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Pastimes : The Justa & Lars Honors Bob Brinker Investment Club -- Ignore unavailable to you. Want to Upgrade?

To: orkrious who wrote (8005)	8/23/1999 8:43:00 AM
From: Oblomov	Read Replies (2) \| Respond to of 15132

I don't believe in EMH (Efficient Market Hypothesis) either, but your statement that [no]one can beat the market in the long run by trying to time being in and out of it. is a pretty good summary of the weak form of EMH. To summarize the forms of EMH: weak form: past prices cannot be used to predict future prices semi-strong: weak form + published news cannot be used to generate profits (already discounted) semi-strong: semi-strong + even unpublished news cannot be used to generate profits (already discounted) The weak form implies that technical analysis does not work, and the semi-strong and strong forms imply that fundamental analysis is flawed. There has been at least some attempt to justify EMH empirically (such as the well-touted fact that 85% of actively-managed funds failed to beat the S&P 500 index during 1995-1997), but the basis of the theory rests on theoretical grounds, namely that stock price changes are stochastic. The only non-random trend, according to EMH, is the long-term growth of the economy, which the stock market supposedly reflects. So EMH does not claim that long-term price trends cannot be identified. Even the most stalwart efficient markets theorist would probably agree that there are some economic climates (low inflation, declining interest rates, rising productivity) that are more favorable to stocks than other climates. But, since you do not believe in EMH I assume that you are implying that it is unwise to try to leap out of every bull market correction. I agree with this statement. The opportunity cost is much greater than any possible benefit (on average, at least). But a bear market is a different animal (pardon the pun). A bear market is a period where the stock market greatly underperforms most other asset classes, including cash), due to fundamental economic conditions. Note that only the strong-form EM theorist would say that it is not possible to time the market using fundamental analysis models. Why do I not believe in EMH? Because it ignores the essentially irrational nature of humans: we are usually either too hopeful or too fearful, and fail to judge risks properly. Jay, at what point would your faith in the market be shaken? That is, what would need to happen - not that it ever would - to change your mind about remaining fully invested in the stock market at all times? It is obvious that some people beat the market by a wide margin consistently; whereas, most players underperform. I would guess that the distribution of returns among the players in the market is shaped like a negative exponential distribution. IMO, this means that it is possible to outperform the market, either through stockpicking, or asset allocation. AA

To: orkrious who wrote (8005)	8/23/1999 11:34:00 AM
From: Ian@SI	Respond to of 15132

I know some people will take issue with my ability to provide a link. Maybe Ian can??? <g>. Actually, Jay the references to the research are documented in Malkiel Burton's book, "A Random Walk Down Wall Street" wherein he attempts to prove the validity of the EMT. Personally, I think he did exactly the opposite, BWDIK. Market timing is roughly equated to the weak form of the EMT; which he quickly disproves and cites references throughout the discussion. I tend to further equate this to TA, which, by my definition, works only so long as the trend remains intact, then it ceases to work until another recognizable pattern / trend begins to remain intact. But we're on the wrong thread to convince anyone of anything. Ian.