I DESERVE RESPECT

[DcifrThs]

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personally i don't believe markets are efficient

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Barron, I seem to remember someone refering to an argument you had in a thread with another BFI 2p2er regarding this, but I can't find the specific location. Can you find the link? I'd like to browse over it.

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uhhh, i sux at teh search.

it would be less work if i just summarized it briefly:

efficiency imo is a grey scale between not so efficient and very close to totally efficient.

very cloe to totally efficient markets require (generally- i.e. i don't remember exactly what is required but the following are the two main things) all info priced in and all players rational and profit maximizing.

the more standardized the available info and the higher the dollar weighted percent of the players in a market that are rational profit maximizing entities, the more efficient the market.

thus equities are more efficient than currencies (since currencies have many non profit maximizing dollar weighted entities. i.e. central banks and people who allocate to int'l equities without hedging the returns. those currency exposures aren't taken for profit maximizing purposes) etc.

overall, i think equities get the closest to efficient and currencies and some bond markets get the furthest (UK IL bond market, US LT treasuries mkt etc.)...currencies are the definite furthest though imo.

that was basically my point whenever i had that argument (i don't remember the argument lol...i just am pretty sure what iw ould have said)

sorry i sux at teh search [img]/images/graemlins/frown.gif[/img]
and sorry shoe for the highjack

Barron

[kimchi]

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overall, i think equities get the closest to efficient and currencies and some bond markets get the furthest (UK IL bond market, US LT treasuries mkt etc.)...currencies are the definite furthest though imo.


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That's interesting, because when I was designing a trend-following trading system a while back, i discovered that individual equities trend the least efficiently, followed by equity indexes, commodities, and currencies which trend the best. i didn't study bonds as they weren't suitable for my system.

I assume this ties into their efficiency.

[DcifrThs]

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overall, i think equities get the closest to efficient and currencies and some bond markets get the furthest (UK IL bond market, US LT treasuries mkt etc.)...currencies are the definite furthest though imo.


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That's interesting, because when I was designing a trend-following trading system a while back, i discovered that individual equities trend the least efficiently, followed by equity indexes, commodities, and currencies which trend the best. i didn't study bonds as they weren't suitable for my system.

I assume this ties into their efficiency.

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how did you determine this (i.e. what test did you run?)

can i run that test in MATlab?

also, what time period were you looking at? over how long? (i.e. t and T.... t=1day T=1 year)

also, note that my listing was based on my understanding and thus was simply an educated guess.

thanks,
Barron

[Phone Booth]

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very cloe to totally efficient markets require (generally- i.e. i don't remember exactly what is required but the following are the two main things) all info priced in and all players rational and profit maximizing.

the more standardized the available info and the higher the dollar weighted percent of the players in a market that are rational profit maximizing entities, the more efficient the market.

thus equities are more efficient than currencies (since currencies have many non profit maximizing dollar weighted entities. i.e. central banks and people who allocate to int'l equities without hedging the returns. those currency exposures aren't taken for profit maximizing purposes) etc.

overall, i think equities get the closest to efficient and currencies and some bond markets get the furthest (UK IL bond market, US LT treasuries mkt etc.)...currencies are the definite furthest though imo.


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I couldn't disagree more. The key isn't so much in dollar-weighted (in trading volume) profit-maximizing entities, but rather in dollar-weighted value-maximizing entities. For instance, if all profit-maximizing entities are momentum-chasers in search of greater fools, this will result in extremely inefficient prices. One important fact is that equity markets have by far the least amount of relevant public information - it's relatively easy to model home owners with 750 FICO paying back their mortgages, but much less difficult to model anyone of Microsoft's competitors or some random graduate students coming up with products that threaten Windows or Office. Since it's extremely difficult to model the true value of a business, best profit-maximizers in the sector are often not value-driven and rather sentiment-driven. They very often trade on market technicals, by which I don't necessarily just mean charting but all residual information that affects the price of a security, but not its value.

I also don't get this notion that markets driven by need are necessarily inefficient (more specifically, the notion is that speculators are more successfully value-driven than natural actors). People allocating to international equity without hedging are not making currency markets any more inefficient, unless you feel that their decision making is flawed, in which case their "irrationality" has an effect on the corresponding equity market as well.

Besides, most of the trading in currencies, whether directly or indirectly, is done by banks and large corporations with international exposure. To me, it seems that these are the exact entities whose views reflect the fundamentals. Unlike stock markets, where most of the trading is certainly not done by those whose views reflect the fundamentals (insiders) but rather by those who are far removed from businesses and are either 1) trained to trade on technicals or 2) momentum-driven asset-allocators (almost all large funds, individual investors).

