in and forestall any problems). If economists could just step outside the system, and the system were incapable of seeing the predictions and theories of economists, the accuracy of economics would improve with time. As it is, economic knowledge filters into the system and induces ever more complex dynamics. While the equations of motion for the atmosphere remain constant regardless of the increases in meteorologists knowledge, the equations of motion for the markets and the economy grow ever more complex in response to participant's growing knowledge of economics. Regarding Boundedness: Absolute Boundedness is Decreasing: I do believe that the absolute boundedness of each agent in the modern economy is decreasing (maybe we agree on this?). We (individuals, businesses, and governments) all enjoy much greater visibility on to timely, relevant information than in the past. Moreover, software (whether it is Black-Scholes or ERP) augments our intellectual abilities to improve the consistency (= rationality) of our decisions. But does this mean that we are approaching the EMH-required nirvana state of having rational profit-maximizers? Relative Boundedness is Increasing: I think not because even as boundedness of the individuals is decreasing in an absolute sense, the overall complexity of the economy is increasing far faster. To extend the chess metaphor: the size of the board is increasing, the number of pieces on the board is going up, the pieces are learning new moves, the topology of the board is become more convoluted, etc. (BTW, this litany of on going changes to the rules of the metaphorical markets=chess is the reason that I don't much care for the chess metaphor for trading/economics -- chess is a closed world, the markets are not). Although the economic equivalent of Big Blue is letting us examine ever greater numbers of future moves and countermoves (and we have smarter algorithms for evaluating board configurations), the growth of the combinatoric complexity of economic systems is rising faster than our ability to predict it. In my opinion the look-ahead depth is actually decreasing as companies and individuals adopt sophisticated methodologies that accelerate cycle times. Boundedness is Unavoidable: The point is that a market of a million participants is ALWAYS smarter than any one participant. Compared to the markets, the individuals will always be pathetically bounded-rational. Indeed, relative bounded rationality worsens in the face of a denser, more interconnected global economy. Ultimately, I believe that a theory of economics that assumes purely rational participants (not bounded rational ones) is probably nearly useless. That EMH is NOT totally useless is because it does provide a sound theoretical basis for the tendency toward efficiency and an explanation for why the markets are as efficient as they usually are. In Search of a Better Theory The Real Issue: What is the Distribution/Dynamics of Inefficiencies It seems that we can all admit that the markets have at least some inefficiencies in them -- we now only seem to be arguing over the number, size, and transience of the microinefficiencies (and whether some threshold number/magnitude of microefficiencies are sufficient to invalidate EMH). IMO, Perhaps the biggest deficiency of EMH is that it is a first-order theory -- predicting the central tendency (the first-order moment) of the markets to converge towards price efficiency. What I, and other traders, want is a second-order theory that predicts the dispersion of dynamics in the market. (BTW, options traders, who would like to understand the second-order dynamics of the second moment of prices would seek a third-order model of pricing :eek: ). An improved, second-order version of EMH would consider that the boundedness of participants has a cross-sectional distribution and undergoes long-term changes. Perhaps some merger of EMH and complex adaptive systems would help predict the presence of heavy tails, pricing bubbles, and the quantum foam of a inefficiencies that real markets populated by real people are subject to. Until such a theory appear, funds like LTCM should not base their decisions on a theory that could not predict the potential for the market to be wrong for as long as it was (assuming, of course, that is was the market that was wrong, and not LTCM that was wrong). Markets Become LESS Efficient if Everyone Believes in EMH? Here's a real mind blower. If everyone believed in EMH, nobody would look for inefficiencies in the market (all us traders would pack it up and get "real" jobs). Inefficiencies would grow in the markets as long-term structural changes in the economy inevitably change the true valuation of companies WRT the prior valuation models (only nobody would notice because under EMH there is no point in looking). The proverbial sidewalk would become littered with $100 bills that nobody is looking for because everyone believes that they do not exist. I find it deliciously amusing that EMH only works to the extent that some participants disbelieve the theory and continue searching for inefficiencies anyway. This paradox that an equilibrium state of efficiency requires a disequilibrium belief in inefficiency is just the sort of second-order effect that a better economic theory would contain. Of course, part of me hopes that nobody discovers that theory. Please Believe in EMH: I agree with what daniel_m said back on page 3 of this thread. I secretly hope everyone becomes an EMH adherent because it leaves more opportunity for us nonbelievers. Until economics creates a better theory that shows me the error of my ways, I'll be Traden4Alpha
'chess is a closed world, the markets are not' ~Alpha~ So utterly simple and yet this is precisely the reason why so many seemingly savy players (not newbies who havent a clue) bust out; they neglect to truly embrace just how organic she is...
Take your feel good philosophy elsewhere. If you have some scientific reason to show the market is efficient or not efficient, post it. However, this Zen crap that you post under 5 handles is getting really old.
ApeCoil, What is so 'zen' like or 'feel good' about stating the obvious? This is NOT philosophy -- I am no Karl Popper... She is organic and those who do not accept this simple truth will eventually get pounced on. She is not a static or an inanimate piece of matter Aphie and I don't need to be a scientist or economist to know this. I have the best kind of truth Aphie -- Existential Truth... Truth that is imbedded into the very core of my being, truth that has been crammed down my throat whether i wanted it to be or not, truth that only one who has played the game day in and day out everyday for the last 5 years can have, truth that comes after repeated swift kicks in the teeth and lessons you have not even dreamt about yet... That is the truth she has given me and it sure as f&ck didn't come from a book, professor, or elite trader... If this is too 'zen like' for you then all I can offer you is a dick stuffed between two slices of bread you fuckin &%$#! Organic = Zen-like & feel good? -------> Perhaps... Aphie = newbie, arrogant & ignorant putz who is about to get his lunch eaten? ----> most definitely... WAR, SICKNESS, and PISS-POOR TRADING, From all my schitzo ass aliases Commisso, Jcom, Publias, GordonGekko, FPC, Super Ego, etc...