BGR,
If prices reflect value accurately, and adjusted for inflation the economy keeps growing (which it has never failed to do in human history as productivity has gone up), wouldn't it make sense to invest?
Over long periods it has not failed to grow, but there have been many periods this century, lasting 1-5 years, when the economy was not growing, and investment in stocks was simply not a good idea. If your investment horizon is 30-35 years, however, stocks are the best investment. IMO, the markets are a means of exchanging differing ideas about value, and over long periods market prices converge to an accurate representation. My willingness to exploit short-term under or overvaluation may make markets more efficient, but that does not mean that they are efficient as a result. EMH is an ideal, one that does not necessarily hold in real markets.
I was not worried last summer. I continued to DCA in S&P funds. My understanding is that several immature professional money mangers had already spent their big bonuses and panicked when Russia defaulted.
Maybe so, but EMH, in all three of its forms, requires a consensus of
interpretation on the part of the market participants. According to
EMH, price is the means whereby consensus is achieved. So, you were
able to take advantage of the temporary undervaluation of the market.
Indeed, the EMH is just that, a hypothesis. However, I do not think that your assumption c holds for the semi-strong form. There is, however, overwhelming experimental evidence in support of the semi-strong form of EMH, by checking mutual fund returns over market indexes in the years past. Remember that theory of relativity was not proven for a long time, as well.
In your post to Heinz below, you say
Efficiency requires rapid adjustment of market prices in response to consensus, nothing more and nothing less.
How do you reconcile this statement with your rejection of assumption c? My understanding of EMH is that the assumptions are for all forms;
what differs in the three forms is the degree of knowledge dissemination.
Also, can you provide me with the falsifiability rule for EMH, so I can stop being nagged by the thought that it is merely a metaphysical conjecture, like the "hypothesis" that an infinite number of angels can dance on the head of a pin. Swedenborg claimed overwhelming evidence for that... EMH is, in my view, meliorism; in other words, it is wishful thinking that mere humans actually resemble the models that our economists concoct. This does not mean that the models are not useful in themselves.
I enjoy the discussion, thanks...
AA |
