RE: re : securities analysis
Anecdotally (speaking as a fund manager) it 'feels' like the January effect is happening in Q4 as investors try and front run the January performance. David -Original Message- From: [EMAIL PROTECTED] [mailto:[EMAIL PROTECTED]] On Behalf Of Bryan Caplan Sent: 05 April 2002 20:34 To: [EMAIL PROTECTED] Subject: Re: re : securities analysis William Dickens wrote: However, as I recall, the increase in expected returns that one gets by following such a strategy are measured in basis points, not percentage points as some advocates of this approach would suggest. So Bill, are you willing to stick your neck out regarding the January effect? Thaler says average ROR in January is 3.5%, versus an average of .5% for all other months. Is this another case of basis points being exagerated into percentage points? -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] Smerdyakov suddenly raised his eyes and smiled. 'Why I smile you must understand, if you are a clever man,' he seemed to say. Fyodor Dostoyevsky, *The Brothers Karamozov*
Re: re : securities analysis
But the real question is whether there were any clustering in the attributes of the minority who consistently beat the market. If there is a strong clustering of attributes (they ate the same brand of corn flakes for many many years or went to the same school or followed the principles of the same Guru of investing or whatever ...) obviously then there is some causal variable that may explain the phenomenon and it would not be scientific to dismiss this clustering by taking the argument that majority under performs the market anyway. There is strong evidence against clustering. Clustering would imply that there should be a fairly strong correlation between who outperforms the market in one year and who outperforms the market in the next. A study done a few years ago (NBER working paper - - I don't recall the authors) showed that there was a statistically significant, but vanishingly small, correlation in the performance of publicly traded funds from one year to the next. So you can increase your expected return a tiny bit above the average for all mutual funds by picking a fund that performed well in the previous year, but from what I remember it wasn't enough of a gain in expected performance to overcome the under-performance due to over-management [*whew*]. So then what should we make of the fact that several people who follow a particular strategy have all done well? Nothing at all. Suppose that I profess to the world that the thing to do today is to own gold and drug stocks. Suppose that I happen to get lucky and those two assets do particularly well over the next five years. Would anyone be surprised if dozens of people from the golden-drugs school also did well? In the example cited above one would need to look deeper. Have all these people done well picking different stocks using the same principles or does the fact that they ascribe to the same principles mean that they have all picked mostly the same stocks and therefore had highly correlated returns? If the latter then there is no more of an insult to efficient market theory than if one person had done very well for the same length of time. And in a market with lots of participants that will happen frequently. All that aside, there is evidence that value investing works and that is an anomaly. However, as I recall, the increase in expected returns that one gets by following such a strategy are measured in basis points, not percentage points as some advocates of this approach would suggest. One other thing. I very much liked Alex's thoughtful commentary on this. As he noted, there are lots of anomalies that can mean that stocks are badly mispriced, but that doesn't necessarily mean that there are guaranteed excess returns out there. This was the point of Summers' old noise trading model. You can have market equilibrium with irrational traders dominating the market, but the additional risk that their behavior induces in the market exactly offsets the increase in expected return that is created by the mispricing that they cause. This possibility was made all too clear to me when I took a $20,000 short position in Amazon.com - - a year too early. I haven't met anyone who will argue that Amazon wasn't over priced at that time, and if I hadn't been forced to abandon the position or face bankruptcy I would have made money. However, I couldn't afford the margin calls and ended up losing a lot of money on the deal. Insult was added to injury when a year after I was forced to abandon my position I had to sit at a dinner table listening to someone brag about how much money he had just made shorting Amazon.com, and about how stupid participants in the stock market obviously are. When I asked him how he had decided when to take his short position he cited an argument with another person over market efficiency as the precipitating incident - - in other words dumb luck. - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens
Re: re : securities analysis
This possibility was made all too clear to me when I took a $20,000 short position in Amazon.com - - a year too early. William T. Dickens But those who bought long-term put options (LEAPs) on Amazon could lose no more than than their financial investment, and the put options could be held or others bought until the downturn, with no margin calls. Fred Foldvary = [EMAIL PROTECTED] __ Do You Yahoo!? Yahoo! Tax Center - online filing with TurboTax http://taxes.yahoo.com/
Re: re : securities analysis
