EMH

["Devine, James" <jdevine@xxxxxxx>]

[was: RE: [PEN-L] Marxist Fianancial Advice]
 
I wrote:
>>BTW, the stock market is basically unpredictable _even though_ it
>>doesn't fit the "efficient markets" hypothesis.

Doug writes:
>>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? 
 
No, since I meant only the "strong form." 
 
>Would you argue that stock
>prices don't adjust almost instantaneously to fresh news? 
 
yes, though a lot of the "news" is about what other stock-speculators are doing (or fake news). Thus, the news can tell one to go with the herd, joining a bubble or a panic. 
 
>Would you
>argue that there isn't a strong element of randomness in prices? 
 
No. Didn't I say something about "the stock market is basically unpredictable" above?
 
>If
>you say the market is basically unpredictable, then you're
>subscribing to at least part of the EMH.

Yes: but see Steve Keen's discussion in his DEBUNKING ECONOMICS. 

>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 SM is predictable in the sense that pen-l is 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.

right. I do think, however, that Warren Buffett trades on expensive-to-get information. Insiders trade on nonpublic information (and it pays off until they get caught).

>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?"

I think the problem with these models is that they don't treat "what other speculators are doing" as part of the information set that speculators use. But I am not an expert on this subject. 

jd