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Strategies & Market Trends : Value Investing

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To: Honest Abe who wrote (3585)	3/22/1998 4:23:00 PM
From: Chuzzlewit	Read Replies (2) of 78645

Abe, there are several forms of the Efficient Market Hypothesis, and I'm not claiming that the strong form is correct. Probably all on this thread would agree that the weak form is correct (TA is nonsense -- there is no "memory" in past price behavior). In addition, most people would agree that it is possible to "beat" the market. All you have to do is look at the Value Line effect. I also agree with you criticisms of MPT as taught in elementary finance courses. It is a purely hypothetical construct that bears little resemblance to real behaviors. Nevertheless, it is an excellent starting point because it avoids many of the pitfalls in stock selection methods, and it underscores the concepts of risk and rate of return. You are quite correct in making the point that MPT assumes that historical correlations persist in the future. We know, for example, that as companies grow their betas tend to converge to 1.0. That's because we really don't have a good handle on multiperiod horizons, and it's really the same problem in valuing a growth company based on expected growth rates. Nevertheless, I believe it is the best starting point from which to construct a portfolio. It has stood me in very good stead. Regards, Paul

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