Buffet,
The babble I was referring to was coming from you. Warren Buffet is an investor that buys businesses and actively participates in their management.
You and I and everyone else in this forum trade shares of companies when we participate in capital markets. You, me and Ed are not "investors" and no matter how many times we say it, it won't be true.
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Frankly, though, G-a-D-style investing works best when more people believe EMT (prompting several OID people to contemplate endowing EMT Chairs at b-schools around the country), so I'm not sure why I'm bothering.
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This is quite the paradox, since indexing works best when know-it-alls from Wharton and other top B-Schools become entrenched firmly in sell-side Wall Street brokerage research firms, brokerage houses, mutual funds and the like; working to make the market even more effecient.
So maybe indexers are the ones that should shut up and encourage everyone to do their "homework".
I am not sure how I contradict Bill Cara and will lightning strike if you acknowledge Fama and French or is it merely a fireable offense?
Frankly, the evidence that actively managed mutual funds are -EV is so overwhelming I can't believe anyone would argue otherwise.
Here is an interesting interview with Fama
Here are some gems that aren't really 3 factor related, but about EMT and active managment.
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The analyst believes he knows something, or infers something, that other analysts don't see. He sees an evolution taking place or he believes this company is doing better than people think, and that's why he gets paid millions of dollars on Wall Street to pick stocks. What's wrong with this thesis?
Well, not everybody can have that talent. In fact, as far as I can tell, not many do. The system is designed to make that very difficult. By that, I mean that under US accounting [and regulatory] systems, if you reveal anything, you have to reveal it to everybody.
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The efficient market theory and the random walk theory aren't the same thing. The efficient market theory is much more powerful than the random walk theory, which merely postulates that the future price movements can't be predicted from past price movements alone. One extreme version of the efficient market theory says, not only is the market continually adjusting all prices to reflect new information but, for whatever reason, the expected returns—the returns investors require to hold stocks—are constant through time. [For example, we know that, since the '20s, returns on the New York Stock Exchange common stocks have averaged a little over 10% per year.] I don't believe that. Economically, there is no reason why the expected return on the stock market has to be the same through time. It could be higher in bad times if people become more risk-averse; it could be lower in good times when people become less risk-averse.
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One thing I did a couple of years back was take all the funds that survived from the beginning of the Morningstar tapes, which is 1976. Now, funds that survive that long will have survivor bias built into the test, because only the successful funds survive. So I split the sample period in half and took the 20 biggest winners of the first 10 years, or the first half of the period, and I asked how did they do in the second half of the period. Well, in the second half of the period, half of them were up and half of them were down.
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For the most part, I think it is luck. The evidence is pretty strong that active management doesn't really do better than passive management.
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