[DcifrThs]

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very cloe to totally efficient markets require (generally- i.e. i don't remember exactly what is required but the following are the two main things) all info priced in and all players rational and profit maximizing.

the more standardized the available info and the higher the dollar weighted percent of the players in a market that are rational profit maximizing entities, the more efficient the market.

thus equities are more efficient than currencies (since currencies have many non profit maximizing dollar weighted entities. i.e. central banks and people who allocate to int'l equities without hedging the returns. those currency exposures aren't taken for profit maximizing purposes) etc.

overall, i think equities get the closest to efficient and currencies and some bond markets get the furthest (UK IL bond market, US LT treasuries mkt etc.)...currencies are the definite furthest though imo.


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I couldn't disagree more. The key isn't so much in dollar-weighted (in trading volume) profit-maximizing entities, but rather in dollar-weighted value-maximizing entities. For instance, if all profit-maximizing entities are momentum-chasers in search of greater fools, this will result in extremely inefficient prices. One important fact is that equity markets have by far the least amount of relevant public information - it's relatively easy to model home owners with 750 FICO paying back their mortgages, but much less difficult to model anyone of Microsoft's competitors or some random graduate students coming up with products that threaten Windows or Office. Since it's extremely difficult to model the true value of a business, best profit-maximizers in the sector are often not value-driven and rather sentiment-driven. They very often trade on market technicals, by which I don't necessarily just mean charting but all residual information that affects the price of a security, but not its value.

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i see what you're trying to say here but it is literally just semantics in terms of profit vs. value maximizing.

profit maximizing = the individual placing the order is concerned with his/her/its bottom line (in terms of that specific order/market). however they trade, be it value, technicals or whatever, their goal is to maximize their bottom line profits.

your argument makes a very good point though in that since equity markets have such a large dollar weighted percentage of rational profit maximizing entities doing VERY DIFFERENT types of trading, the inefficiency is quite likely higher. if they were all doing the same type of trading, i'd venture to guess the market would be less inefficient.

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I also don't get this notion that markets driven by need are necessarily inefficient (more specifically, the notion is that speculators are more successfully value-driven than natural actors). People allocating to international equity without hedging are not making currency markets any more inefficient, unless you feel that their decision making is flawed, in which case their "irrationality" has an effect on the corresponding equity market as well.

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if you are placing a currency bet simply to gain on the underlying equity without factoring in the currency (what virtually all foreign investors in equity markets do), you are not concerned with your profit as it relates to the currency market. you are just using the currecny market as a tool.

much like central banks (that hold pegs) do. look at every single peg ever. they all break down eventually. this is a HUUUUGE inefficiency. central banks that peg don't care about their profit/fundamentals/technicals whatever. they simply are willing to spend as much as necessary to hold down/up the value of their currency relative to another.

that is a very clear source of market inefficiency.

more precisely, the view that an individual cannot affect the rationality of the currency market without affecting the rationality of the equity market (in the case of a domestic investor allocating to int'l equity markets w/o hedging) is wrong. their decision in the equity market has unintended and irrational consequences in teh currency markets.

look at it this way. is it rational to add volatility to your portfolio without adding any return?? developed world currencies don't yield any return over the long run and add a ton of volatility. rational actors in the currency market would hedge some amount (less than 100% given transaction costs) in order to reduce that volatility. the fact that probably over 95% of dollar weighted int'l investors hedge 0% shows that given all the above, they are irrational in the currency market even if they are being rational in the equity markets.

Finally, let me take this exact statement and prove it wrong:

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I also don't get this notion that markets driven by need are necessarily inefficient (more specifically, the notion is that speculators are more successfully value-driven than natural actors).

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look at commodity markets. the returns from backwardation have been to speculators, paid by for "natural actors" or hedgers. they are using the market in order to reduce volatlity of their underlying product so as not to be exposed entirely to future price movements of that product.

in other words, that market (to the extent it is used by the hedgers) is based on need. speculators DIRECTLY gain from that. this is studied, proven, etc. the hedgers pay speculators to hedge their future revenue streams.

they are basically paying insurance. they are consciously losing money in the commodities market to insure their revenues for their business. they are making efficient business decisions, yes. but within that, they are making inefficient decisions in terms of the commodities market.

i.e. they are not placing bets on price changes to derive profit from that market. they do not add to efficiency in that market. they subtract it by the way that act to secure their overall bottom line (which is rational for them overall) vis a vis the commodity market.


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Besides, most of the trading in currencies, whether directly or indirectly, is done by banks and large corporations with international exposure.

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that is most likely hedging and can be argued as definitely rational from the opint of view of a bank with a large amount of exposure to something that they cannot control or accurately predict and thus cover some of their exposure...but, as stated above, that rational action by a business can lead to inefficiencies in another market.