William Dickens wrote: However, as I recall, the increase in expected returns that one gets by following such a strategy are measured in basis points, not percentage points as some advocates of this approach would suggest. So Bill, are you willing to stick your neck out regarding the January effect? Thaler says average ROR in January is 3.5%, versus an average of .5% for all other months. Is this another case of basis points being exagerated into percentage points? -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] Smerdyakov suddenly raised his eyes and smiled. 'Why I smile you must understand, if you are a clever man,' he seemed to say. Fyodor Dostoyevsky, *The Brothers Karamozov*
Re: re : securities analysis
William Dickens wrote: This possibility was made all too clear to me when I took a $20,000 short position in Amazon.com - - a year too early. Why didn't you take a series of smaller short positions instead? You could have held a $1000 short position for twenty times as long, no? -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] Smerdyakov suddenly raised his eyes and smiled. 'Why I smile you must understand, if you are a clever man,' he seemed to say. Fyodor Dostoyevsky, *The Brothers Karamozov*
Re: re : securities analysis
But those who bought long-term put options (LEAPs) on Amazon could lose no more than than their financial investment, and the put options could be held or others bought until the downturn, with no margin calls. The Longest term option that was availale wouldn't have gotten me far enough to have made money and the premium was _huge_. - - Bill
Re: re : securities analysis
So Bill, are you willing to stick your neck out regarding the January effect? Thaler says average ROR in January is 3.5%, versus an average of .5% for all other months. Is this another case of basis points being exagerated into percentage points? So if you invest in stocks in January and bonds the rest of the year and the bonds earn 80% of the average annual return of stocks you get ~10.5% return vs. 9.3% from stocks vs 7.2 from bonds. If most of the volatility in stocks is in January as well you don't save much on risk premium. Not hard to imagine that the tax cost of getting in and out of stocks every year could dominate an extra 1.2% return. That plus I thought I remembered that Thaler's January effect has been more subdued since he wrote his article. Thaler advises a fund and I haven't heard that it is head and shoulders above other funds. - - Bill William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens
Re: Securities analysis
On Thu, Apr 04, 2002 at 11:16:54AM +0530, Koushik S wrote: Those who believe that the jury is still out on efficient markets hypothesis Efficient as compared to what? To a utopia you dream of? Or to the kind of government intervention we can see happens? As a practising value investor, I see many many instances of ridiculous valuations of companies (over and under valuation) all the times which can be turned into avenues of profit. Great. Why aren't you a billionnaire yet? BTW, those who will turn their better information into profit ARE part of the market. That actually everybody knows as much about companies and no one has an information edge ? In a free market, the way prices vary depend on the information that is being used. If you refrain from using your information, there will be discrepancy between the price and what it would be. However, by using your information and turning it into an avenue of profit, you will also affect the price in such a way that the avenue of profit will be lost and your information will not be worth anything anymore. You will need to constantly feed the market with new accurate information so as to continue making a profit. All in all, the approximated fact that no one has an edge in information is a postcondition of a free market, not a precondition of it. Similarly for the approximated equation between price and amortized marginal cost (that, e.g. Marx took for granted), and many other such equations. Yours freely, [ François-René ÐVB Rideau | ReflectionCybernethics | http://fare.tunes.org ] [ TUNES project for a Free Reflective Computing System | http://tunes.org ] In its weak form, Utilitarianism sums up as a requirement of observational consistency and behavioral relevance for ethical rules. -- Faré
Re: Securities analysis
At 11:16 AM 4/4/2002 +0530, you wrote: Hence it is very difficult for me to understand how people can believe Efficient Markets Hypothesis especially when its assumptions are so flawed ( rational people, no information asymmetry !). I am never able to understand why there is so still so much heat generated to this day. I have a counter point. Can somebody first prove that the assumptions behind efficient markets hypothesis are true ? That today's man is no longer driven by greed and fear and is rational (at least when it comes to investing !!) ? That actually everybody knows as much about companies and no one has an information edge ? If this cant be proved how would a theory built on these foundations be true ? Not everyone in an efficient market need be rational or informed -- just enough to spot and arbitrage transitory mispricing -- a point I made in my last post. There has actually been experimental evidence that a budget constraint is sufficient to generate rational pricing in a market with irrational participants. Unfortunately, I don't recall the citation. Also, few actually believe in strong form market efficiency where even inside information is priced in an unbiased manner (although rational expectations could induce