Re: Marxist Fianancial Advice

[Doug Henwood <dhenwood@xxxxxxxxx>]

Devine, James wrote:

> BTW, the stock market is basically unpredictable _even though_ it
> doesn't fit the "efficient markets" hypothesis.

Again, I must turn into a pedant and ask just what you mean by that.
There are several forms of the EMH. Quoting myself from Wall Street,
characterizing Eugene Fama's review:

> Fama distinguished among three varieties of the EMH: the weak,
> semi-strong, and strong forms. The weak form asserts that the past
> course of security prices says nothing about their future
> meanderings. The semi-strong form asserts that security prices
> adjust almost instantaneously to significant news (profits
> announcements, dividend changes, etc.). And the strong form asserts
> that there is no such thing as a hidden cadre of "smart money"
> investors who enjoy privileged access to information that isn't
> reflected in public market prices.

This isn't entirely nonsense, is it? Would you argue that stock
prices don't adjust almost instantaneously to fresh news? Would you
argue that there isn't a strong element of randomness in prices? If
you say the market is basically unpredictable, then you're
subscribing to at least part of the EMH.

The anomalies that have been identified over the years - that low P/E
stocks outperform high P/E ones, for example - imply that stocks are,
at least to some degree, predictable. The same with Shiller's work on
overreaction, which implies that speculators who bet against extremes
of mob psychology (which is essentially the strategy of both Keynes
and Soros) are part of a smart money cadre that aren't trading on the
basis of nonpublic information, but on an unpopular analysis.

You could say that the market efficiently reflets the often
nonsensical consensus of investors, which is something EMH types
wouldn't agree with. Even some dissidents have a problem with
irrationality. The first time I met Joseph Stiglitz was late in the
dot.com mania. I was very curious to hear his analysis of that
lunacy. But his info theory still holds that investors are rational,
just not all equally informed. So he wondered aloud, "Why do people
buy those stocks?"

Doug