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To me, it seems that these are the exact entities whose views reflect the fundamentals.

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no. they are not concerned with the value they get from the currency market by itself. they only care about how their trading profits correlate and offset their underlying large exposure. volatility of profit streams to them is likely to be a huge cost and they want to reduce that cost via hedging (trading in teh currency markets).

so while it may reflect the fundamentals of their business, it doesn't have to have anything to do with the fundamentals fo the currency market (i.e. interest rate differencitals, CA balances, momentrum etc.)

you do have a good point though that there are a large dollar weighted number of profit maximizing entities that are trained in currency trading NOT from hedging (goldman's prop currency desk etc.). these actors bring a good amount of efficiency to the market. but if a larger actor (central bank) wants to have a currency pegged in some way, there is no way that the prop desk will bring enough efficiency to the currency market to offset teh temporary and HUGE inefficiency brought by the central bank doing the pegging.

when the peg breaks, there is a return to efficient pricing.

if you plotted some measure of currency efficiency (between 0% efficient and 100% efficient) over time, you'd probably see way bigger variance than you would if you did the same plot for the stock market. the stock market is at whatever level of inefficiency it is at and likely has been for some time with the introduction of technicals etc. moving it away from the previous long term average to a new one.

that is in stark contrast to currency markets where it can be far closer to 0% efficient until there is a break in the peg and a return to closer to 100% efficiency.

now please note that this is a VERY basic argument not intended to prove anything for a fact, just to show some of my thoughts on this issue. you may, for instance, disagree that for the stable time of a peg that the currency market is inefficient. you may argue that indeed it is efficient during that time. i just take issue with that line of thought and don't think that it is by any stretch. we can dig into that further as well as other assumptions i've made if you wish.

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unlike stock markets, where most of the trading is certainly not done by those whose views reflect the fundamentals (insiders) but rather by those who are far removed from businesses and are either 1) trained to trade on technicals or 2) momentum-driven asset-allocators (almost all large funds, individual investors).

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can you rephrase this, i can't tell if you're saying that 1) and 2) relate to currency markets or stock markets.

thanks,
Barron

[prohornblower]

Congrats! Warren Buffett is looking to hand over the reigns to Berkshire Hathaway soon.

[DesertCat]

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In that I recommended the following stocks.

Stock Current price 8/23 price gain in < 2 months
----- -------------- ---------- ------------------
NTDOY 68.35 57.70 18.45%
GME 56.65 47.45 19.38%
GNK 66.35 54.17 22.48%
VMW 95.09 70.20 35.45%
TTWO 17.98 14.35 25.29%

As a reference, the S&P 500 is up 5.9% over the same time period.


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I don't want to rain on your parade, but don't get too excited yet. I have one word for you, "variance". During the internet bubble anyone could have results like this if they just stuck to tech stocks. If they stayed in tech after the bubble they gave it all back and then some. These were people who mainly knew nothing about the companies, their valuations, the future, nada. The market can make anyone look like a genius over a short period.

You've made some great picks, but it's the long run that separates skill from just good fortune. It won't always be this easy. But given the crap you've had to take on this forum, you deserve the opportunity to crow a little.

BTW, love your title.

[DcifrThs]

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In that I recommended the following stocks.

Stock Current price 8/23 price gain in < 2 months
----- -------------- ---------- ------------------
NTDOY 68.35 57.70 18.45%
GME 56.65 47.45 19.38%
GNK 66.35 54.17 22.48%
VMW 95.09 70.20 35.45%
TTWO 17.98 14.35 25.29%

As a reference, the S&P 500 is up 5.9% over the same time period.


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I don't want to rain on your parade, but don't get too excited yet. I have one word for you, "variance". During the internet bubble anyone could have results like this if they just stuck to tech stocks. If they stayed in tech after the bubble they gave it all back and then some. These were people who mainly knew nothing about the companies, their valuations, the future, nada. The market can make anyone look like a genius over a short period.

You've made some great picks, but it's the long run that separates skill from just good fortune. It won't always be this easy. But given the crap you've had to take on this forum, you deserve the opportunity to crow a little.

BTW, love your title.

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my long winded post was just trying to say some version fo this with a few addendums etc..

DC did it perfectly.

also, check your email...i sent youa rudimentary excel sheet.

Barron

[SlowHabit]

Shoe,

Coach me plzzz.

[DcifrThs]

EDIT TIME EXPIRED:

you say:


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For instance, if all profit-maximizing entities are momentum-chasers in search of greater fools, this will result in extremely inefficient prices

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but that isn't rational. they need to be BOTH rational AND profit maximizing.

Barron