unbiased expectations about hidden inside information!). Aside from that, what information asymmetries are you talking about? Again, not everyone in the market needs to be equally informed to obtain rational equilibrium prices. Now I will be so controversial as to invoke Milton Friedman's instrumentalist methodology, which asserts that the realism of assumptions is of secondary importance compared with the predictive power of the theory. In other words, the proof is in the empirical pudding. And when the scientific method is applied, the jury is out, as I asserted in my last post. Finally, I must express much dismay at the willingness of list members to assert pervasive irrationality -- presumably implying that the (neoclassical) economics paradigm, founded on the assumption of rational choice is not an appropriate way of viewing the world. After all, this listserve is named after a delightful book which applies the economic approach to anything and everything! To me, what defines an economist -- armchair or otherwise -- is the willingness to apply the economist's way of thinking to all kinds of empirical problems and puzzles and hopefully be able to tell a plausible story with refutable and testible implications. __ - Original Message - From: Kevin Sachs [EMAIL PROTECTED] To: [EMAIL PROTECTED] Sent: Thursday, April 04, 2002 1:32 AM Subject: Re: Securities analysis At 11:24 AM 4/2/2002 -0800, you wrote: Information does not instantly get propagated to all participants in a market, so there are profit opportunities for those who study market patterns. It is not necessary that all market participants be informed for a capital market to be informationally efficient. What is necessary is that there be some informed traders that will spot transitory mispricing and that those informed traders be able to act on the information quickly (i.e., that transaction costs be low). The jury is still out on the scientific evidence supportive of or contradictory to efficient market theory. It is noteworthy though, that evidence of market efficiency anomolies seldom demonstrates the existence of trading rules that yield genuine abnormal profits. Kevin D. Sachs, Ph.D. Assistant Professor phone: 513.556.7198 University of Cincinnati fax: 513.556.4891 Department of Accounting/IS email: [EMAIL PROTECTED] 302 Lindner Hall, P.O.Box 210211 Cincinnati, OH 45221-0211 Kevin D. Sachs, Ph.D. Assistant Professor phone: 513.556.7198 University of Cincinnatifax: 513.556.4891 Department of Accounting/IS email: [EMAIL PROTECTED] 302 Lindner Hall, P.O.Box 210211 Cincinnati, OH 45221-0211
Re: Securities analysis
There are actually two issues 1) Is the market efficient? and 2) Can someone, using public information, systematically earn higher returns than those on a suitably risk-adjusted market basket? These issues are related but they are not the same. If the market is efficient the answer to the second question is certainly no. If the market is inefficient, however, it does not follow that the answer (in practice) to the second question is yes. Some types of inefficiencies such as two different prices for the same good can and will be eliminated through profitable arbitrage but when arbitrage is not possible eliminating market inefficiencies is risky. Even if you knew that X was a bubble, for example, you can short the stock but you then run the risk of the bubble flying much higher before it bursts. Essentially, the failure of Long Term Capital Management was precisely this problem - right theory but they ran out of capital before they could profit from the elimination of the inefficiency. In addition, we must also face the fact that if the market is inefficient due to investor irrationality it is very likely that we (yes, you and I) and our agents are also irrational in some respects. Thus if we care about issue 2 then pointing to bubbles of the past or arguing that people are irrational or greedy etc. misses the point. The real test of issue 2 is, Do portfolio managers/stock picking newsletters or other active strategies outperform a passive index strategy? And the answer to this question is a resounding NO. Taken as a group and taking into account transaction costs the active strategies actually *underperform* the indexing strategy. I don't know anyone who disputes this finding - note that whether this is because the market is efficient or portfolio managers are just as irrational as everyone else is open to question but not relevant to question 2. At any given time, of course, some portfolio managers beat the market but, again as a group, no more than you would expect by chance. Of course there are a few outliers, Warren Buffet and Templeton, for example. It's quite reasonable to mark these down as a chance but my own view is that there are a few geniuses out there and that Buffet is to stock picking what Michael Jordan was to basketball. I no more think that I could duplicate what Buffet does than I could duplicate what Michael Jordan does even if Jordan wrote a book explaining how he plays the game. (Indeed, careful observers of Buffet find that how his investing decisions cannot be explained soley by reference to his rules of investing.) Alex -- Dr. Alexander Tabarrok Vice President and Director of Research The Independent Institute 100 Swan Way Oakland, CA, 94621-1428 Tel. 510-632-1366, FAX: 510-568-6040 Email: [EMAIL PROTECTED]
re : securities analysis
Title: Blank The specific article ( Super Investors of Graham and Dodd'sville) Imentioned gives the case study of five or six of Benjamin Graham's discipleswho have outperformed the market over a significantly long period of time.While Buffett has hogged the limelight but there are many others, not aswell known, who come from the same intellectual school of investing and havestatistically outperformed the market over long period of time. To use yourown analogy, if six Micheal Jordans came to NBA from the same high schooland had similar averages clearly somebody needs to take notice and study whysuch a disproportionate people have performed so stupendously. I am notsure if one can dismiss such evidence as a freak event.If you take the entire market then many players attain sub-indiceperformance. These I am sure will be the majority. However there are a few(such as Buffett) who gain substantially at the expense of the majority.If you measure this situation and ask the question does the majority underthe perform the index of just about match the index, the answer will be anresounding and obvious yes.But the real question is whether there were any clustering in theattributes of the minority who consistently beat the market. If there is astrong clustering of attributes (they ate the same brand of corn flakes formany many years or went to the same school or followed the principles ofthe same Guru of investing or whatever ...) obviously then there is somecausal variable that may explain the phenomenon and it would not bescientific to dismiss this clustering by taking the argument that majorityunder performs the market anyway.The real question is whether the hypothesis should be built on theunderperformance of the majority or on the outperformance of the minority(if it is strongly clustered)It is in this context that I would like you to look at the article whichtakes the hypothesis of the strongly clustered minority to find out ifmarkets are efficient. I strongly suggest that those interested in thisfield should at least read the article.RegardsKoushik- Original Message -From: "Alex Tabarrok" [EMAIL PROTECTED]To: [EMAIL PROTECTED]Sent: Thursday, April 04, 2002 10:42 PMSubject: Re: Securities analysis There are actually two issues 1) Is the market efficient? and 2) Can someone, using public information, systematically earn higher returns than those on a suitably risk-adjusted market basket? These issues are related but they are not the same. If the market is efficient the answer to the second question is certainly no. If the market is inefficient, however, it does not follow that the answer (in practice) to the second question is yes. Some types of inefficiencies such as two different prices for the same good can and will be eliminated through profitable arbitrage but when arbitrage is not possible eliminating market inefficiencies is risky. Even if you knew that X was a bubble, for example, you can short the stock but you then run the risk of the bubble flying much higher before it bursts. Essentially, the failure of Long Term Capital Management was precisely this problem - right theory but they ran out of capital before they could profit from the elimination of the inefficiency. In addition, we must also face the fact that if the market is inefficient due to investor irrationality it is very likely that we (yes, you and I) and our agents are also irrational in some respects. Thus if we care about issue 2 then pointing to bubbles of the past or arguing that people are irrational or greedy etc. misses the point. The real test of issue 2 is, Do portfolio managers/stock picking newsletters or other active strategies outperform a passive index strategy? And the answer to this question is a resounding NO. Taken as a group and taking into account transaction costs the active strategies actually *underperform* the indexing strategy. I don't know anyone who disputes this finding - note that whether this is because the market is efficient or portfolio managers are just as irrational as everyone else is open to question but not relevant to question 2. At any given time, of course, some portfolio managers beat the market but, again as a group, no more than you would expect by chance. Of course there are a few outliers, Warren Buffet and Templeton, for example. It's quite reasonable to mark these down as a chance but my own view is that there are a few geniuses out there and that Buffet is to stock picking what Michael Jordan was to basketball. I no more think that I could duplicate what Buffet does than I could duplicate what Michael Jordan does even if Jordan wrote a book explaining how he plays the game. (Indeed, careful observers of Buffet find that how his investing decisions cannot be explained soley by reference to his rules of investing.) Alex -- Dr. Alexander Tabarrok Vice President and Director of Research The I
RE: Securities analysis
The (stock) market might, at least as a matter of initial heuristics, be assumed to be efficient. But only insofar as _risk_ is concerned. One can imagine, that is, that the price of a share of GM not only has in mind all the known data about GM -- including what to make of all the highly-indefinite data which the Enron saga reminds us may not be entirely transparent -- but also provides the correct assessment of the likelihood of all those things which matter in pricing a stock, that is, what the stock (or, if you insist on being Buffett, the company) will be worth tomorrow (which contemplates what it will be worth the day after, ad inf.). But you can do that only if you've never heard of uncertainty (Knight, of course, and for the exotics among us, Shackle and Lachmann). And especially never, if you've heard of entrepreneurs -- not just the alert entrepreneurs of Kirzner, but the _creative_ entrepreneurs who do all that creative destruction, who think of possibilities which do not _exist_ until they are thought of. And those entrepreneurs are not just in business, of course. Some of them do post-graduate work in, among other places, the mountain caves of Afghanistan. Michael Michael E. Etchison Texas Wholesale Power Report MLE Consulting www.mleconsulting.com 1423 Jackson Road Kerrville, TX 78028 830) 895-4005
re : securities analysis
At 11:48 PM 4/4/2002 +0530, you wrote: The real question is whether the hypothesis should be built on the underperformance of the majority or on the outperformance of the minority (if it is strongly clustered) More specifically, the question is whether the overperformance of the minority could have been predicted based on information which was publicly available at the times they traded, since they were presumably not privy to inside information that wasn't also available to the rest of us. This question gets at the gist of market efficiency. Unfortunately, we don't understand the trading rules of these successful traders (and probably never will). Alternatively, we might ask whether these traders have discovered ways of reducing transaction costs that the rest of us haven't caught onto, allowing them to profit in ways other informed investors can't. Also, as I teach my students, market efficiency is an equilibrium concept. If someone is not there to take advantage of new information first, then efficient prices will never obtain. Are these successful traders the elusive information arbitrageurs that make markets efficient? I suspect not since, if I were one of them, I wouldn't want you to know! Finally, and probably most to the point, how are we measuring outperforming the market? This is a crucial issue in empirical studies of market efficiency. Since the profits of the traders we're discussing were reported in a case study, it's not clear that any rigor was used in measuring abnormal profit. If these investors specialized in portfolios whose risk characteristics were greater than those of the overall market, we expect them to earn a higher rate of return than that of a market portfolio. So, how carefully was this done. Even rigorous studies of market efficiency are sensitive to the problem of mis-specification of the assumed asset pricing model -- the model upon which abnormal profits are measured. In fact, given our current scientific technology, market efficiency cannot be empirically refuted since we cannot distinguish a genuine inefficiency from a mis-specified asset pricing model. Unfortunately, all empirical tests (except experiments) jointly test efficiency and the asset pricing model assumed. Kevin D. Sachs, Ph.D. Assistant Professorphone: 513.556.7198 University of Cincinnatifax: 513.556.4891 Department of Accounting/ISemail: [EMAIL PROTECTED] 302 Lindner Hall, P.O.Box 210211 Cincinnati, OH 45221-0211
Re: Securities analysis
At 11:24 AM 4/2/2002 -0800, you wrote: Information does not instantly get propagated to all participants in a market, so there are profit opportunities for those who study market patterns. It is not necessary that all market participants be informed for a capital market to be informationally efficient. What is necessary is that there be some informed traders that will spot transitory mispricing and that those informed traders be able to act on the information quickly (i.e., that transaction costs be low). The jury is still out on the scientific evidence supportive of or contradictory to efficient market theory. It is noteworthy though, that evidence of market efficiency anomolies seldom demonstrates the existence of trading rules that yield genuine abnormal profits. Kevin D. Sachs, Ph.D. Assistant Professor phone: 513.556.7198 University of Cincinnatifax: 513.556.4891 Department of Accounting/IS email: [EMAIL PROTECTED] 302 Lindner Hall, P.O.Box 210211 Cincinnati, OH 45221-0211
Re: Securities analysis
what's everyone's opinion here on fundamental vs. technical analysis? Dan Information does not instantly get propagated to all participants in a market, so there are profit opportunities for those who study market patterns. There may be changes in volume and price preceding a major trend. Investors Business Daily, for example, features articles on it. It is probably not complete nonsense, but for the non-professional investor, he best stick with Modern Portfolio Theory and not time the market. Fred Foldvary = [EMAIL PROTECTED] __ Do You Yahoo!? Yahoo! Tax Center - online filing with TurboTax http://http://taxes.yahoo.com/
Securities analysis
Okay, since others have broached the subject of market volatility, what's everyone's opinion here on fundamental vs. technical analysis? (Maybe vs. is the the wrong connective to use here. After all, they reflect different trading styles, no?) Cheers! Dan http://uweb.superlink.net/neptune/
Re: Securities analysis
I think Mark Twain summed it up for technical analysis when he said Monday is a bad day for speculation. The other bad days are Tuesday, Wednesday, Thursday, Friday, Satruday and Sunday. - Original Message - From: Technotranscendence [EMAIL PROTECTED] To: [EMAIL PROTECTED] Sent: Tuesday, April 02, 2002 8:34 AM Subject: Securities analysis Okay, since others have broached the subject of market volatility, what's everyone's opinion here on fundamental vs. technical analysis? (Maybe vs. is the the wrong connective to use here. After all, they reflect different trading styles, no?) Cheers! Dan http://uweb.superlink.net/neptune/
